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Finance

Goldman wins banking license to help multinationals in Japan

Stable commercial and consumer services supplement volatile trading profits

Goldman Sachs is bringing its new transaction banking services to Japanese multinationals.   © Reuters

NEW YORK/TOKYO -- Goldman Sachs on Wednesday received a license to operate banks in Japan, expanding the burgeoning business into a new market as its trading desk becomes less reliable as a cash cow.

Subsidiary Goldman Sachs Bank USA, which handles consumer and corporate banking, will offer services such as helping Japan-based multinationals with dollar funding. It is set to open a location in Tokyo in September.

Goldman is putting transaction banking -- handling cash management, payments and the like for corporate customers -- at the core of its growth strategy. The business, which launched in the U.S. last year, has more than 250 clients and $35 billion in deposits, and expanded into the U.K. in June.

The company is a latecomer to the field. Major American and European commercial banks including JPMorgan Chase, Citigroup and HSBC have already moved into transaction banking -- a source of reliable profits, even with thinner margins than investment banking -- and snapped up prime clients.

But "with no real legacy technology ... to defend, we are positioned to innovate unlike many others in the industry," CEO David Solomon said in a 2019 internal memo, when the company launched Apple Card. The same reasoning is believed to be behind Goldman's decision to enter transaction banking behind rivals.

Goldman hired engineers earlier than many of its American peers, to build from scratch a new cloud-based platform for online transaction banking. Simplicity and ease of use are the main selling points for the platform, which can handle domestic and overseas payments in more than 120 currencies.

The diversification push has also included a foray into retail banking. Launched in 2016, Goldman's consumer bank, now known as Marcus, has drawn customers with accounts touting relatively high yields in a period of rock-bottom interest rates. It had $97 billion in deposits at the end of 2020 -- on par with midtier U.S. banks -- which has led to lower funding costs for Goldman.

Goldman, which has no bank branches or ATMs, looks to use technology to compensate for its low brand recognition. Part of this strategy involves "banking as a service," or offering financial services for nonbank customers.

A successful example of this model is the Apple Card, launched in 2019. Apple develops the user experience elements, such as integration with mobile devices, while Goldman handles the back end, including payments, account management and customer service. Goldman is also acquiring General Motors's credit card business in a deal announced in January.

The company is working to branch out from a structure that makes it more vulnerable than rivals to market swings. The trading division, which generated nearly half Goldman's revenue last year, was hamstrung by tighter financial regulations and low interest rates before volatility sparked by the coronavirus pandemic boosted returns.

Since the 2008 financial crisis, stock markets have rewarded banks that bring in steady profits.

Morgan Stanley, which has expanded its wealth management and asset management operations through acquisitions, has a price-earnings ratio of 12.9, thanks to expectations of a stable stream of commission income. Goldman, with its focus on in-house development, has been slower to pivot, which is reflected in a lower ratio of 8.1.

Goldman's trading desk logged its highest quarterly pretax profit since 2010 in the first quarter of this year. But its performance is likely to come down to earth in second-quarter earnings scheduled for release next week, drawing investors' attention back to its diversification plans.

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