Running a Consumer Fintech Startup within Goldman Sachs

BRIAN KENNY: The German Revolution of 1848 was inspired by workers protesting high taxes and political censorship. For a relatively modest revolution, it had a lasting impact, leading to the breakup of the German Confederacy and the establishment of the German state that we know today. But not everyone stuck around to see how it turned out. The unrest and rising antisemitism led to a wave of immigration to the shores of America, the land of opportunity. One of those brave souls, Marcus Goldman, landed in Philadelphia where he found work as a merchant peddler and started a family with his young bride, Bertha. Before long, in search of opportunity, he made his way to New York City, where his knack for finance and entrepreneurial spirit earned him the reputation as a trusted advisor to the jewelers in Lower Manhattan and the tanners on Beekman Street. And the rest, as they say, is history. Today, Goldman Sachs is one of the best-known financial institutions in the world; a brand steeped in tradition and synonymous with big finance, and definitely not the place accessible to the average Joe. Today on Cold Call, we’ll discuss the case entitled, “Marcus by Goldman Sachs,” with case author Rory McDonald. I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents Network.

Rory McDonald’s research focuses on how firms compete and innovate effectively in new technology-enabled markets. It’s the perfect focus for today’s conversation. Rory, thanks for joining me today.

RORY MCDONALD: Thanks. It’s great to be with you, Brian. Appreciate it.

BRIAN KENNY: First time having you on the show, we’ll make it as easy as we can so that you come back and join us again. And I think this case lends itself to that. Really interesting case about, as I was sort of teasing in the introduction, just a storied brand in Goldman Sachs, I would say. If you look at the stalwart brands in the world, I’d certainly like to think Harvard Business School is one of those, and I think Goldman Sachs is a brand that sort of holds up right alongside that. So, people will certainly know the name and I think there’ll be very surprised to hear about this new direction that Goldman Sachs has gone in. Thanks for writing the case and being here to talk about it.

RORY MCDONALD: Yeah, my pleasure.

BRIAN KENNY: I’m going to ask you to start just by letting us know when you walk into the classroom, what’s your cold call to start this case with the students?

RORY MCDONALD: Yeah. I think I set it up in terms of, “It’s 2014, we’ve got Goldman Sachs, a $34 billion company looking for growth. They’ve settled on a digital direct-to-consumer offering.” And to kind of get the juices flowing a little bit, I show a couple of quick videos, and they’re videos of the Marcus by Goldman Sachs offering. And what’s pretty stark about them is just how different it looks relative to how you think about Goldman Sachs. They really couldn’t be farther from the buttoned-up elite B2B investment bank that we’re used to talking about. One of them has a dad who is kind of an every man who doesn’t seem to do a lot well in his house, but he gets really excited about saving money with a Marcus checking account. And he has this little jingle that he sings that, “So, maybe I’m not a genius at every single thing, but saving more is enough to make me sing.” And it says, “You can money.” The reason I show these videos is because it really kind of pushes students to reevaluate their thoughts about Goldman Sachs and how far and different this thing is that they’re doing. So, I follow all that up with, “So, why did they do this? What are they trying to accomplish?” And that’s my cold call and people will come out at that direction.

BRIAN KENNY: I was hoping we might get you to sing that jingle, but I guess it’s not going to happen.

RORY MCDONALD: (singing) You can money.

BRIAN KENNY: Very good. First vocal performance on Cold Call ever. Thank you. We talked a little bit about your area of scholarship. I can see why this case interested you. How did you sort of set your sights on Marcus and how does it relate to the work that you do more broadly?

RORY MCDONALD: Yeah, for sure. I mean, it’s like all these cases, right? It’s a confluence of factors. And so my research, as you mentioned, tries to understand how companies effectively navigate nascent industries and product categories. A lot of my research is set in the financial technology context or the FinTech context, where we’ve seen startups, ventures like LendingClub who pioneered peer-to-peer lending or Wealthfront with the robo-advisor category. And these ventures have created new product categories and combined previously unconnected enterprise models, and they’ve done pretty well in their own right, but they’ve simultaneously reshaped and transformed the financial services landscape. But here we don’t have a FinTech startup. We have Goldman Sachs, a 150-year old elite investment bank. It is the most established of established companies, and an incumbent in the space. And yet, here they are getting into the FinTech game by creating their own internal startup. And as someone who teaches the course Building and Sustaining a Successful Enterprise, it’s an elective course where we often look at the challenges incumbents face when there’s certain types of market and technological change. The case is sort of a perfect match for my research interests and my teaching interests.

