More Detail on Goldman’s Online Lending Play

Goldman Sachs will soon enter into the alternative lending market, with plans to lend directly to both consumers and small businesses.

For months now whispers have circulated that the mammoth investment bank has been weighing the possibility of entering into the alternative finance space. Goldman has already involved itself in various ways. Not so along ago, for example, the FT suggested that GS might be looking to align itself with the emerging markets trade finance platform Aztec Money.

The bank also served as a lead underwriter in the landmark listing of Lending Club. Goldman will soon be staring down Renaud Laplanche’s outfit as a direct competitor.

The new lending business will be headed up by the recently hired Harit Talwar, who was on-boarded in early May. Mr. Talwar left his job as Head of Card Services at Discover Financial in order to lead Goldman’s charge into the online lending space. Mr. Talwar has also been made a partner in the firm (one of only c.400), an unusual move which – as Ben McLannahan of the FT points out – reflects the importance of his new remit. The New York Times reports that the new lending operation could boast as many as 100 employees by the end of the year.

Goldman made an effort to elucidate the scale of the online lending opportunity in March, just a few months before hiring Mr. Talwar. The company produced a research note which estimated that of the $150bn in profit earned by US banks in 2014, $11bn could be captured by non-bank lenders over the next half-decade.

Upon hiring Mr. Talwar in May, Chief Executive Lloyd Blankfein and COO Gary Cohn proclaimed:

“The traditional means by which financial services are delivered to consumers and small businesses is being fundamentally reshaped by advances in technology, maturity of digital channels, use of data and analytics, and a focus on customer experience.”

Goldman has veered away from the typical P2P model in launching the new initiative (as, you might argue, have many of America’s original P2P platforms!). Loans will not be funded by a pool of retail and institutional money. Instead lending will be financed directly through Goldman’s New York State-chartered banking subsidiary, which was birthed in the wake of the 2008 financial crisis, when Goldman became a bank-holding company. To date this arm of the company has mostly written loans to private clients and institutions, and currently holds $128bn in assets.

The size of the average Goldman loan will likely be around $15k-$20k. The New York Times stated that the company is considering issuing borrowers with “a sort of prepaid card”, from which money may be drawn down for purchases. In terms of an arrival date, early 2016 has been banded around in the press.

So what does Goldman’s imminent arrival spell for the incumbent alternative lenders?

There appears to be two schools of thought. Some believe that Goldman’s near-depthless resources and prestigious reputation could spell trouble for the likes of Lending Club and OnDeck. Others are convinced that the company has underestimated the difficulty of breaking into a flourishing industry that was in part born of anti-bank sentiment. The existing players will likely have to wait until next year to gauge the true competitiveness of Goldman’s lending business. 

We’ll be exploring the Innovative Finance ISA at our #AltFiSeminar on April 27th https://t.co/xfzZWz7hgl

— AltFi News (@AltFiNews) April 12, 2017