The Goldman Sachs Group, Inc. (GS) Earnings Call Transcript & Summary

So welcome everybody to day 2 of the Wolfe Fintech Forum. I'm really pleased to introduce our next speaker, Hari Moorthy. Hari joined Goldman back in 2007 as Global Technology, Head of Margin Risk, which until I read your bio, candidly, I didn't even know that role existed. And...

It was super important.

That, I'm sure. And after a brief stint at JPM, rejoined Goldman to help launch their Transaction Banking business. Look, the Transaction Banking expansion, it's still in its infancy but the KPIs really speak for themselves, and it continues to be a really exciting growth opportunity for the firm. So I really appreciate you joining us this afternoon to educate us on the story.

So maybe just to kick things off, Hari, I thought it might be helpful, just since Transaction Banking is a relatively new initiative, having only launched in early 2020, if you could just speak to what attracted management to this particular opportunity? And maybe help us size the TAM. And what are your longer-term ambitions within the space?

Thank you, and thanks for the introduction. Super excited to be here. Just as you said, I rejoined Goldman Sachs in 2018 to set this up from scratch, from the ground up. It was a super-exciting journey. So just to give you a bit more context before I jump to TAM. This business is one of the latest businesses that Goldman launched in 2020, during COVID. Just to size this up, we have gotten roughly $54 billion in deposits by end of last year, 2021, our full year of being in the business. We've got roughly 350-plus clients in our platform using our platform actively. And we've also launched this platform in the U.K. in 2021, in the middle of COVID. The way that we look at the addressable markets across the globe, where we are actually actively participating, we think it's roughly in the $150 billion ballpark. And the biggest participant in this ecosystem has roughly about 6% to 7% of the market share. And with a differentiated product, with the mindset that we started with a clean sheet of paper and the access to the clients that we have through Investment Banking channels that Goldman has, we believe we have right to win and continue.

Great. So as we think about One Goldman, right, which has definitely been a big management initiative to eliminate some of the silos that exist, as we think about partnership across different parts of the firm, how are you leveraging the Goldman franchise to drive additional revenue synergies? And which areas of the business are you partnering with at the moment most extensively?

Absolutely. Look, the way I think about TXB, or Transaction Banking, we call it TXB internally, is that this is the best product of the One GS ethos. We are super-connected both internally and externally. When we launched this business in 2019 first, we had the toughest clients onboarded as our first clients. That's Goldman Sachs itself. And we had Goldman Sachs Treasury as our client. And since then, we have been partnering pretty actively with our Investment Banking team as well as our Global Markets team and Asset Management team. Just to give this a bit more perspective, I mentioned about 350 clients. 90% of those clients are clients of Goldman Sachs already before TXB came alive in the firm. So we believe the One GS ethos, every which way possible, in addition to accessing the firm's clients, we're also accessing some of the best parts of Goldman Sachs, such as technology, risk management, compliance framework. All of them are super-important for this business. And finally, I will make this remark, that with the reach that we have with our Investment Banking franchise, the number of clients we touch, in number of different areas, in solutioning their needs, Transaction Banking naturally becomes one of the many solutions that we can provide to our clients' journey. So this just naturally sort of overlaps with everything that we have done organically over the last several years.

Great. So it's interesting, as you start to outline some of the growth opportunities, one of the things that like we're asked quite often is really around your value prop and the areas of differentiation on the platform. And I know at the strategic update in February, David talked about the fact that your platform is highly differentiated in the marketplace. And I was hoping you could just give us some color on, what are some of the attributes that make your platform unique? Just so we can understand the areas of superiority, for lack of a better term, maybe compared with some of the other legacy platforms that have been around for years, and in some cases, even decades.

Look, I think the #1 differentiation is bringing in the One GS ethos and the client obsession that Goldman is known for. So we want to be the trusted advisers to our clients. And even before we began the journey in 2019, we spent time with roughly 250 treasurers and CFOs, and we just listened to them. And over that period, stunningly enough, they were consistent in the themes they told us about, the areas where we could be highly differentiated. So once we learned those areas of differentiation, we went about building a platform that is completely on cloud, using APIs, using real-time data, to satisfy those needs to our clients in a very differentiated way than the rest of the industry does. I'm happy to go into some of the details, but the 3 areas that clients have pointed out to us consistently is that it takes a number of days, if not weeks, to onboard a client. Like one of the clients told me that launching a rocket and having a round trip to space is faster than opening a bank account. And the second one is, once a payment is sent out to a bank portal or any other banking system, it takes days, if not weeks sometimes, to get the confirmation of payments being sent out. They have no way of accessing their [indiscernible]. And third, many of these large corporates have multiple entities keeping several tens of millions of dollars of cash or other currencies. They don't have a good way of forecasting how much money they should be keeping in each of those entities that they fund. So having real-time data to predict the cash flows, to predict how much cash they should be optimizing in each of those entities was a super-big value that they would expect from the banks. So our goal then translated to taking all these requirements, making it real-time, having APIs and everything through the stack to be completely real-time in a very modern way. So we embraced cloud completely. The entire platform is built in cloud. We feel it's secure, it's highly available. Our availability is to the tune of 99.8%, about, throughout last year, including weekends. So we don't shut down our systems during weekends and bring them back on Monday morning. And when we talk about APIs, we mean APIs every step of the way. It's one thing to have APIs on top of a huge mainframe system that was built 30 years ago, to have real-time postings, to have our clients use on a real-time basis is massive.

