Goldman Stumbles on Path to Main Street With Apple Card Flap

(Bloomberg) -- Lending money to ordinary Americans, Goldman Sachs Group Inc. says, represents a major part of the future of a Wall Street titan more accustomed to dealing with the world’s biggest corporations. But a series of perceived missteps over its flagship Apple Card has introduced the first big test of whether the investment bank is ready for Main Street.

Lawmakers and regulators are investigating whether the computer models that Goldman uses to determine who gets the card and their credit limits are unintentionally cementing decades of gender bias. The issue brought the type of nightly news attention the bank hasn’t faced in years, after a prominent tech entrepreneur set off a social media storm with a viral tweet saying he and his wife were treated unequally.

For executives at Goldman Sachs and Apple Inc., a credit card launch they hailed as the most successful ever has given way to a very public controversy, just as consumer advocates are prodding reconsideration of whether algorithms are entrenching discrimination that they were meant to stamp out.

“The biggest threat to Goldman’s longer-term success is the political climate,” said Ron Shevlin, director of research at bank consultancy Cornerstone Advisors. “They know very well they are going to be under more scrutiny than a bank in Small Town, USA.”

Goldman responded that it doesn’t take gender or marital status into account when determining creditworthiness, and the bank said it will introduce the ability for household members to share an Apple Card credit line. The bank also said it welcomes a discussion of the topic with policy makers and regulators.

On Nov. 7, David Heinemeier Hansson said he was allowed to borrow 20 times as much as his wife, even though he has a lower credit score and they reported the same income and share finances. Apple’s own co-founder, Steve Wozniak, fanned the flames by announcing his wife’s credit limit was a tenth of his.

That prompted New York’s Department of Financial Services to open a probe, and politicians including Senator Elizabeth Warren, a leading contender for the Democratic nomination for president, to weigh in. Warren slammed the bank for its response to the issue, and said if Goldman can’t show that its algorithm doesn’t restrict women’s access to credit, it should ditch it.

“The risks of unaccountable, black-box algorithms shouldn’t be underestimated,” Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee, said this week. “I’m looking into the allegations about Apple’s credit card and have asked both Apple and Goldman Sachs for a briefing.”

Coverage of the controversy:

  • Elizabeth Warren slams Goldman over the issue
  • Goldman says it will allow shared cards
  • Claims show AI hasn’t solved some 1970s problems

Goldman executives say their algorithms aren’t a black box as they can determine what factors drive decisions. But as the bank defends itself, it’s fighting an uphill battle against customers feeling shortchanged by a credit card that was touted as the most consumer-friendly one around. And they face an army of critics on social media -- egged on by Hansson and others -- itching to bash the bank for perceived sexist practices.

It’s a far cry from last year, when Harit Talwar, a senior executive at the bank once labeled a “vampire squid” for its financial crisis dealings, declared that he hoped Americans would come to view Goldman as a “lovable teddy bear.”

In its first few years, Goldman’s entry into consumer finance was marked by rapid growth. The Apple Card was meant to advance the Main Street expansion, which includes its online bank called Marcus and was big piece of the firm’s overall growth plan.

Goldman had targeted $1 billion of new annual revenue from consumer lending by the end of next year, an estimate initially based on growing its book of Marcus personal loans to $12 billion. Reaching that level now probably depends on the success of the Apple Card, especially after the bank tapped the brakes on Marcus to focus on the newer offering.

The August launch was a smashing success, Goldman Chief Executive Officer David Solomon and Apple CEO Tim Cook said. Goldman’s regulatory filings show that consumers who snagged an Apple Card collectively could borrow as much as $10 billion within the first few weeks, a number that suggested millions of new customers.

Apple -- which markets its card as “created by Apple, not a bank” -- continues to refer queries to its bank partner. Goldman is left to largely face this challenge on its own.

In some ways, the events of the past week exemplify a concern a former senior executive articulated roughly a decade ago when Goldman was asked about getting into home mortgages.

“Goldman Sachs is largely an institutional business,” then-Chief Financial Officer David Viniar said on a 2006 earnings call. “There are different risks when you are touching the retail customer.”

The bank is now making moves. A senior Goldman executive in charge of customer support contacted Janet Wozniak to discuss her experience with the card. Goldman then raised her credit limit -- as it did for Jamie Heinemeier Hansson after requesting more information. It’s also trying to quell online outrage by addressing critics on Twitter and sharing more about its internal processes.

Janet Wozniak said that Goldman executives counseled her on the need to build her own credit, which she called a valuable lesson. She was surprised to find that years of sharing cards with her husband hadn’t boosted her own metrics.

“I don’t really think Goldman Sachs is messed up. I think the whole credit system is messed up,” she said in an interview. “Bad data in equals bad data out.”

The bank has maintained that a few examples don’t prove that its process is biased or that it did anything wrong. In a podcast that aired Wednesday, Carey Halio, chief of Goldman’s banking subsidiary, was asked whether internal reports that blessed the algorithm behind its credit card lending were up to snuff. Halio said the bank was confident that it’s done everything right.

Then Halio offered a lesson: Americans need to be more educated about their finances.

©2019 Bloomberg L.P.

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