BRIAN KENNY: That’s great. Let’s talk a little bit about Goldman Sachs’ traditional business. What business are they in, as people sort of know the traditional Goldman Sachs?

RORY MCDONALD: Yeah. Well, as you alluded in the intro. Founded in 1869, Goldman Sachs is sort of a global investment bank and financial services company headquartered in New York, and they offer investment banking, financial advisory, MNA, underwriting of initial public offerings, they do asset management, trading of securities, private wealth management. And I think particularly relevant for the case is that this is 150-year-old institution that has historically served only businesses and the wealthiest individuals, so that’s obviously very different in what they’re doing with Marcus.

BRIAN KENNY: Yeah. Why move off of that? What prompts them to want to kind of stray into uncharted territory?

RORY MCDONALD: As you can imagine, opinions differ and it sort of depends on who you ask. And I think their own answer may have evolved over time, but I can think of at least three reasons. One is sort of the classic of chasing growth. Here you are at the beginning of the case in 2013, revenues at this bank have stagnated below pre-crisis levels, and the firm has yet to rebound from a substantial decline in securities trading revenues. We need growth and we need it now. That’s a good reason to pursue this. Another is being opportunity-driven or maybe even opportunistic. They want to make a strategic use of what they think of as an underutilized asset, and that’s this banking license that Goldman has acquired in its conversion from broker dealer to bank holding company during the 2008 financial crisis. And the idea here is that they were paying the costs of being a bank, but they weren’t doing much banking business, “We’re the only one of our peers that doesn’t have a consumer bank, and so let’s go ahead and utilize that underutilized asset.” And I think the third is sort of the preemption of fintechs. There’s this sort of widely circulated analyst report that was produced by two Goldman Sachs equity researchers called, “The Future of Finance: The Rise of the New Shadow Bank.” And the report argues that FinTech and kind of other non-banking lenders are going to potentially capture a big portion of bank profits over the next few years. And so, Goldman Sachs was one of the underwriters of LendingClub’s IPO. They felt, I think, they had some unique advantages and could get into this business.

BRIAN KENNY: The case goes into pretty good detail about the way that they brought the team in. But I would love for you to describe a little bit about Harit Talwar and his background, and how do they even begin to think about bringing in the right people to do something that is in many ways a complete anomaly to what they’ve normally done?

RORY MCDONALD: Yeah. And this is a really important idea and sort of the theoretical backdrop of the case. When we teach the case, we usually pair it with a module note on identifying and developing capable leaders. And the module note introduces a theory or a framework that we call, “Schools of Experience.” And so, it basically contrasts two different ways of hiring somebody or putting together a team. The first one is what we call the right stuff approach, which basically means you’re looking for that magic combination of talent, fearlessness, grit, sustained self-confidence, anything that helps people climb the ranks of the organization and get to the top. It’s all about the looking for those attributes of successful managers. By contrast, there’s this schools of experience approach that focuses on specific career experiences and asks: what past experiences would the ideal person for this role have? And the reason this is relevant is that just because you have a really smart, capable person, who’s climbed the ranks at Goldman, it doesn’t mean they’re going to be great at running a consumer startup within Goldman. Meanwhile, if you have the best entrepreneur in the world, it doesn’t mean they’re going to be great at running a venture that has to interface with the culture and the processes and priorities of this larger organization. I think this is a really, really key idea here is how do we get the right leaders in and how do we build this team? So, as you mentioned, we’ve got the two key hires here are really Harit Talwar, who was tapped to lead what was called at the time Project Mosaic that eventually became Marcus. And he eventually became the global head of the consumer business. He came over from Discover Financial Services where he was the president of US Cards and the chief marketing officer. It’s pretty clear that he had at least parts of those schools of experience in the sense that he had the consumer experience in a regulated environment and probably could work in a larger organization. But then there’s this other hire, this Omer Ismail, who is the managing director in Goldman Sachs’ private equity arm. And he comes in and he basically… he calls himself, or somebody else calls him, the Goldman interpreter or the Goldman whisperer. The idea is that he sort of understands the culture at a very, very deep level and can help Harit and the other members of the group really navigate that interface between the startup and the larger organization.

BRIAN KENNY: You can’t underestimate the importance of that, right? We have done other cases on Cold Call, where you bring somebody who’s a star in one environment into an environment, and hope for the same kind of magic to happen. And it just doesn’t because of so many reasons, these unwritten rules that exist, and this language that they just don’t understand. So, I think that’s a really interesting move that they made, and having somebody play that sort of buffer between Harit and the tradition that he was stepping into.

