Interest rates

Goldman’s Marcus Raises Consumer Interest Rates

In financial services, as in almost every industry vertical, there is a concept known as the race to the bottom.

Broadly speaking, we could view this as a ploy between companies to cut prices, to entice consumers with the promise of the same (or better!) service for less money.

This strategy can only go so far… towards, well, free, as evidenced by the fact that, for example, stock brokerage commissions have dropped to pennies or fractions of pennies or free of charge.

In digital banking, we can see the opposite of race to the bottom, in a way. Call it the race to the top.

Goldman Sachs’ digital banking arm, Marcus, as noted by Bloomberg, raised the rate paid on its high-yield savings account to 1.7%, which marks a rebound to pre-pandemic levels, and up from 1.5% last month. Bloomberg noted that other firms such as Ally Bank have also raised rates, for example, to 1.6%.

But dig a little deeper, and we see other online providers offering even higher APYs. SoFi, for example, offers 2%. UFB Direct offer 2.2%. loan club offer about 2.0%. The Varo site announces a first 1.2%, which then pushes higher to 5% on eligible accounts.

There is no shortage of examples of digital players reacting to rising interest rates, yes, but also to a dramatic short-term competitive shift. And Goldman, with its relatively (very) deep pockets, can perhaps hold the race to the top better than its peers.

Laiming to maintain margins

For digital peers, the question is how net interest margins could be maintained. Ally Financial, for example, said in its latest results that NIM was above 4%, for the first time in the country’s history. Part of this is related to higher rates paid on productive assets; if prices too increase in deposits with the aim of keeping customers in place (and attracting new holders), the balancing act could become a little more difficult. Goldman has over $100 billion in deposits and, like other banks, is looking to create an ecosystem that of course includes loans and credit cards, the latter in conjunction with General Motors and Apple.

This too generated $487 million in net interest income in its consumer and wealth management segment last quarter, indicating there is dry powder to continue investing in the business (even if companies like Ally have relatively higher deposits, at $140 billion, for example) and to help fund new offerings and higher rates. In past earnings calls, management has made it clear, in the words of CFO Denis Coleman, that the company “will drive deposit growth and support other origination activity on our lending platforms.”

Read also: With digital verification, Goldman’s Marcus seeks to create a 153-year-old neobank

The race to the top – at least the highest APY on high yield accounts – has begun in earnest.

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