Goldman Sachs Plans to Offer Consumer Loans Online, Adopting Start-Ups’ Tactics
By MICHAEL CORKERY and NATHANIEL POPPER JUNE 15, 2015
Goldman Sachs’s push into lending is being led by Harit Talwar, a former top executive at the credit card giant Discover, who joined the bank last month. Credit Clarion Pictures
Goldman Sachs has spent 146 years largely as the bank of the powerful and privileged.
Now the Wall Street powerhouse is working on a new business line: providing loans that can help you consolidate your credit card debt or remodel your kitchen.
While the new consumer lending unit is still in the early planning stages, 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 unit will offer the loans through a website or an app — functioning like a virtual bank in one of the oldest companies on Wall Street. Without the costs of bank branches and tellers, Goldman can lend the money at lower interest rates while still making a profit.
The company hopes to be ready to make its first loans next year, according to people briefed on its plans, who spoke on the condition of anonymity.
In devising its new strategy, Goldman is putting itself in league with start-ups that are similarly trying to use technology to disrupt the traditional business of finance. Unlike the media and retail industries, banking has been relatively slow to shed its bricks-and-mortar business model — a trend Silicon Valley and now Goldman are seeking to exploit.
But the new venture carries considerable risks. After the financial crisis, Goldman was vilified, accused of profiting while homeowners lost their properties to foreclosure. If the bank is too hard on its borrowers — suing a struggling family for unpaid debts, for example it could revive a popular image as a bank that earns profits at the expense of ordinary people.
The lending will also involve Goldman in a relatively risky business in which it has little experience, dealing with ordinary borrowers with limited financial cushions.
“Everything Goldman has done in the last 30 to 40 years has all been focused on the commercial side, or things that abut it very closely,” said Chris Kotowski, a bank analyst with Oppenheimer & Company. “I refuse to believe that hiring a couple of programmers and offering to make $15,000 loans online is a highly value-added banking strategy.”
Still, this new type of lending could help burnish the firm’s relevance to mainstream Americans.
The $840 billion consumer loan business is facing a shake-up as online upstarts like Lending Club, Prosper and even PayPal have begun offering small loans.
These outsiders have captured only a tiny slice of the market so far. But with their low overhead, they are convincing some analysts that they will be able to eat away at the businesses of old-school banks with the legacy costs of branches and tellers.
Jeffery Harte, a bank analyst at Sandler O’Neill & Partners, said, “Online lending has the potential to be quite disruptive to the way credit is extended.”
On Wall Street, Goldman has a reputation for spotting businesses that are being transformed and finding a way to seize the opportunity.
To the degree that Goldman can “assess the risk and price things electronically, it may be a low cost way of getting into the business,” Mr. Harte said.
The bank’s push into lending is being led by Harit Talwar, a former top executive at the credit card giant Discover, who joined Goldman last month.
In a sign of how seriously Goldman is treating the new venture, the company approached several top consumer finance executives about the job, which comes with the title of partner, a highly coveted position at Goldman, the people briefed on the matter said. The operation could have a staff of as many as 100 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’s chief executive, Lloyd C. Blankfein, and its president, Gary D. Cohn, noted that “the traditional means by which financial services are delivered to consumers and small businesses is being fundamentally reshaped” by technology and the use of data and analytics.
Some of Goldman’s traditional business lines are under pressure. Sluggish markets and new regulations have diminished historically profitable areas like trading, forcing Goldman and other Wall Street companies to hunt for new sources of revenue.
Before the financial crisis, Wall Street firms were generally not permitted to do traditional consumer lending because they were not set up as federally insured banks. But as part of the government bailout in the 2008 crisis, Goldman and its archrival, Morgan Stanley, were required to become bank holding companies.
Since 2011, the two banks have talked about increasing their lending and have tripled the amount of outstanding loans — to $42 billion in the case of Goldman. Until now, though, they have focused on providing mortgages and credit lines to existing, generally very wealthy, clients.
With its new business, Goldman will take a very different approach, offering the types of loans that are traditionally pitched through mailing blasts to American homes.
The firm is probably going to focus on lending to customers who most likely would not come close to the $10 million minimum balance required to become one of Goldman’s private wealth clients. The loans would not be backed by collateral like a home or automobile, allowing Goldman to charge higher rates.
“When you are looking around at the universe of asset classes, there is 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 may eventually lend to small businesses, which have typically struggled to obtain bank loans.
The initial financing for the loans would come from certificates of deposit, which Goldman has been amassing in recent years. As the business grows, the bank may securitize the loans — bundle them and sell them to investors — to reduce some of the risk that it holds on its own books.
Goldman is still considering the details of the loans it will offer. In early discussions, the firm has been talking about making loans that would be about $15,000 to $20,000, people briefed on the conversation said. To distribute the money, Goldman is considering issuing a sort of prepaid card that could be drawn down each time the borrower buys something with it.
Goldman has not decided whether to attach its name to the loans or market them under another brand.
Consumer loans can be a fundamentally risky business even for a company with a reputation for deftly managing risk. Many people take out personal loans as a last resort to deal with cash flow problems at home or in their businesses.
“If you grow too fast in the personal loan business, you can get some bad surprises,” said William N. Callender, a managing director in the financial services practice of AlixPartners, an advisory firm.
Also, Goldman will have to overcome powerful forces that favor the incumbent Main Street banks. Even if Goldman can offer lower rates, consumers may still prefer credit cards to personal loans, simply out of habit.
“The biggest thing the banks have in their favor is inertia,” said Mr. Clements, the former consumer banking executive.