As various commentators across the segment pointed out last week, Goldman Sachs‘ latest earnings report was nothing to write home about. The venerable institution did manage to beat The Street, but as Bloomberg pointed out, it’s easy to beat expectations when no one is expecting anything good.
“Revenue recovered from a nasty dip in the first quarter,” Bloomberg noted, “but wasn’t enough to inspire much confidence that the bank’s glory days are thundering back.”
Goldman is not the only major FI that has seen the expectations around it become somewhat less great of late. The banks reporting last week had similar issues and showed similar areas of strength.
But Goldman — perhaps following the old adage that, if one can’t come bearing good news, the next best option is to show up with interesting news and hope that does the trick — did bring something largely unexpected to last week’s earnings roundup: a quick glance behind the curtain at its forthcoming entrance into the world of consumer lending.
A very quick glance. If Goldman Sachs’ online lending platform was a Hollywood movie set for release, last week’s announcement would be more akin to a 15-second teaser trailer meant to get your attention about the film than a fully produced two-minute mini-plot summary meant to get you to buy a ticket.
The online lending market has been anticipating Goldman’s entry for some time. The firm first announced its plans to launch the platform just about a year ago. But since that announcement, Goldman has had little to say, until now, about how the service will be run, how it will tie to Goldman’s bigger efforts to enter retail banking or even when it’s coming exactly. Those answers, while not quite crystal clear, are somewhat better known now.
What remains to be seen is if it will work, if the government will stop it from happening with new regulations and if the disruptors that Goldman is now directly competing with can effectively fend off disruption from a big and well-capitalized player.
So, what do we know now?
The bad news was that Chief Financial Officer Harvey Schwartz wasn’t offering much in the way of concrete specifics about the whens and hows of Goldman’s move to lending — other than to note suggestively that analysts should stay tuned for a bigger update this fall.
He did, however, speak to the design process and how Goldman is putting together its product, with special attention paid to the diversity of consumer opinions sought on the matter.
“We are keenly aware this is a new business opportunity for us and, importantly, a new client base. One of the things we did was to reach out to thousands of consumers to really understand what they want and what are their borrowing priorities,” noted Schwartz. “Through that, we learned some things that are probably not that surprising. They want a product that is simple, straightforward, that provides a lot of value. They also want a high-quality user experience.”
From there, Schwartz noted, the objective was pretty clear.
“What we’ve attempted to do is to take all of this feedback and develop one product which we plan to launch later this fall. So, that is where we stand.”
And while that is rather a vague description, there were some more interesting concrete details on offer. It seems unlikely, for example, that Goldman’s desire to get into the consumer lending space is not going to offer a soft landing for one of the myriad online lending platforms that would probably like just such an acquisition, given the difficulties those firms are currently having raising funding or investor interest.
While Schwartz did not categorically rule out doing some shopping when it comes to filling out its capabilities, the clear message was that Goldman prefers to run this mainly as an in-house effort.
When asked by a JPM analyst if the firm was considering the “case for buying something? … So you get to a critical mass more quickly?” Schwartz neatly shot that idea down.
“This particular effort, when we looked at it, we really felt like it was best designed from scratch. The reason for that is we are kind of uniquely positioned. It allows us to leverage our technology skills and our risk skills … if you look at the competitive landscape, there are benefits that online lending platforms provide to consumers, and there are benefits for large commercial providers of credit … we are really looking to bridge the gap between those strengths and offer consumers, the best we can, a really thoughtful, differentiated product.”
Schwartz also briefly spoke to the idea that the consumer lending portion of Goldman’s new line was connected to its other big retail expansion into consumer deposit accounts. Goldman purchased $15 billion in consumer accounts from GE Bank during Q2. He noted the two efforts were separate — Goldman Sachs isn’t becoming Goldman Sachs Savings & Loan — but connected insofar as they both buttress and diversify the Goldman brand.
“We view those as separate. Having said that, the acquisition went well, adding in excess of $15 billion of deposits to the firm … We have had in excess of 20,000 consumers open up new accounts with us. We have had very significant growth in a short period of time. It really speaks to the brand strength.”
It also at least speaks to one solution that will be open to Goldman — but not its marketplace lending competitors — should investors get skittish about its loan packages from time to time. It has that big pile of deposit account dollars to fund those loans. Not exactly a new innovation in lending but one that is surprisingly useful when times get lean.
Well-Positioned At The Right Time
Which, as it turns out, is right now for those disruptive innovators in the marketplace lending segment. Lending Club’s various difficulties literally shredded the firm’s reputation, and the collateral damage has hit other players in the space. And those players weren’t exactly doing terrifically in 2016 before Lending Club detonated. Default rates were already up, and investors were already skittish.
That has led to comparative weakness in the segment. Borrowers still want to borrow, but investors are less interested in investing, unless they are granted very generous terms (the sort that tend to drive away prime borrowers).
And Goldman comes uniquely positioned to sell its loan packages to investors. On name, experience and contacts alone, Goldman is going to have a comparatively easier time securitizing consumer loans and selling them to investors. Selling things to investors is among the things that Goldman is uniquely expert in doing after all. If those loans turn out to be hard to securitize at times, see the aforementioned deposit accounts.
Much Still To Be Known
Apart from the fact that Goldman offered few other hard details, there are a variety of unknowns here. One of which is how badly and fundamentally marketplace lending innovators have been injured. The casualty reports thus far have been horrible, but it seems the various marketplaces are working double time to recover.
SoFi has become a lending/social network. Lending Club has made BFFs with Morgan Stanley and hired Patrick Dunne as chief capital officer to work with the individual and institutional investors who fund the company’s loans. Dunne is a very serious mainstream player with 25 years of work in investment via BlackRock and Barclays. Prosper is starting its own fund to buy the loans it underwrites to target high net worth investors.
It also remains to be seen if Republicans will win the election in November and reinstate Glass-Steagall as is a plank of their party platform. Such a regulatory change could statutorily bar Goldman from entering into these types of retail functions because it is an investment bank.
But one things remains clear: Goldman isn’t going away and clearly sees an opportunity to tip-toe in and perhaps do some big disrupting of its own.
Ready or not, the marketplace lending economy has yet another wolf coming round the door.