RORY MCDONALD: Yeah, and I think this effort has no chance without both of them together. Obviously they encountered plenty of struggles as it was, but I think those two key people were really, really important here.

BRIAN KENNY: They’ve got to recruit a team underneath Harit to support him, and I would imagine, as great as the Goldman Sachs brand is, and people would be enticed just to be able to work for that brand, I would think they’d also be a little hesitant to step into a situation where there is no guarantee that they’re going to succeed here. What’s their value proposition to potential hires that they’re going to bring in?

RORY MCDONALD: Yeah, that’s a great question. I mean, you’d think because it’s Goldman Sachs, top company, arguably the top brand in financial services, this is going to be easy to recruit people. But remember, they’re looking for entrepreneurial managers who could function in a larger organization. There’s not a lot of these people floating around. And then you’ve got the challenge here of your lack of business plans. You can’t really talk candidates through a business plan because you don’t have one, and you’ve got Goldman’s commitment and interest, but really Goldman doesn’t have any track record in the consumer business. And so I think the value proposition, and I think what ultimately convinced people who came aboard, was this combination of brand excitement over the challenge to do something new and the demonstrated commitment by Goldman. If the is CEO backing this thing and talking about it publicly, it means that they really, really want to do this and do it right.

BRIAN KENNY: All right, so you’ve got this team of entrepreneurs who’s now assembled and they’re ready to go. What were some of the decisions that they had to make early on? How did they define the operating model?

RORY MCDONALD: Yeah. There was a couple of issues that came up with that. I think a lot of the things really were about, “How do we structure this within the context of the broader organization, such that we can get the best that Goldman Sachs can give us to support this initiative while also not letting those things hold it back?” Two really fun anecdotes from the case are… one is kind of figuring out the reporting lines. We’ve got Goldman’s a head of technology, which is insisting that Marcus’ CTO, who’s Bo Hartman, should report to him because all the other technology people within Goldman Sachs report, but Harit is like, “Well, that doesn’t make a lot of sense here because technology is the product when we’re talking about Marcus here. SO, it’s not a support function like it is in the larger Goldman Sachs organization.” At the same time, Harit knows he’s an outsider. He needs the support of the Goldman parent organization, and he’s got to figure out which battles he wants to pick. And so he did something I thought was pretty clever. He lets him report to the head of technology, that is the CTO, but he and the other engineers, they actually sit on Harit’s floor. As a result of that, they’re still working together and getting done what they needed to get done. The other big deal was where do you locate this thing? Do you locate it in a garage offsite, in a completely different geographic area? And it turns out that they actually locate it within Goldman Sachs itself. And Harit’s got this great quote from the case where he says, “Many large organizations put new and innovative things outside the mothership to avoid contamination. My view is that’s wrong because you’ve lost the battle on day one if you’re convinced that contamination will occur. Successful change agents immerse themselves in the body they want to change. They become proud of the body they want to change and then they change it.” And so, as Talwar alludes to it, many theories would argue for a different approach here than the one Goldman took of doing this thing within the offices at Goldman Sachs.

BRIAN KENNY: Yeah, and we’ve seen so many instances of that over the years. When the internet sort of came into being an e-commerce popped up, you had a lot of traditional places that were launching these sort of side businesses experiments to see how it was going to go, but never really having that full commitment to bring them in. So, that’s a pretty smart decision, I think, on Harit’s part to make that.

RORY MCDONALD: I would say very controversial too. I mean, I think controversial internally and controversial with scholars who would look at this and say, “Ooh, boy, I don’t know if this is going to work, if you do it inside the parent organization like that.”

BRIAN KENNY: I also want to talk about the brand, as I kind of, spoiler alert, I kind of blew it in the intro talking about Marcus Goldman, but I just thought that was a really cool story about how they came up with the brand. Can you just share that?

RORY MCDONALD: I’m glad you liked this, Brian, because I just love this part of the case. This was just so fun doing the interviews here. Basically the backdrop is within the firm, you’ve got opinions that range widely from, “Call it Goldman Sachs,” right? Call this new initiative that they’re doing, call it Goldman Sachs, all the way to, “Anything but Goldman Sachs.” And so, as you can imagine, there was some trepidation that this sort of new initiative would spoil Goldman’s reputation or harm the brand. And that was a big, big concern. So, they did their market research, their focus groups, and all the things that you would imagine when coming up with a brand name. And Goldman didn’t actually feel accessible to the kinds of consumers that they wanted to reach. But when they tested X by Goldman Sachs or Y by Goldman Sachs, what they found is that trust levels rose and purchase intent increased. And so they stepped back from that. And as you alluded to in the intro, they paused to consider Goldman’s history. The firm was founded in by Marcus Goldman. Plus, you had these first name brands, such as Amazon’s Alexa and Apple’s Siri who were trendy at the time, and they came up with this Marcus by Goldman Sachs brand name. And it turned out that was really a stroke of genius. I mean, consumers seem to like it, it was a hit for getting buy-in for the venture at Goldman, the larger organization. And when it was unveiled to senior management in February of 2016, you had Lloyd Blankfein, whose reaction was famously, “Why didn’t I think of that?” Really, really a kind of a fun process with coming up for it and really was kind of a clever stroke of genius.

