Four years after Goldman Sachs and Apple debuted a credit card, the Wall Street behemoth is facing an expensive breakup from a relationship that other lenders deem too hazardous and unprofitable.

According to two people familiar with the situation who asked not to be named while discussing possible negotiations, Goldman will come under pressure from bidders to lower the value of its investment in order to increase the price when looking for a buyer for its portion of the partnership.

Goldman does not disclose the value of its ownership.

Another setback for CEO David Solomon’s consumer strategy, which sought to diversify the bank’s revenue streams outside its customary mainstays of trading and investment banking, is the anticipated dissolution of the Apple-Goldman collaboration.

Analysts suggested that the possible write-down on the Apple card would be the most recent in a run of losses stemming from Goldman’s disastrous entry into consumer banking. The financial specifics of the card industry are not broken out by Goldman in its results.

There were no comments available from Goldman Sachs.

According to the two individuals, Apple will probably be pressured by potential bidders to alter the terms of the agreement.

They are probably going to try to get their hands on Apple’s exclusive credit card information, according to two other industry insiders. According to Apple’s website, no third parties are sold the data of its cardholders for marketing or advertising purposes.

If terms are adjusted, credit card companies like Capital One, Citigroup, and Synchrony Financial would make sense as participants in the project, according to both sources and an additional person with knowledge of the circumstances.

Synchrony chose not to respond. At a conference this month, the company’s CEO, Brian Doubles, stated separately that “you’ve got to have a really good risk-return equation” for card trades.

There were no comments from Citigroup and Capital One.

According to persons briefed on the situation, The Wall Street Journal reported last month that Apple just issued Goldman a proposal that would allow Goldman to leave the contract in the upcoming 12 to 15 months.

Although Apple declined to comment on the nature of the Goldman sale talks, it did state that it was focused on giving users a “incredible experience”.

Solomon declared in February of last year that Goldman was searching for “strategic alternatives” for its consumer sector, having lowered its expectations for retail the previous year.

Under previous Goldman CEO Lloyd Blankfein (who departed in 2018), the bank started discussions with Apple to develop a credit card that would leverage the massive client base of the tech giant. Among its primary negotiators was Stephen Scherr, who headed Goldman’s consumer division before rising to the position of finance chief.

After taking over in late 2018, Solomon launched the Apple card over a year later. A person with knowledge of the matter stated that by 2022, the parties had renegotiated an agreement that would endure until the end of the decade.

In October, Solomon informed analysts that the bank was attempting to eliminate the “drag” on profits from its credit card division, which also involves a joint venture with General Motors.

“Our partnerships with Apple and GM are long-term contracts,” Solomon said at the time. “And we don’t have the unilateral right to exit those partnerships.”

His remarks were seen by analysts as an indication that the card companies were losing money.

Two people with knowledge of the matter and one who was also aware of Apple’s initial proposal but chose not to be named in order to discuss private negotiations claim that when Apple first shopped the deal with potential partners, other banks, including JPMorgan Chase, passed because their potential cut of profits was too small.

There were no comments from JPMorgan.

According to Warren Kornfeld, senior vice president at Moody’s Investors Service, banks are required by law to set aside roughly 7% of anticipated sales to cover predicted losses, which is one reason why new credit card companies usually lose money in their first years of operation.

According to the two people familiar with the company, Goldman was in charge of setting up the provisions for credit losses rather than disclosing them to Apple.

There was also an underwriting difficulty with the Apple card. Analysts claim that Goldman’s clientele is primarily rich and that the bank had limited expertise lending to less well-off borrowers. According to one of the people with knowledge of the matter, the two businesses gave cards to clients with worse credit scores in an effort to increase sales.

According to earnings filings, Goldman’s consumer sector experienced increasing paper losses as it allocated more funds towards delinquent loans.

Additionally, the businesses made an effort to entice potential clients by promising “no annual fees, foreign transaction fees, or late fees,” as Apple stated on its website.

Additionally, they launched high-yield savings accounts for cardholders in April, which allowed Goldman to receive deposits of $10 billion by August, according to a statement made at the time by Apple.

According to one of the people with knowledge of the company, the two partners would eventually split any actual loan losses. According to the source, Goldman handled customer care while Apple paid for marketing. The business expenses were also split.

“Goldman had no meaningful presence in the credit card business,” said Mike Taiano, vice president at Moody’s. “This was a big deal…they wanted to break into the card business, so they were probably willing to take less favorable economics.”

(Adapted from ThePrint.in)