A cautionary tale about Goldman and Apple’s credit cards

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How it all started so well.

When Goldman Sachs and Apple teamed up to launch a credit card in 2019, neither the storied investment bank nor the tech giant had much experience in consumer banking. But that didn’t stop them from dreaming big.

They promised to offer an “innovative new type of credit card” with no fees and a cutting-edge app “designed to help customers live healthier financial lives.”

Goldman CEO David Solomon hailed Apple Card as “the most successful credit card launch ever,” and analysts predict the partnership will revolutionize financial services. did.

But now, five years later, this double act is a new look at what can go wrong when large corporations try to reinvent retail finance on the fly without considering all the ramifications. It’s ringing the alarm.

The head of the US consumer financial watchdog declared last week that Apple and Goldman had “unlawfully evaded” their obligations to consumers by rushing to develop new products. The Consumer Financial Protection Bureau ordered both organizations to pay a total of $89 million for mishandling disputed charges and misleading customers about interest-free payment plans.

The partnership also hurt Goldman Sachs’ financial situation, halting an ill-fated foray into consumer banking that cost it billions of dollars and is now exiting.

This story is partly a warning against arrogance. Retail banking is not only more difficult than it looks, but it is also highly regulated by watchdog agencies that take their duties very seriously. This could lead to conflicts between regulators and greedy entrepreneurs who want to change the way existing businesses are done.

Tech companies are used to releasing in beta. Beta is a fancy way of saying that you release a lightly tested product, then fix and improve any problems you find. That attitude extended to Apple Card as well. Goldman’s board was warned ahead of its formation in August 2019 that its system for dealing with pending charges was “completely unprepared.” The bank would have had to pay a penalty to Apple if there was a delay, but it chose to proceed anyway.

According to the CFPB, in the first two years of the card’s existence, more than 150,000 billing errors reported by customers somehow fell through the cracks. Apple often failed to send reports to Goldman. Even when they arrived, Goldman often did not respond within legal deadlines or at all. Customers were left unattended with tens of thousands of disputed charges.

The CFPB also fined an affiliate for a “confusing” method of offering free installment plans, saying thousands of customers ended up paying interest incorrectly anyway.

Innovation helped solve the problem. Apple designed a unique user interface and integrated cards into other iPhone apps. We also advocated aligning everyone’s billing cycles with the calendar month because it’s easier for customers.

This card also ranked high in customer satisfaction surveys. But some cardholders got lost in key processes, failing to submit forms or check certain boxes. A single billing date led to a significant spike in disputed charges and overwhelmed Goldman’s customer service.

“You want to differentiate your product, and deviating from the norm can lead to confusion,” says Jason Mikula, a fintech consultant who previously worked at Goldman.

Entrepreneurs are often willing to pay the price for innovation. Financial watchdogs take a different view. There’s a reason for that. Where’s the real harm if a fledgling web search engine or flaky chatbot provides less-than-perfect responses, but doesn’t charge customers unfairly or destroy their credit scores? This will result in visible distress, which regulators have a duty to prevent.

The episode holds lessons for another enterprising financial group, one in which asset managers compete to sell alternative assets to wealthy individuals, to heed.

Until recently, private equity and private credit companies raised money almost exclusively from large pension funds and endowments, thereby avoiding most oversight. But now that the institutional market is saturated, they are rushing to offer largely untested products to individual investors who may not understand what they are buying.

Some alternative investment firms partner with traditional asset managers, while others choose to strike out on their own. We hope these new funds and model portfolios perform well. If not, you can be sure that the watchdog is waiting with his teeth bared.

brooke.masters@ft.com

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