BRIAN KENNY: Yeah. Sometimes the answer is right beneath your nose and you don’t even know it’s there.

RORY MCDONALD: That’s right.

BRIAN KENNY: I just thought that was really cool from a branding perspective. All right. Let’s talk a little bit about the challenges that this team faced being entrepreneurs in this long established culture. And then, this soon becomes a case of opposites. It’s almost like they’re going to do everything opposite of what Goldman Sachs has done, and they have to justify it all along the way. So, let’s just talk about some of the… They decided to take a very customer-centric approach, but the customers they’re working with are nothing like the traditional customers, and that sets up interesting dynamics, does it not?

RORY MCDONALD: The big, big deal here is we’re pursuing a client, or in this case a customer, that is just very, very different from who we’ve traditionally served. So, we traditionally serve businesses or the wealthiest individuals, and now we’re serving people who make 75K a year and have a little bit of consumer debt that they want to take care of from some of these personal loans. As you can imagine, that’s a pretty big difference from a marketing standpoint, from a product development standpoint, from a branding standpoint, from a customer service standpoint. And so as you alluded to, there’s really a lot of, I would say, clashes, culture clashes along the way. And sometimes those clashes spark creativity and imagination and newer ways of doing things, and sometimes they just seem to be a slog for the people who are involved in dealing with them. I think that would be some of the key issues for sure.

BRIAN KENNY: Yeah, and then how do you even go about hiring this sort of completely new profile and integrating them into the Goldman Sachs family, so to speak? How did they sort of make inroads there?

RORY MCDONALD: I think a lot of the traditional hiring practices of Goldman had to be relaxed or at least modified. And what you found is that Marcus and the folks who ran Marcus, in some cases, they were able to sort of negotiate relief from some of these practices that governed the Goldman Sachs organization. And sometimes they didn’t, and there were clearly expressed frustrations by this. Some of the people that they hired… Think about the engineers that they hired. They gave them a test to take on whether or not they were proficient in their coding ability and their use of technology. And some of them felt really bad and they felt like that Goldman was disrespecting the experience that they had. And in some cases, they passed on some really good people who just didn’t want to take that test.

BRIAN KENNY: I’m just wondering how the leadership team was able to bring the firm along with them. They were working hard, it seemed, to just keep people informed, “Let’s not surprise anybody.” That’s got to be exhausting to some extent, to almost always feel like you are trying to convince somebody or sell somebody on your ideas, right?

RORY MCDONALD: Yeah, and I think this really gets to the crux of the case, which is you could do this thing outside of Goldman Sachs and just be a FinTech startup. You could do it purely within Goldman Sachs. And here you have a startup within a larger organization, and these are sort of issues that you could anticipate on day one. That’s kind of the nice thing is these are going to be problems that we know we’re going to have to solve as this initiative evolves and grows. And so, having Harit there, having our Goldman whisperer, Omer Ismail, to be able to interpret, I think you’re right. I think it was exhausting. I think it was frustrating for some people on the team. And I think from Goldman itself, it was frustrating because it’s like, “Why are we doing these things that we wouldn’t do if we were thinking about this in the context of Goldman Sachs, and why do you have permission to do that?” So, there was very much of the friction that sparks creativity and innovation, but also the friction that sparks frustration and people being exhausted by having to do this on a day-to-day basis.

BRIAN KENNY: Yeah, a little sibling rivalry dynamic that probably plays out there. And probably nowhere more than in the very visible marketing campaign that they did, which again, I loved because I think it’s great that they’re finding a way to sort of evolve this brand. But I would imagine that having commercials in and of itself was a pretty controversial idea at a place like Goldman.

