Why it matters

Marketplace lending has exploded onto the scene and become a multibillion-dollar industry. Hoping to capitalize on the gold rush of consumers turning to websites to borrow money, Goldman Sachs announced its plans to loan money to consumers via the web. The investment firm, where investor clients are limited to institutions and ultra-high net worth individuals, does not generally work with consumers. The firm opted to set up a bank holding company as part of the 2008 financial crisis, permitting the firm to now offer consumer lending. As one of Wall Street’s more venerable institutions, the move by Goldman is notable and could launch a trend followed by other firms, particularly given the expanding online lending market. However, while the upside of entering a growing industry is clear, Goldman does face some serious challenges. The firm admittedly has zero experience in small consumer loans, a fundamentally risky proposition that could involve trying to collect money from struggling borrowers. On the other hand, the firm would have the advantage of being the only marketplace lender with its own bank, a function currently outsourced by every consumer lender. Goldman is looking to offer its first loans in 2016, sources said.

Detailed discussion

In an internal memo circulated to employees, Goldman Sachs revealed its plans to work with ordinary consumers for the first time, taking advantage of the burgeoning online lending market to offer small loans to individual consumers with the potential to expand offerings to small businesses. Historically, the investment firm has worked with larger businesses and wealthy clients with a minimum of $10 million to invest. The impetus for the new market can be traced to the booming online lending industry as well as heightened regulation of Goldman’s existing business lines.

“The traditional means by which financial services are delivered to consumers and small businesses is being fundamentally re-shaped by advances in technology, maturity of digital channels, use of data and analytics, and a focus on customer experience,” CEO Lloyd Blankfein and President Gary Cohn wrote in the memo, which was circulated to employees to announce the hiring of Harit Talwar to head the program. “The firm has identified digitally led banking services to consumers and small businesses as an area of opportunity for GS Bank.”

The memo, which was provided to the Associated Press, did not provide a schedule for the new offerings. Insiders revealed that initial plans would not require the loans to be secured by collateral, such as a home or automobile, and would be in the $15,000 to $20,000 range. One option being considered: a prepaid card issued by Goldman that could be drawn down each time the borrower makes a purchase.

To avoid having to open retail locations, Goldman will stick to online lending through its website and/or an app, according to the source. Those cost savings will allow the firm to offer lower interest rates, and, unlike some of the larger online lenders that match a borrower with a potential investor, Goldman can turn to its own deposits as a resource—the GS Bank division had $83 billion in deposits at the end of 2014, according to regulatory filings.

Goldman is not the first Wall Street firm to enter the online lending market. Other firms have also dipped their toes into the water, purchasing loans from a lender and converting them into securities, for example.

“Today, we see an opportunity to leverage our competencies in technology and risk management to capture this opportunity at accretive returns and without the burdens of legacy costs and fixed infrastructure,” according to the memo. “In this way, GS Bank can effectively extend capital to this important segment of the market and economy.”

Sources said Goldman hopes to make its first loans in 2016.