If you work in a 'traditional' front office banking job and are hoping for a long and fruitful career years into the future, you might want to recalibrate your expectations after yesterday's Goldman Sachs investor call. Goldman isn't revealing exactly what its big plan is yet - that will come in January. But there were plenty of intimations of what's coming next.
Goldman Sachs is going to be all about platforms
Under CEO David Solomon, Goldman Sachs wants to increase its margins and therefore its return on equity, which stood at an annualized rate of 11.1% in the second quarter. It intends to achieve this by harnessing the power of 'platforms.'
The word "platform" was mentioned 19 times in Goldman's second quarter call - far more than the word "technology" (three times). But platforms are effectively a synonym for technology. - Goldman is building technology-based platforms that require high upfront investment, but will then generate healthy margins ad-infinitum.
At least this is the intention. Stephen Scherr, Goldman's CFO said Goldman is applying its platform mentality to new business and to existing businesses. It's all about "marginal margins," said Scherr. The intention is to build businesses that operate at "scale" with very little increase in costs as revenues rise (hopefully) exponentially.
Nowhere is this more the case than with Marcus, Goldman's online retail bank and with Goldman's new transaction banking platform. Since their inception, Scherr said Goldman has incurred a total pretax loss of $1.3bn on Marcus, the transaction banking platform and the Apple card, of which $275m was lost in 2019 alone. However, spending on this triumvirate is expected to peak in 2019 and 2020, and after that - it's hoped - the revenues will start rolling in.
Trading platforms to do the work of traders and salespeople
It's not just Marcus, the Apple card and the transaction bank that are platform-oriented at Goldman. - Platforms are big in the securities division too.
Yesterday, Scherr reiterated the importance of Marquee, the platform that's making SecDB, Goldman's historic risk and pricing engine, directly available to clients. He also praised Goldman's newish bond 'pricing engine', which he said can, "play both sides of a risk trade," in a way that would previously have taken "thousands of man hours." Even the equities sales and trading business, which just had its best second quarter for four years, had its success attributed to platforms rather than people. "We're starting to see some benefits from... investments in our low touch capabilities," said Solomon in relation to equities' Q2 success.
Needless to say, Goldman isn't the only bank focused on creating platforms to automate what were once human-intensive businesses. Every bank is doing something similar. Goldman is, however, very transparent about its direction of travel. As the firm becomes more "platform driven," it will become less about "human capital," said Scherr.
It will also become less about compensating human beings. "It is our expectation that compensation will decline as a proportion of total operating expenses and the efficiency ratio will become a more relevant measure for the firm," said Sherr yesterday. In other words, Goldman is building a business that will be able to ramp up revenues whilst relying far less on human beings than in the past. If you're one of the humans that still works there in the future, this will be good - but if your role could be done by a 'platform' your days are probably numbered, and this is clear even before the new plan is unleashed in six months' time.
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