Dive Brief:

• Omer Ismail and David Stark, two top executives at Marcus by Goldman Sachs, are joining Walmart's fintech startup backed by venture capital firm Ribbit Capital, Bloomberg and The Wall Street Journal reported Sunday, citing anonymous sources.
• Ismail's departure in particular may be surprising, as he only formally ascended to the role as head of Goldman's consumer bank Jan. 1 — although he reportedly took over day-to-day operations in September from Harit Talwar, who at the start of 2021 became chairman of the bank's consumer division.
• "These are substantive hires that should serve as an unambiguous signal of Walmart's seriousness regarding its fintech foray," Isaac Boltansky, an analyst at Compass Point Research & Trading, told Bloomberg.

Dive Insight:

Walmart's poaching of two longtime consumer-banking executives from one of the country's six largest banks validates the retailer's startup efforts and sends a warning shot to the industry.

The retailer previously said the strategic partnership "will bring together Walmart's retail knowledge and scale with Ribbit's fintech expertise to deliver tech-driven financial experiences tailored to Walmart's customers and associates." 

But details of Walmart's fintech startup have been scarce. The company hasn't disclosed the new entity's name, specific services it intends to provide or a launch date. A spokesperson for Walmart did, however, tell Bloomberg on Sunday it isn't planning to apply for an industrial loan company (ILC) charter.

Critical, too, may be that the hires come from Marcus, a brand that built itself from the ground up to generate $1.2 billion in annual revenue — up 40% from 2019 — and hold $97 billion in deposits and $8 billion in consumer-loan balances five years after launch.

Ismail and Stark have experience laying the groundwork to roll out a startup. The former joined Goldman in 2002 and was among a group of executives who devised the strategy to expand into digital banking in 2014. Stark joined Goldman in 2015 and played crucial roles in sealing and maintaining the bank's credit-card partnerships with Apple and General Motors. The bank promoted him last month to head of large partnerships, according to a memo seen by Reuters.

Two of the "deep bench" players Goldman might tap to fill the void left by Ismail and Stark are Talwar — Ismail's predecessor — and Marcus's new direct-to-consumer business chief, Swati Bhatia, who previously served as digital payment company Stripe's chief payments risk officer.

While Goldman might have a deep bench, Walmart's backer has deep pockets. Ribbit Capital has invested millions of dollars in companies such as Affirm and Credit Karma and, notably, the Financial Times reported, gave Robinhood more than $500 million in convertible debt financing in January, when it needed to boost its capital buffers amid the GameStop trading splurge.

That pathway to providing banking services has drawn consistent blowback from lawmakers and trade groups who argue it lets commerce companies sidestep Federal Reserve oversight.

The Federal Deposit Insurance Corp. (FDIC) released a final rule in December requiring ILC parent companies to enter into a written agreement with the agency on capital and liquidity levels, and pledge to maintain "the industrial bank's capital and liquidity at levels that the FDIC deems necessary for the safe and sound operation of the industrial bank."

The Bank Policy Institute, Center for Responsible Lending and the Independent Community Bankers of America warned the rule would spur an uptick in ILC charter applications.

"Given the effective date of the FDIC's rule is not until April 2021, firms may attempt to secure their charter in the next few months in order to avoid being subject to this rule," the trade groups wrote, adding that the rule would act as a signal that the charter is "a viable back-door option for entering the business of banking."

The FDIC has received more than a dozen deposit insurance applications from proposed ILCs since 2012. Two companies — Brex and Thrivent Financial for Lutherans — filed applications last month. When the FDIC last March approved applications from payments company Square and student loan servicer Nelnet, it marked the first new ILC charters in more than a decade, a development that spurred Sen. Sherrod Brown, D-OH, of the Senate Banking Committee to invoke Walmart's name.

"Just before the last crisis, regulators gutted financial rules and even considered letting megacorporations like Walmart own banks — and here we go again," he said in a statement.

Walmart applied for an ILC charter in 2005 — though it has said it had hoped to use the charter not to open bank branches but to save about $30 million a year by processing credit and debit card transactions internally, according to Bloomberg. The retailer withdrew its application two years later.

Fighting Walmart's charter efforts, however, may be short-sighted, Ed Mills, a policy analyst at Raymond James, told the Financial Times.

"Banks have spent the last 15 years fighting against Walmart getting a bank charter, but what has changed is that Walmart is no longer the biggest threat to the banking industry — tech and fintech is."

This time around, the company is being a bit more vague. "Our customers have been clear that they want more from us in terms of financial services," Walmart CEO Doug McMillon said last month at an investor event, according to The Wall Street Journal. "This new approach will help us deliver for them in a differentiated way more quickly."

Walmart's goal is to "monetize their most valuable asset — the frequency and relationship they have with customers across the globe," John Tomlinson, an analyst at M Science, told Bloomberg. The average person goes to Walmart's stores or website about 30 times a year, M Science estimated.

In any case, the mere mention of Walmart in the banking sphere may serve as a trigger word, banking consultant Bert Ely told Bloomberg. "The minute you start talking about Walmart and banking, the alarm bells go off," he said.