So as we think about the process around customer acquisition, I understand like how the value prop is differentiated. But maybe, Hari, if you could just speak to how long does the process typically take from that initial engagement until you actually onboard the client? And what are some of the biggest hurdles or pain points that exist to attracting those clients? And how are you eliminating some of those hurdles?

It's a great question. So we, at the beginning, set 2 go-to-market strategies that is very clear in our minds. The first and foremost, which I alluded earlier, to be pairing with our Investment Banking professionals, to be part of their journey in solutioning the clients' needs, and every step of the way, stay tuned their clients' needs and provide them the services they need and the solutions they want. So the level of client obsession that we had early on to provide what they want helped us acquire clients. So when we first embarked on this journey, we were content to be the #3 and #4 provider, just to have a initial set of services provided to them. So as I look forward, we have 2 parts in this journey, right? We can acquire new clients through additional Investment Banking franchise and additional acquisitions that we could do. Also, once we have an imprint in the client's ecosystem, we continue to expand our services to their needs over a period of time. So we go deep within our clients and we also acquire additional clients. So just to frame this in numbers for you, Steven, I know you wanted to know numbers. Our Investment Banking franchise covers roughly about 12,000 clients globally. Roughly half of them are in the U.S. and the U.K. and we had roughly about 1,000 clients as our target clients for Transaction Banking. And we have roughly 350 of those clients in our platform right now. So that's our journey #1, large corporate client acquisition through our Investment Banking franchise and partner with our clients at every step of the way. The second most important journey that we have taken is to open up everything that we build for corporates as a banking-as-a-service tool for many of our fintech partners to build on top of us. So we have announced a number of partnerships through which we cater to a large swath of small and medium clients, that historically Goldman did not have access to, and provide services that we already built to those clients through our partners. And the most important aspect of that is there's no other part of Goldman Sachs that is competing for the same exact small and medium clients along with our partners' client acquisition. So our only channel to acquire clients is through our partnerships. So we believe over a long period of time, continuing to invest in our solutioning mindset with the large corporates and continue to expand our footprint and partnerships and acquiring our clients indirectly through our partners, especially the small and medium clients, would be what we would be pursuing.

So I was hoping to maybe spend a little bit of time talking about the partnership since that's obviously critical to the strategy. You highlighted several partners, many of whom are actually participating in this conference, Amex, Visa, Fiserv, Stripe. I was hoping you could speak to just how these partnerships really complement the offering. I know that you talked about the limited client overlap. But also, how are they integrated into the platform seamlessly?

So I'll talk about it in the 2 go-to-market strategy verticals I spoke about. The first one for the large clients. We want to be very good in the products we provide to our clients. And when we are not providing a certain product category, we want to partner with the best-in-class service provider for that product category. So let me give you an example. When we went and talked to a number of our clients, we provided the Transaction Banking services, but we weren't particularly eager to provide the card payments, our T&E services, our virtual card services. So therefore, it made a lot of sense for us to partner with American Express, clearly a best-in-class in that ecosystem. And we integrated those services and provided a single interface to our clients. When clients interact with Goldman Sachs, some of those payments could be their regular-way wire payments or foreign exchange payments, some of them could be card payments. And we made that super-simple for our clients to integrate using our APIs, the single API that the clients connected to. Same way with Visa. When we connect into the rest of the world, the traditional model of connecting to the world through SWIFT network and the correspondent banking network was available to us, and we did connect into them. We also partnered with Visa to come up with alternate rails to connect into those countries and efficiently send payments on a real-time basis. So we effectively built out an intelligent payment routing system within TXB, and that can route payments based on certain criteria that client has given us. Are they optimizing for cost or are they optimizing for card spend? Are they optimizing for expediency? All of it is possible, and we built all of the intelligence within Transaction Banking platform. Then if you go to the small and medium plans, we partner, as you said, with Stripe, where Stripe built a Stripe treasury product using Goldman Sachs Transaction Banking services. And that service is still in beta, launching to the small and medium clients shortly. And then we also partner with Fiserv to partner within their SnapPay ecosystem and provide payment capabilities to the SnapPay users. So as you can see, our reach is broader. And because we are API-enabled tech platform, we could continue to connect easily to our clients in a very nimble way.

