Goldman Sachs plans to offer consumer credit online, taking tactics from startups

Goldman Sachs has largely been the bank of the powerful and privileged for 146 years.

Now, the Wall Street powerhouse is working on a new line of business: providing loans that can help you consolidate your credit card debt or remodel your kitchen.

While its new consumer credit division is still in the early stages of planning, Goldman has ambitious plans to offer loans of a few thousand dollars to ordinary Americans and compete with Main Street banks and other lenders.

The new entity will offer the loans through a website or an app — it works like a virtual bank in one of Wall Street’s oldest companies. Without the overhead of bank branches and counters, Goldman can lend the money at lower interest rates and still make a profit. The company hopes to be ready to issue its first loans next year, according to people informed of its plans, who spoke on condition of anonymity.

In crafting its new strategy, Goldman is putting itself in a league with startups that are also trying to use technology to disrupt traditional finance. Unlike the media and retail industries, banking has been relatively slow to move away from its brick-and-mortar business model — a trend that Silicon Valley and now Goldman are trying to capitalize on.

But the new company carries considerable risks. After the financial crisis, Goldman was slandered and accused of making a profit while homeowners lost their homes foreclosure. If the bank is too harsh on its borrowers — for example, suing a troubled family over unpaid debts — it could revive the popular image of a bank that makes profits at the expense of ordinary people.

Lending will also involve Goldman in a relatively risky business in which it has little experience and deals with ordinary borrowers with limited cash cushions.

“Everything Goldman has done in the last 30 to 40 years has been focused on the commercial side or things that are very closely related to it,” said Chris Kotowski, banking analyst at Oppenheimer & Company. “I refuse to believe that hiring a couple of programmers and offering to make $15,000 loans online is a high value banking strategy.”

Still, this new style of lending could help polish the company’s relevance to mainstream Americans.

The $840 billion consumer lending business is about to be revolutionized as online newcomers like Lending Club, Prosper and even PayPal have started offering small loans.

These outsiders have only captured a tiny portion of the market so far. But with their low overheads, they’re convincing some analysts that they’ll be able to eat away at old-school banks’ legacy branches and counters.

Jeffery Harte, banking analyst at Sandler O’Neill & Partners, said, “Online lending has the potential to be quite disruptive to the way loans are originated.”

On Wall Street, Goldman has a reputation for spotting companies in transition and finding a way to seize the opportunity.

To the extent that Goldman “can assess risk and pricing electronically, it can be a cost-effective way to get into the business,” Mr. Harte said.

The bank’s foray into lending is being led by Harit Talwar, a former top executive at credit card giant Discover who joined Goldman last month.

In a sign of how seriously Goldman takes the new company, the company approached several top consumer finance executives for the job, which comes with the title of partner, a highly coveted position at Goldman, people with the matter said . The operation could have as many as 100 employees by the end of the year, they said.

Goldman declined to comment on the plan. But in a memo to employees announcing the hiring of Mr. Talwar last month, Goldman CEO Lloyd C. Blankfein and its president, Gary D. Cohn, noted that “the traditional means, with where financial services are delivered to consumers and small businesses Businesses are being fundamentally reshaped by technology and the use of data and analytics.

Some of Goldman’s traditional businesses are under pressure. Sluggish markets and new regulations have eroded historically profitable areas like trading, forcing Goldman and other Wall Street companies to seek new revenue streams.

Before the financial crisis, Wall Street firms were generally not allowed to provide traditional consumer credit because they were not incorporated as federally insured banks. But as part of the government bailout of the 2008 crisis, Goldman and its arch-rival Morgan Stanley were forced to become bank holding companies.

Since 2011, the two banks have talked about expanding their lending, tripling the amount of outstanding loans — in Goldman’s case, to $42 billion. So far, however, they have focused on delivery mortgages and lines of credit to existing, typically very wealthy, customers.

With its new deal, Goldman will take a very different approach, offering the types of loans traditionally given to American households through mailing blasts.

The company will likely focus on lending to clients who would most likely not get anywhere near the $10 million minimum balance required to become one of Goldman’s retail clients. The loans would not be backed by collateral such as a home or car, allowing Goldman to charge higher interest rates.

“If you look around the asset class universe, there’s still nothing better than unsecured American consumer debt,” said Nick Clements, a former banking executive at Barclays and Citigroup who co-founded MagnifyMoney, a website that helps borrowers compare credit card and loan offers .

Goldman can eventually lend to small businesses that typically struggle to get bank loans.

Initial funding for the loans would come from certificates of deposit that Goldman has amassed over the past few years. As the business grows, the bank can securitize the loans — pool them and sell them to investors — to reduce some of the risk it carries on its own books.

Goldman is still reviewing the details of the loans being offered. In early discussions, the firm has discussed about $15,000 to $20,000 in loans, according to people briefed on the call. To distribute the money, Goldman is considering issuing some sort of prepaid card that could be accessed whenever the borrower makes a purchase.

Goldman has not yet decided whether to brand the loans with their name or under a different brand.

Consumer credit can be an inherently risky business, even for a company known for its adept risk management. Many people take out personal loans as a last resort to deal with liquidity problems at home or in their business.

“If you grow too fast in the personal loan business, you can be in for a nasty surprise,” said William N. Callender, managing director of financial services at AlixPartners, a consulting firm.

Also, Goldman must overcome powerful forces that favor the incumbent Main Street banks. Even if Goldman is able to offer lower interest rates, consumers may still prefer credit cards to personal loans, simply out of habit.

“The biggest thing that banks have in their favor is inertia,” said Mr. Clements, the former executive of consumer banking.

About Gloria Skelton

Check Also

SiriusPoint Ltd. Contingent value rights to negotiate on the

HAMILTON, Bermuda, June 16, 2021 (GLOBE NEWSWIRE) – SiriusPoint Ltd. (“SiriusPoint” or the “Company”) (NYSE: …