Goldman Sachs is to expand its transaction banking business to 36 countries over the next 18 months, the head of the business told IFR, signalling plans for a dramatic scaling up from its current presence in just two countries.
Goldman launched its transaction banking platform in the US in June 2020 and started in the UK a year later. It is aiming to bring in at least US$1bn in annual revenues from the business, which helps corporates manage their cash and accounts, accept receivables, make payments and handle other processes and is often dubbed the "boring" side of banking.
“We believe we can scale over the course of the next 18 months to serve about 36 countries. That will make us a very credible global franchise,” said Hari Moorthy, global head of TxB, Goldman's transaction banking unit.
“We are actively looking to launch in European countries as well as in Japan and we are also expanding to other places globally as led by our clients,” Moorthy told IFR.
He said several launches could be done around a “cluster” of European countries.
Moorthy declined to name the next countries in Europe on the list, as he said the bank was working with several regulators, although Germany is expected to be one of the next countries where TxB is available.
Goldman is taking on commercial bank rivals that have dominated transaction banking for decades. It has its eye on a big fee pool – revenues from processing payments, cash management, and the other services that make up transaction banking are estimated to be about US$150bn annually, about half of which is in the US.
The biggest banks in the industry include Citigroup, HSBC, JP Morgan and Deutsche Bank. All the major players have been investing heavily in recent years to improve technology as they seek to grab more of the fee wallet.
But Goldman sees an industry that involves a lot of manual processes as ripe for disruption and argues that its cloud-based tech will give it an edge over the huge legacy mainframe platforms run by rivals
Moorthy said TxB could scale up easily, isn’t burdened by the cost of updating legacy technology platforms, and has a platform that can onboard customers and process transactions quickly and efficiently. Insiders compare the approach to how much of the developing world bypassed landline telephones and jumped straight to the advantages of mobile.
And while new technology firms have entered the payments industry and are shaking it up, they can lack banking know-how.
“It’s a tale of two stories – we are outbanking the fintechs and we are out-finteching the banks,” Moorthy said.
Ahead of schedule
When Goldman told analysts and investors in January 2020 about its plans to launch into transaction banking, it said it wanted TxB’s revenues to hit US$1bn and deposits of US$50bn about five years after launch.
Eighteen months after launch, deposits have already hit the US$50bn target. Revenues were US$225m in 2021, up more than 50% from 2020, Goldman finance director Denis Coleman told analysts last month. As a liabilities business, revenues have faced headwinds from ultra-low interest rates and the Covid-19 pandemic, but could get a lift from rises in interest rates this year.
“In light of what we see as a very, very attractive addressable market that leverages our core competency with the corporates, we feel good about the progress to date and on the forward,” Coleman said.
Goldman took the plunge into transaction banking after the successful launch of its digital consumer bank Marcus in 2016. It said TxB should be accretive to returns and margins in the long term, and it was also attracted by "sticky" revenues that were less volatile than other banking income, and said the business could also deepen relationships with clients and diversify its funding.
Goldman rehired Moorthy in 2018 to lead the buildout of TxB. Moorthy previously worked for Goldman for seven years until September 2014, then spent four years at JP Morgan.
Building TxB has been a major investment, although Goldman declined to say how much it has cost.
It now has about 500 people in the business, and Moorthy said that is expected to rise to about 700 by the end of this year.
Goldman itself was the first client of the business. The bank had 60 bank relationships and 8,000 accounts spread around the world. As with other major multinationals, moving money was complex and took time and resources. Moorthy said by creating an effective accounts structure for Goldman itself, the firm generated US$3bn–$4bn of liquidity savings.
There are now more than 350 active clients on the platform, Coleman told analysts last month.
TxB sits within investment banking, and that is the most direct route to get clients who the bank already knows.
“Our primary clients are the investment bank coverage clients across the globe,” Moorthy said.
It has also partnered with payments firm Stripe and American Express to provide TxB services to clients of both companies, including providing its payments platform to Amex’s large corporate clients.