That's great. And it looks like we've actually had a couple of questions just on the competitive landscape. And so Hari, I thought it might be helpful if you could just speak to, within Transaction Banking, both just the competitive landscape across both the traditional banks and the fintechs. And who are the largest players in the space? And who's actually ceding share at Goldman, given the growth that you've seen thus far?

As I said, the TAM and the addressable market that we're looking at is roughly about $150 billion. Based on our analysis, the biggest player still holds only 6% to 7%. Since the market is so big, our goal, even if we got to roughly $750 million over the next 3-year period, it still meaningful in the context of Goldman Sachs. But of course, our sights are much bigger than that, and we want to sort of embark on this journey for the long term, build a bigger business for Goldman Sachs. If you look at the traditional fintechs, we are a fintech in the context of providing services using technology platform, ultimately with our platform business, and we are continuing to improve the platform using new services. But it's backed by Goldman Sachs' balance sheets, the connections within our Investment Banking franchise. And the client mindset and a trusted adviser mindset that we have; controls, the licenses that we need to operate in multiple countries; and the compliance framework and the legal framework that Goldman brings to the table, differentiates us from a traditional fintech model. Through the traditional banking model, we feel differentiated because of our technology platform since we started from a clean sheet of paper. Again, just to put some numbers to you, Steven. We released roughly 2,000 releases last year alone compared to a traditional player, that they would plan about 4 to 5 releases. So for our ability to be nimble, to be responsive to our clients' needs, to provide a high-quality consumer-grade experience to corporates is a massively differentiated factor. So with respect to traditional banks, they all tend to compete in the space, but we believe we can actually carve our niche in this market, and we can actually successfully expand our market share, again, through the traditional acquisition as well as the small and medium business clients.

So one of the other questions that we've gotten on the competitive landscape, and this is really focusing on the 2 big competitors, which are JPMorgan and Citi. Both have talked about plans to step up investment and certainly allocate more resource to Transaction Banking. Any signs of the competition has intensified at least since your initial launch? And any just insight you can share in terms of just general trends around the competitive landscape, where it's getting more intense?

Look, I'll be humble. We are in the second year of business right now. So I just want to put this in context in some of the large players you mentioned. And we have tremendous respect for some of the big names you had mentioned. They had been in the business for the last 30 years-plus, and their systems and processes have evolved over that 30-year period. So we are actively watching their announcements and are actively watching to see how they are shaping their offering as we're embarking on our own journey. Look, I'll make this point. I've worked in some of those large organizations prior to my arrival at Goldman Sachs. It's one thing to build a brand-new system, scale it using new talents, some of which is internal talent, some of which is external talent that we got, but in a nimble short time frame. And in some ways, I would argue that's easier to do today because of the advancements in the cloud technology, the advancements that happened in the compliance, on this cyber, the framework and the regulations that have come about, catching to the organizational infrastructure, that did not even exist 5 years ago, let alone 30 years ago. So the traditional players will have a huge hop to make to upgrade their traditional infrastructure and the processes around it. That's going to take time for them. So we are not taking any of that lightly. We are watching carefully about how they're thinking about this journey. But ultimately, the proof is in the pudding. Are clients liking what we are doing? Can we be with the client every step of the way? I'll give you one anecdotal example, this is super interesting. We have built some advanced analytics and data-led solutions for our clients. A large client of ours usually sends a payment every day morning at about 6:30 a.m. It started a couple of months ago, a Wednesday morning, one of our folks found the client had not sent the payments at 6:33 a.m. They made a call to the treasurer and the treasurer did not know they had an issue on their side. Then they looked around and they found the issue, it happened to be a manual issue, and then they sent the payments. So that's an example where we jumped from being a #3 and #4 in the banking hierarchy within that client to a #1 spot fairly shortly right after that [ wire cloud service ]. So the things that we could do using technology power and the analysis of data and the nimbleness through which we can operate is massively different. And we would love to see the rest of the industry to sort of evolve that.