RORY MCDONALD: Yeah. I think that’s right, Brian. I mean, things that are taken for granted in a consumer business, they really had to convince the senior folks at Goldman that this was a good idea and that it was warranted. And so, if you think about the overarching message from the parent organization, “Do no harm to the Goldman Sachs master brand.” That’s sort of your overarching charge, and the charge is really a constraint, right? But things like running a TV ad during a football game or getting celebrity endorsements, this is just absolutely something that is used often in a consumer business and not so much in a B2B firm like Goldman Sachs. And you had to have legal and compliance who wants to review everything because after all, Goldman Sachs is a big financial player. The things that their analysts say can move markets. And so being very thoughtful and careful about how we’re going to market this thing such that we don’t make any false claims or run afoul of regulators was really, really important.

BRIAN KENNY: Yeah. I’m thinking I probably won’t propose a Superbowl ad in the Harvard Business School budget next year, but you never know. Let’s see how this works out. I want to talk about the outcomes here. Well, how did go with Marcus and what seems to be the reaction once they start to get some traction in the marketplace?

RORY MCDONALD: It sort of depends on who you talk to here. Very early on, there was an announcement made that they wanted to hit a $1 billion revenue target. That was announced publicly, and it got people very, very nervous. So, they actually achieved that objective. I think it was by the end of 2020, the business had gotten up to 1.2 billion in annual revenue, it had amassed about a hundred billion in deposits and held another eight billion in consumer loan balances. And there’s this wonderful Wall Street Journal article that came out in 2019 called “Goldman Sachs Tries Banking for the Masses.” It’s been a struggle, and an unusually, I would say, honest and transparent look at some of the cultural dynamics between Marcus and between Goldman Sachs proper. I would say they got to where they wanted to go, but it was definitely a bumpy ride along the way. And really, as Harit would himself tell you, “Hey, we’re into this a few years, right? Goldman Sachs is 150 years old. This is still early days.” And so, recognizing that there’s still a long way to go. And I think that there’s this great quote by Goldman CEO, David Solomon, who said, and it sort of reflects kind of the mixed views of, “We’ve kind of had some successes, but we’ve also not gotten the recognition that we deserve.” He says, “If we were out in Silicon Valley and made 20% of the progress that we’ve made, people would be throwing money at us to own a piece of this business. But nestled inside little old Goldman Sachs, we’re just going to have to prove it over time.” And I love that quote in so many ways because it reflects, “Hey, we’ve gotten there, it’s been bumpy. We need more recognition for what we’ve accomplished and we still have a long way to go.”

BRIAN KENNY: Yeah, that’s perfect. You got to keep proving it every day, apparently in a culture like that. The case also starts to point to some of the expansion that Marcus started to do. And for me, that definitely raised the question of, is that too much too soon? Should they really just be focusing on their core business and getting that as right as they possibly can? Or is it better to start to spread your bets around into different parts of the business?

RORY MCDONALD: I think there was a real big question mark with both Omer and Harit and the rest of the team of, “How fast do we push this thing?” In other words, there’s constantly new things that we could be going into, but are we better off kind of really solidifying those markets that we’ve moved into to really make sure that our product is working really well, that we’re delivering on the promise that we’ve made to customers, or should we be opportunistic and go after all of these opportunities that really beckon towards us that we’re seeing other fintechs move into? As the case alludes to, there’s some discussion, obviously they went into to consumer loans first, to personal loans first, but then they’ve since expanded into quite a few other things. So, savings accounts for customers, financial education, more recently wealth management, they launched a credit card with Apple. They’ve really expanded, and I would say probably more rapidly than they anticipated.

BRIAN KENNY: Yeah. Super interesting to see how it continues to play out. You’ll probably be writing a follow-up case about this.

RORY MCDONALD: Oh, absolutely. And it was just announced recently that that Omer, who is one of the protagonists, is leaving to go run the FinTech business that Walmart is creating. And so if you think about having the schools of experience to do that, I can’t think of anybody better with a better resume, although I’m sure he’ll be missed by Goldman.

BRIAN KENNY: Yeah. That’s great. This has been a really great conversation. I just want to have you sort of send us off by letting us know if there’s one thing about this case that you want people to remember, Rory, what would it be?

RORY MCDONALD: Yeah. I think right along with my research, creating a new market or a product category, in this case, it’s new to the firm category, it’s just really, really hard. And there’s a reason we can name many entrepreneurs and CEOs, but not so many of these corporate entrepreneurs. Their names don’t pop to our mind. So, you have to do everything you can to make sure you’re walking into the right situation. Even then it’s going to be hard. I’ll leave you with that.

BRIAN KENNY: Rory McDonald, thank you so much for joining us to talk about the “Marcus by Goldman Sachs” case. It’s been great having you on the show.

RORY MCDONALD: Brian, I really appreciate you having me.