Banking regulators in the United States have raised concerns over Goldman Sachs' collaborations with financial technology (fintech) companies, citing risks and compliance issues.
The Federal Reserve's warning earlier this year has led to a division of the bank's transaction banking business (TxB) halting its onboarding of riskier fintech clients. According to sources familiar with the matter, the Federal Reserve's concerns include inadequate due diligence and monitoring processes when accepting high-risk non-bank clients.
The division of Goldman Sachs' TxB that has come under scrutiny provides banking infrastructure to fintech clients, including payment start-ups Stripe and Wise. It is reported that the team has stopped signing on riskier fintech clients in response to the regulatory warning, while the other aspect of TxB's business, which provides cash payment services, remains unaffected.
Internally, some employees within the TxB unit have raised concerns about the bank's approach to risk, indicating a tendency to downplay potential risks. One internal complaint from an employee at the unit reportedly prompted an internal investigation within the bank.
The Federal Reserve's critique adds to the challenges faced by Goldman Sachs in its efforts to expand into new businesses under the leadership of CEO David Solomon. Transaction banking was identified as one of the growth initiatives during the bank's 2020 investor day, intended to leverage its corporate franchise, risk management capabilities, and innovative culture to diversify revenues and funding. However, this recent regulatory scrutiny has posed a hurdle to those expansion efforts.
Goldman Sachs' TxB division operates within the Platform Solutions segment and provides banking infrastructure to fintech companies without a US banking license. While the business remains relatively small for the bank, it aims to generate approximately $750 million in revenues in this area by 2024. In contrast, Goldman Sachs reported total revenues of $47 billion in the previous year.
The Federal Reserve's investigation of Goldman's TxB business coincides with broader regulatory scrutiny of non-bank financial entities. Earlier this year, Cross River Bank, a major US lender to fintech companies, faced criticism from the Federal Deposit Insurance Corporation for unsound banking practices. Similar issues were highlighted at Blue Ridge Bank by the Comptroller of the Currency in the previous year.
Goldman Sachs has refrained from commenting directly on the regulatory matters, stating, "We are not permitted to comment on any supervisory matters related to our regulators." The Federal Reserve has also declined to comment on the issue.
By fLEXI tEAM