Hari, you had actually talked about some of your longer-term ambitions. And I know that -- maybe if we could just spend some time just honing in on the targets that David had spoken to or had updated last February. At Investor Day, management had outlined the path to profitability for the business. You updated those targets -- or David did, in February, of a $750 million revenue and more than $100 billion of deposits in 2024. How far along are you with regards to investment and scaling the platform? And is the business still on track to actually deliver profitability?

So just to be very clear, last year, 2021, was the first full year for us to be in the business. As David mentioned in the conference, we made $226 million roughly in revenue. And today, we are pretax profitable. And we have launched this business completely in the U.S. And it's a single platform. We extended this in the U.K. so we can onboard U.K. clients. And so the beauty of this platform is we build this once, and every jurisdiction that we go, we connect to the local rails, the compliance protocol to the local jurisdiction, and then off we go. And then we continue to do this in other countries. We are expanding to other global markets as well. So with respect to the interim targets that David mentioned, we feel very comfortable with the $750 million revenue and the $100 billion deposits. Just so you have a reference, in the 2020 Investors Day, our goal was roughly hitting $50 billion in deposits in 2025. The fact we hit that ahead of time, end of last year, at $54 billion, we feel pretty good about that journey over the course of next 3 years. But just to be super clear, that's not the only milestone that we're marching to. We want to make this a longer-term business for Goldman Sachs. While that's an interim milestone, our ambitions are building this bigger, healthier, stronger recurring revenue business over a period of time.

So if we look at it with that longer-term lens and even beyond the 2024 targets that you guys had outlined, what do you see as an achievable profitability margin or return for this business once it is at full scale? And how should we think about just the potential cap or ceiling in terms of what market share is achievable in the context of that $150 billion TAM that you cited?

Look, I'll point to a couple of figures that we observed externally. At scale, this business tends to be roughly in the upper 40s, lower 50s in terms of margin for the established players. With the brand, with the client reach and the feedback that we received with clients to date and the platform that we have built on a global basis, we feel very good about that range in the longer term. As we scale this business, as we continue to invest in this platform, as we expand the reach, as we expand to more clients, and within each client, we expand to be the top provider for them, we feel it's very well within our reach to be able to get there in the super long term. In the second point of your question, I don't personally believe there's limits. Just again, I give you the numbers, like at $150 billion, even at 1%, it's a meaningful number for Goldman Sachs. And the market is so fragmented, with a differentiated solution, with a focus and a committed platform strategy, we believe we'll continue to scale. The other interesting fact is that $150 billion pie also expands as the available pool of cash for corporate also expands. So there's no ceiling even at the $150 billion level on a TAM basis. So we feel pretty good about the industry and our ability to scale and our story to our clients to be with them every step of the way.

And so as we think about how this business is going to evolve over the long term, maybe if you could just speak, Hari, to the broader product and geography road map. I know you guys have expanded into the U.K. I was hoping you can give some perspective on, what are your geographic ambitions or ambitions in terms of geographic footprint over the long term?

So we have 2 dimensions again, the large corporate footprint as well as the small and medium clients through partnership. So talking about the large corporate footprint, we are actively expanding to Western Europe. We're also actively expanding to Japan. Then we are actually expanding to some of the South Asian countries, at which point, [ order of which ] could grow are only 3 factors. Where do our clients want us to be? What is the cost of putting a sales force in each of the jurisdictions? And our ability to connect into the local rails and the local compliance laws that exist with each of the jurisdictions. So we feel pretty good about that scale over a period of time, but post 2023, they're going to be client-led in the specific demographics that we'll be expanding. And then the other question that you had about the small- and medium-sized clients. We believe it's going to be in the evolved markets in the U.S., U.K., Western Europe markets, because some of the other countries have leapfrogged in terms of the sophistication of the payment systems. We want to focus on some of these larger economies where we can make a reasonable dent within our small and medium client base that our partners has planned to get to.

Got it. And certainly a popular topic, at least at the moment amongst bank investors, is on deposit betas and sensitivity to higher rates. And just now that we have several rate hikes that are baked into the forward curve, I was hoping you could just speak to the revenue sensitivity of the business to increases in short rates. And do you expect to see a material benefit? And give just some perspective on deposit betas, given it's a predominantly institutional client base.

