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To think it all started out so well.
When Goldman Sachs and Apple teamed up to launch a credit card in 2019, neither the storied investment bank nor the technology giant had much experience with consumer banking. That did not stop them from dreaming big.
They promised to offer “an innovative, new kind of credit card” with no fees and a cutting edge app “designed to help customers lead a healthier financial life.”
Goldman chief executive David Solomon hailed the Apple Card as the “most successful credit card launch ever,” and analysts predicted that the partnership would shake up financial services.
But five years on, the double act is a cautionary tale about what can go wrong when big companies try to reinvent retail finance on the fly without thinking through all of the ramifications.
The top US consumer finance watchdog last week declared that Apple and Goldman had “illegally sidestepped” obligations to consumers in their haste to create a novel product. The Consumer Financial Protection Bureau ordered the two groups to pay a combined $89mn for mishandling disputed charges and misleading customers about interest-free payment plans.
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The partnership has also turned financially sour for Goldman Sachs, which is now trying to exit as it shuts down an ill-fated push into consumer banking that racked up billions in losses.
The saga is partly a warning about hubris. Retail banking is not only harder than it looks but also heavily regulated by watchdogs who take their duties very seriously. That can put the regulators at odds with buccaneering entrepreneurs who want to shake up existing ways of doing business.
Tech firms are used to launching in beta, a fancy way of saying that they put out a lightly tested product and then modify and improve it as problems are discovered. That attitude spilled over into the Apple Card. Goldman’s board was warned ahead of its August 2019 launch that the system for dealing with disputed charges was “not fully ready”. The bank, which would have had to pay penalties to Apple for a delay, opted to push ahead anyway.
In the first two years of the card’s existence, more than 150,000 customer-reported billing errors fell between the cracks in some way, the CFPB said. Apple often failed to send the reports to Goldman. When they did arrive, Goldman often failed to respond within legal deadlines — or at all. Customers were left on the hook for tens of thousands of charges that they disputed.
The CFPB also fined the partnership for the “confusing” way in which it offered a free instalment plan, saying that thousands of customers wrongly ended up paying interest anyway.
Innovations contributed to the issues. Apple designed a distinctive user interface and integrated the card into other iPhone apps. It also insisted that everyone’s billing cycle coincide with the calendar month, because that was simpler for customers.
The card won top rankings in customer satisfaction surveys. But some cardholders got lost in key processes and failed to file forms or tick particular boxes. The single billing date led to huge surges in disputed charges that overwhelmed Goldman’s customer service.
“You want to differentiate the product, but when you deviate from the norm, it can be confusing,” says Jason Mikula, a fintech consultant who previously worked at Goldman.
Entrepreneurs are often willing to pay that price for innovation. Financial watchdogs take a different view. There is a reason for that. If a fledging web search engine or a shaky chatbot offers less than perfect responses, where is the real harm? But charging customers unfairly or wrecking their credit scores causes measurable pain that regulators have a duty to prevent.
The episode carries lessons that another group of swashbuckling financial groups should heed: money managers racing to sell alternative assets to wealthy individuals.
Until recently, private equity and private credit firms took money almost exclusively from big pension funds and endowments and avoided most oversight that way. But now that the institutional market is saturated, they are jostling to offer largely untested products to retail investors who may or may not understand what they are buying.
Some alts firms have partnered with traditional asset managers, others are opting to charge ahead on their own. I hope these new funds and model portfolios work brilliantly. If not, you can be sure that the watchdogs are going to be waiting with bared teeth.
Follow Brooke Masters with myFT and on Twitter