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What does Goldman taking over the GM card book mean for Intelligent Systems?

Updated: Oct 18, 2020

In case all of that in the title was just gibberish to you: Today, Goldman Sachs won the bidding war for GM's card book, taking over from Capital One. GM's card book is between $2.5bn in size, whereas Goldman's existing card book is about $2.3bn. The deal more than doubles the size of Goldman's card book.

Intelligent Systems (INS) main operating subsidiary is CoreCard. Corecard is the core processor for Goldman's card operations. What does a core processor do? Basically all the boring backend stuff that involves adding up and subtracting numbers behind the scenes to arrive at the correct account balances. This system has to be extremely reliable, yet also flexible enough to accommodate different card providers idiosyncrasies.

Intelligent System managed to get Goldman onboard through a combination of a high level of client service, willingness to support lots of customization on its software and underpricing its competition. This was necessary as Goldman itself was launching its first card in partnership with Apple, which differentiated itself with the tagline "No Fees". While No Fees is great for the consumer, it forced Goldman to keep its own costs down, which Corecard helped a lot with.

With the help of Corecard , Goldman now has one of the cheapest card infrastructures on the street. Now that a 1-year non-compete with Apple has expired, they can go on a tear and continue to do co-branded card deals. While the details of these deals aren't public, it is likely that their low-cost infrastructure allows them to underprice incumbents like Capital One.

Corecard itself makes revenue in multiple ways, best described by the following slide from their latest presentation:

Customers can choose to either license Corecard's software, in which case they pay license revenue and service revenue or subscribe to it, in which they pay processing revenues. The monetary reward for step-ups in customer milestones aren't disclosed and are difficult to predict. Corecard would definitely unlock a milestone or two based on the GM deal, it's just difficult to say how much revenue this unlocks. Based on trailing 12M numbers, Goldman makes up about $22 million of INS revenues. Given the high level of service work involved in integrating the GM card portfolio, it's reasonable to assume additional revenues of $15-22 million once the GM deal kicks in.

Core processing is an extremely sticky business. It's unlikely that GS would switch providers from Corecard to a competitor, as any hiccups in the switchover would put the (limited?) goodwill GS has been able to build up with consumers to date at risk. At the same time, Corecard is unlikely to pick up lots of new customers in any given year as most credit card providers already have a core processor and it is just as risky for them to switch to a new provider as it is for Goldman. Corecard's target market therefore largely consists of new entrants into the credit card market (such as Goldman). Corecard has also hinted at another large potential client in 2021.

Before this deal, Corecard's existing portfolio was growing at about 20-25% per annum, largely thanks to Apple Card. Taking the midpoint of that organic growth (22.5%) over two years ($36 million to $54) and adding another $15 million in revenues from the GM acquisition one can get to ~$69 million in 2022 revenues. Incremental revenue, in particular on the licensing, maintenance and processing side, should come with very incremental margins.

The GM deal will grow Goldman's card portfolio to roughly $5bn. But Goldman is a $1.1tn bank. How big do they want to get in cards? The following slide offers some clues:

Assuming a 50/50 split between consumer unsecured and loan/card balances, Goldman would be targeting $10bn+ in card balances by 2025.

Disclosure: I had an existing position in INS which I added to today. Long INS

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