An Expensive Lesson in Credit Cards


It seemed like a good idea to get into lending back in 2016. Then three years later, Goldman Sachs made a splash in credit cards by winning the Apple Card from Barclays. With a goal to drive into credit cards for iPhones, Goldman might have been a bit to risk tolerant. And now, with an unsteady economy, there are risks, risks, and more risks.

200 West Street in Manhattan is rumbling with retail credit difficulties as the economy begins to stutter. According to Bloomberg, Goldman Sachs is cutting jobs in its retail position, and learning how to survive an anticipated recession, a skill mastered by top credit cards firms such as American Express, Bank of America, Citi, Chase, and Discover. If you have an iPhone and did not get your fancy white metal Apple credit card yet, it might be too late, as the issuer will soon tighten their underwriting.

Bloomberg reports:

  • Goldman Sachs Group Inc. is embarking on one of its most significant job cuts ever as it locks in on a plan to eliminate about 3,200 positions this week, with the bank’s leadership going deeper than rivals to shed jobs.
  • The firm is also poised to unveil financials tied to a new unit that houses its credit card and installment-lending business, which will record more than $2 billion in pretax losses, the people said, asking not to be identified discussing private information.

Sure, Goldman Sachs is a top global investment bank, but is it ready for consumer credit risk?

  • Slowdowns in various business lines, an expensive consumer-banking foray, and an uncertain outlook for markets and the economy are prompting the bank to lower costs. 
  • Those broader industry trends have been compounded by the bank’s mistakes in its retail-banking foray, where losses piled up much faster than forecast throughout the year.

Successful Lenders Live and Die by Credit Scoring in Credit Cards

Last November, we noted that Goldman Sachs could have done better on booking loans.  It is one thing for a mass-market credit card to tweak FICO Score ranges to allow for some riskier lending, but top banks balance their risk. You can control the operation risk by adding a few downward tweaks on credit scores, with a risk-based rate boost.

But listen to me: Never bet the ranch on subprime credit scores.

You might remember this November tidbit from Payments Journal, as reported by CNBC:

  • While competitors like Bank of America enjoy repayment rates at or near record levels, Goldman’s loss rate on credit card loans hit 2.93% in the second quarter. That is the worst among big U.S. card issuers and “well above subprime lenders,” according to a Sept. 6 note from JPMorgan.

And Goldman Sachs’ learning has been expensive so far.

According to that same report:

  • While competitors like Bank of America enjoy repayment rates at or near record levels, Goldman’s loss rate on credit card loans hit 2.93% in the second quarter. That is the worst among big U.S. card issuers and “well above subprime lenders,” according to a Sept. 6 note from JPMorgan.

So, for now, brace you self for a market shift. That shiny Apple card looks like it carries portfolio risk. And the GM cobrand we mentioned in September, that will prove interesting.  Then we will have to wait and see about the anticipated T-Mobile credit cards that address a 109 million account base.

I have been a T-Mobile customer for 21 years and was hoping for one of those new cobrands.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.



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