Look, this business is deposits NIM-based. Ultimately, the platform business makes money in the NIM as well as the -- some fees that come with FX and so on and so forth. So invariably, we are tied into the rate environment one way or the other. Look, I'll make 2 or 3 observations on this. First, just to be humble, we are in the second year in business, and we launched the business in the absolute lowest rate environment you can imagine this to be. So we are observing the market very carefully. And as rate rises, we would be watching how the rest of the market reacts, the client mix. And we're also looking to increase the deposit base over these periods. And in our minds, we made some conservative assumptions about beta in order to get to the $750 million revenue number over the 3-year period. But look, we are still learning. And as a result, in 6 months when you and I speak, I'll have a better answer, looking back, as the beta is raising -- as the interest rate is rising, where our beta is going to be. But I'll also make another point. We are very determined to make this a long-term business for Goldman Sachs, much beyond 1 or 2 rate cycle increases. So our ability to kind of be super client-focused, beta has a huge implication to how our client service sort of comes about. We want to be thoughtful about building this business for the long term, not just for 1 or 2 rate cycles.

Great. And one of the questions that has come through, and I'd be remiss if I didn't touch on this given some of the geopolitical tensions, is on the topic of SWIFT. And in light of some of the SWIFT sanctions on Russia, there are some concerns that the latest geopolitical developments could prompt some rethink, if you will, of the current payment infrastructure or ecosystem. How is the business positioned today with regards to SWIFT? And how is the business equipped really to adapt if there are more wholesale or sweeping changes to the payments infrastructure?

Look, we are learning. And as every day goes by, we are learning new regulations that are coming out and the implications of that, to the broader economy, to our clients, as well as to us. When the first set of changes came to us, we were able to make them [ rapidly ] straightforward on an [ inquiry ] basis. That talks to the nimbleness of the platform that we built. As I referred earlier, we were able to make roughly 2,000 changes in the platform that we built. We feel good about that because we have built the testing suite around it. We build them in the cloud. We can actually build them in an active-active mode. We have actually build the infrastructure in the way that a new business would build that in 2022. As a result, we feel good about our ability to change and be nimble through the regulatory changes or any of the other sanction changes, quite frankly, what our clients want in the context of the changes that we are looking to do. But that said, look, it's an evolving landscape, and we are watching very carefully about how this industry is changing and adapting to the new set of "normal."

Do you feel like your platform, though, given that it's built on APIs, does it afford at least a little bit more flexibility relative to some of the larger legacy players that might have legacy infrastructure that they're having to navigate in order to comply with some of these new regulations?

Absolutely. Look, I mean, the biggest, biggest differentiator for us is our ability to be super easily changed, understand the impact of the change and deploy the change in a matter of minutes. And our ability to continuously do that and have the high fidelity, to be 99.95% (sic) [ 99.5% ] automation and 99.98% (sic) [ 99.8% ] uptime, is the critical part of this platform. So I would describe this as a platform business, ultimately. And as we are continuing to invest in our platform, our best capabilities come forward because of our nimbleness. And our clients love it because we are super-nimble to their needs.

Great. I know at the end of last year's discussion, it was with John Waldron, and we talked about blockchain, a distributed ledger technology, certainly a critical area for your business. How do you see the emergence of blockchain technology impacting the Transaction Banking business over the long term? And what are some of the key adoption hurdles that exist today? And how are you positioned for that adoption relative to the peer set?

Look, the entire industry is evolving with respect to blockchain and payments. There are several good uses of blockchain already that's getting pieced out. As John referred in that meeting with you, there's an internal group within Goldman Sachs that's super-focused on the trading aspects of this. And we are very closely partnering with that group to, A, learn from what they've already done; B, how best we can integrate into that ecosystem as we get into the payments angle of this blockchain. But I still think that is a bit too early for us to make a public announcement on it, partly because the technology is still evolving and the regulations around it are still evolving. There were some news this morning about the U.S. currency. There's quite a lot of energy around it. So look, we -- our tech-forward nature and our platform strategy gives itself to be able to nimbly adopt that strategy as it evolves. But right now, we are waiting and watching and how this industry is evolving and quietly shaping that industry as well.

Great. And I know we only have a couple more minutes here. So one of the things that I just wanted to ask on is, recognizing that, and Hari, you might not have been privy to this but you may have heard it secondhand, there was certainly a fair amount of skepticism on the part of investors initially when this was being launched, recognizing that this -- you're building out this business from its infancy from -- you had a blank canvas, there were a lot of established players in this space. I think you disproved the naysayers with really strong KPIs and really good early momentum. What have been some of the biggest surprises, both positive and negative, recognizing you did this with a blank slate? And anything you could speak to just in terms of client feedback with regards to execution?

Believe me, I knew that. Look, it's a right skepticism to have, right? It's a legacy industry with established players, have done this business for several decades, if not years. And we're starting with a clean sheet of paper. We've got a tremendous amount of feedback from our clients and our ecosystem players, but I'll tell you the [Audio Gap]