Data Dive

Putting On The Brakes Edition: Marcus, Square, Google (and Amazon)


When the world of payments and technology can feel like an all-forward-motion all of the time kind of an environment, it can be hard to remember that knowing when to put on the brakes is at times as important — or even more important — than knowing when to hit the gas.

But in a week like this one, the news cycle reminds us that for all the acceleration out there, there are decelerating forces as well.

Such as…

Goldman Sachs Pulls Back On Marcus

News reports this week indicate that Goldman Sachs is looking at reigning in its online lending platform. Internal sources told Bloomberg last week that the bank is becoming concerned about the present phase of the credit cycle and changes in market data.

The news came as something of a surprise — the possibility that Goldman has slashed originations targets for next year set off a new round of speculation about concerns in the consumer underwriting segment. At last report, the firm has underwritten $3 billion in new consumer loans since launching in October of 2016 through the first quarter of 2018.

“We are pleased with the progress we are making on strategic initiatives within our consumer franchise,” Goldman CFO Martin Chavez said at the time. “Our long-term vision for Marcus is to create the leading platform for millions of consumers to take control of their financial lives.”

Moreover, in August of this year, Marcus launched in the U.K., reportedly offering the highest savings account interest rate in the country to lure new customers its way. Initially, Marcus will start by providing easy-access, online-only savings accounts, with lending products slated to be available at the earliest in 2019.

According to the memo that announced the rollout to staff, Goldman said it’s “an important milestone in the growth of Goldman Sachs’ consumer business, as well as continued diversification of the firm’s funding.”

Germany  was widely reported to be the next target nation for Marcus expansion.

But forecasts for 2019 are reportedly changing — and there are concerns that current market conditions for consumer lending will change. Some lenders are worried about the chance for increased losses in consumer credit as interest rates rise. Others are simply worried about the total debt load of U.S. consumers.

The loss rate on the Marcus loan portfolio was around 5 percent in July.  So far there are no more recent reports on what it is today — or what it is forecast to be next year.

And Goldman isn’t the only notable name looking at some breaks tapping when it comes to lending. Square saw a bit of the same — from its investors.

Square Stock Takes Hit Over Installment Lending

Square shares fell by more than 8 percent on Monday (Oct. 8) and continued that slide for most of the week as investors became concerned that its expansion into helping its business partners underwrite installment loans for consumers is creating risks that are being overlooked.

Sell-side Wall Street Analyst Mark Palmer of BTIG is concerned that the recently debuted “Square Installments” may expose the company in a way that makes it vulnerable to credit markets. Palmer cited risks to the company’s business model, and “credit risk in particular,” noting that extending credit to grow is a risky proposition.

Square’s installment financing is such that the payments firm’s merchants’ customers can take on financing ranging from $250 to as much as $10,000 — that is then broken up into three-, six- or 12-month spans, with the payments separated into fixed monthly amounts. Those who apply for those loans must be pre-approved, and merchants receive the payments upfront.

Square will hold loans on its balance sheet and, eventually, might sell those loans to outside parties, a practice it employs already with its loans extended to merchants.

Palmer noted that taking on consumer lending is risking their own balance sheet — and selling loans after origination can still be a volatile proposition.

And Square wasn’t the only big name venturing into credit that got tagged by the stock market pullback last week. PayPal was down 3 percent, as was Amazon (which extends credit to smaller enterprises). Even credit card companies were down about 2 percent (and a bit more) on the day.

And there is suddenly a lot more credit out there, according to TransUnion — from the start of 2017 to the beginning of 2018, the number of auto loans grew by more than 4 percent, credit cards grew by about 2.6 percent and personal loans by 13.2 percent. Clearly, consumers are comfortable with taking on new credit-related accounts.

But investors, it seems, are getting a bit less comfortable — and investors are wondering how well consumers will do when there isn’t record unemployment and the economy isn’t burning full speed ahead. And preemptive breaks are perhaps being pumped.

And Square’s troubled squaring with their investors this week was not the extent of their troubles. Their stock price took yet another beating later in the week when it was announced that CFO Sara Friar is leaving.

Friar — often described as CEO Jack Dorsey’s right-hand person — is leaving Square to become the CEO of Nextdoor. That caused Square stocks to fall more than 8 percent, extending a 10 percent loss in regular trading. That fall continued the following day as the company’s share price fell as much as 16 percent before closing the day down 11 percent at $69.03, according to the Financial Times.

Friar, according to analysts, is the most visible presence at Square outside of Dorsey himself.

“Ms. Friar’s level of leadership has been an important aspect affording Mr Dorsey ample leeway to perform as a dual CEO, in our view. Simply, Ms. Friar was much more than a CFO to the company and in many respects a key architect in building Square’s business model,” said Citi analyst Peter Christiansen, who holds a “neutral” rating on the stock.

He added that Friar was “the single point of contact for investors.”

Friar, who will stay at Square until December, helped see the company through its initial public offering (IPO), as well as helped build its mobile services.

“Sarah isn’t just a world-class CFO. She’s a multidimensional leader who considered our entire business,” Dorsey said in an email to staff on Wednesday (Oct. 10). “Her team and role evolved through years of learning and building with us, and that’s not something you replace by simply hiring.”

Google Ad Business Has A Hiccup

In fairness, this one could either be an example of hitting the breaks or hitting the gas, depending on whether one works at Amazon or Google.

According to this week’s reports, Amazon is beginning to seriously take on Google’s advertising empire, as more and more advertisers are moving their budget earmarked for Google to the eCommerce giant.

If those reports are accurate, Google could face a threat from Amazon to the $95.4 billion in revenue the search giant nets annually — about 86 percent of its total revenue.  As of 2017, Google will control about 37 percent of all digital advertising budgets — but it seems Amazon is making deep inroads into that advertiser base, particularly among consumer packaged goods brands.

The reports also indicate that Google is almost also its revenue move to other parts of its ecosystem, as brands are increasingly moving advertising dollars to YouTube.

“Leadership is definitely concerned, but [it’s] not a huge threat right now,” one Google staffer told media, noting that at this point they are seeing most brands more likely to be developing products to sell on Amazon, rather than pulling their ad budgets and moving them to Amazon.

Still, six unnamed media agencies told CNBC that Amazon is making a big splash in advertising, with reports that at least one executive called Google search ads “quaint.”

Data from Survata further indicates that about 49 percent of product searches start on Amazon — which is driving many clients to move ad dollars there, often a majority of them.

However, before anyone starts a kickstarter for Google, it should be noted that the shifts aren’t universal. CPG brands are particularly affected. Advertising for things like travel or automobiles remain much more likely to be on Google.

Until next week!



New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.