Goldman Sachs Group Inc. is pushing further into retail banking territory, and experts say the company's strong brand, online reach and massive budget mean big banks, online competitors and community lenders alike should be concerned about losing market share.

When Goldman Sachs held its first-ever investor day in January, the investment banking behemoth revealed plans to expand its retail digital banking strategy through Marcus, the digital consumer bank launched in 2016. CFO Stephen Scherr said Goldman is "embracing the bank model."

Marcus currently offers loans and credit cards and a high-yield savings product. At the investor day, management unveiled plans to roll out Marcus-branded wealth management services later in 2020 and checking accounts in 2021. In five years, Goldman expects its entire consumer and wealth management business to have $125 billion in consumer deposit balances and $20 billion in loans and card balances, while recording pretax income of at least $700 million.

Goldman has seen considerable growth in its consumer deposits since launching Marcus, which brought in about $860 million in revenues in 2019 versus $2 million in 2016, according to a company presentation. Consumer deposits had a three-year growth rate of more than 180%, reaching $29.45 billion in the fourth quarter of 2019, based on regulatory filings that do not include non-U.S. deposits. Over the same period, retail CDs grew nearly 39% to $49.85 billion. That far outpaced growth at the big four U.S. banks — Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. — and at many of the major U.S. online banks, according to S&P Global Market Intelligence data.

"They're a threat. They are absolutely becoming a retail powerhouse," said Ron Shevlin, director of research at bank consulting firm Cornerstone Advisors.

The strategy means Goldman can generate customers early in their life-cycle, grooming a desirable retail client base now in hopes that it will be well-placed to serve retail customers more fully in the future.

"In a couple years, they will have the full capabilities that you need to really play across the board to the client needs, and structurally more flexible around the client," said Alois Pirker, research director for the wealth management practice at advisory firm Aite Group.

Digital banks are often most interested in reaching younger consumers, Shevlin said. This approach can take market share from the largest banks because Shevlin noted that 44% of millennials say they bank with Bank of America, JPMorgan Chase or Wells Fargo.

"The real threat of a Marcus checking account is going to be with the top three or four, and then I'd even throw in some of the larger regionals as well," Shevlin said.

'Death of geography'

At the recent investor day, Goldman's global co-head of the consumer and investment management division, Eric Lane, said the firm aspires to be "the leading consumer digital bank."

"We're trying to deliver a retail bank branch through your phone," Lane said.

Unlike traditional banks, which operate costly brick and mortar networks, Goldman is coming to the space unencumbered by branches.

"To a large extent it's about the death of geography," Shevlin said. "Through advertising, through brand building, through technology, many players can come into your geographic footprint and pick away" customers.

Goldman also has a technology advantage because it is building a fresh platform on a new customer base. It is much harder for a legacy consumer bank that wants to meet the demand for digital offerings to convert its existing customer base to new platforms, said Lane Martin, a partner at Capco, a management and technology consultancy focused on the financial services industry.

"The other incumbent players need to think about, not only how do you keep up with what Goldman is doing from a technology and digital perspective, but then how do you not break what you have moving to migrate to this new operating model?" Martin said. "That's making everybody nervous...everyone from big top five banks to the smaller community players."

Goldman's massive marketing budget is another important distinguishing factor for Marcus. Many upstart digital banking companies rely on word of mouth for their marketing strategy, and that will not go far against Goldman's deep pockets, Shevlin said. While Goldman has not publicly disclosed its marketing budget, Shevlin estimated that the firm spent $80 million on advertising Marcus in 2017 and over $100 million in 2018.

Amazon opportunity

Observers also see the value in Goldman partnering with popular consumer brands.

Shortly after the investor day, the Financial Times reported that Goldman is close to partnering with Amazon.com Inc. to offer small business loans. Sources told the FT that as early as March, Goldman could launch an offering of small- and medium-sized business loans through Amazon's lending platform.

Experts say Amazon is a coveted partner that will pair well with a fully digital Marcus ecosystem. Amazon is looking to leverage data it has on people's spending habits on its platform while Goldman is seeking to reach customers electronically, said Brandon Spear, president of B2B payment and credit solutions provider MSTS. The partnership could address the classic underwriting problem of always looking at past finances and historical credit performance to gauge creditworthiness, he said.

"What's really interesting about these aggregators [such as Amazon] is that they're actually able to give you a much more real-time snapshot of the economic activity," he said. "So from an underwriting point of view I think that gives you a somewhat unique window to decide around how you provide credit to someone."

Capco's Martin said that Goldman competitors across the banking world are looking for ways to tie in their products to prominent consumer brands like Amazon and Apple Inc. in order to stay relevant; in 2019 Goldman launched a consumer credit card with Apple.

Big test for smaller banks

However, taking on the largest banking retail incumbents is always challenging even when new entrants to the space have advantages.

Marcus is not the first online bank that is unencumbered by brick and mortar branches and also has the luxury of a big marketing budget. Others in similar situations have seen strong deposit growth but have not yet reached the deposit market-share levels of the big three branch-heavy banks. For instance, Charles Schwab Corp., one of the biggest online banks by consumer deposits, has offered deposit accounts to its brokerage customers since 2007, but its consumer deposits of $190.72 billion as of Dec. 31, 2019, are still less than half of Wells Fargo's. Capital One Financial Corp. acquired the largest precrisis online bank, ING Direct, in 2012, but its consumer deposits as of Dec. 31, 2019, were less than Charles Schwab's.

But even if the largest banks are able to fend off Marcus, the smallest players could face the biggest test. For community banks with primarily local brands and customer bases, gathering new deposits is becoming increasingly difficult, Shevlin said, and they are "struggling" to build that funding base to fuel commercial loans.

"The reality is that, man, this market is getting tough," he said. "It was tough enough before Marcus came in."