Goldman Sachs (NYSE: GS) wants to lend you some money.
No really, the nearly 150-year-old Wall Street firm is hoping to break into the consumer lending business.
News broke recently that Goldman Sachs is looking to make loans for a couple thousand dollars apiece so that everyday Americans can pay off credit cards or remodel their homes.
If all goes as planned, this new endeavor could put pressure on conventional lenders, as well as “new” lenders like Lending Club (NYSE: LC). The threat to Lending Club becomes even more pronounced when you consider that Goldman Sachs hopes to offer its new type of loans online though its own website.
Granted, Lending Club had its own troubles before the Goldman announcement. Shares of Lending Club soared 56% on the day of its December 2014 initial public offering. Since then, the euphoria has worn off, with the stock now up just 10% from its IPO price.
Goldman’s Bad Rep
Goldman Sachs won’t be the immediate killer of the Lending Club business model.
To start, Goldman Sachs is still a hated name on Main Street. Recall that in 2012 it was reported that Goldman refers to its clients as “Muppets.” It’s also been vilified for its role in the 2008 financial crisis and for profiting as everyday people lost their homes.
Goldman’s new venture could be an attempt to find any way possible to grow, which comes as some of its traditional businesses are under attack from regulators.
The one silver lining is that Goldman could market this new business line under another name or brand in an effort to avoid any negative stigma that its name has with Main Street consumers. It can also raise money relatively quickly and easily, giving it a large base from which to lend. It can then package up these loans as collateralized debt obligations and sell them to other Wall Street firms, thus shifting the risk to CDO investors.
Goldman already has a large customer base – including private-wealth clients with minimum account balances of $10 million – to whom it can sell these packaged loans. It’s worth noting that doing so would be similar to the Lending Club business model, where it has no default risk.
Conventional banking looks something like this: Banks take deposits and pay a small rate to customers, then they use that deposited money to make loans and collect interest on the loans.
The Lending Club Advantage
Lending Club is a different model from traditional banking. It doesn’t take any of the default risk that conventional banks assume. It makes its money from connecting lenders with borrowers. Not only does it collect a fee for the loan origination, it also collects some interest on the loans.
The key for Lending Club is to keep volumes high. That’s something it’s doing fairly well thus far. The fact that it offers investors a solid 5% to 8% yield gives it a steady flow of money to lend.
If anything, however, Goldman’s new initiative speaks volumes for the consumer lending business. The consumer loan market is upwards of $840 billion. For perspective, Lending Club has originated just under $10 billion in loans since it started.
There’s still an opportunity for Lending Club to tap into other areas of the market, such as mortgages and small-business loans. It already has a partnership with HomeAdvisor for home improvement loans, and it recently announced a deal with Citigroup (NYSE: C) to offer loans to lower-income borrowers.
Lending Club has momentum on its side, not to mention the fact that many Americans still hate Goldman Sachs. It’s the leader in peer-to-peer lending and one of the better secular plays on the rise of financial technology.
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