BREAK THINGS

Goldman Sachs is ready to disrupt the financial industry’s startups

Obsession
Future of Finance
Obsession
Future of Finance

Since Goldman Sachs was founded more than a century ago, Wall Street has adapted to everything from the invention of the automobile and the demise of the gold standard to the rise of the internet. More recently, bank CEOs have contended with regulations that are reshaping their businesses in the wake of the financial crisis, as well as technology startups that want to change the financial industry.

Goldman CEO Lloyd Blankfein suggested in a CNBC interview that both influences are behind its decision to branch out from investment banking and start its consumer lending arm called Marcus, which has lent out about $1 billion since it was created last year and is on track to double that amount in 2017. Goldman has traditionally aided mega companies and governments in raising money, but now it’s going after consumer loans ranging from $3,500 to $30,000.

As Blankfein told CNBC’s Jim Cramer this week, one reason for the shift is that the world no longer looks kindly on some of its historic specializations, like trading on its own account, known as proprietary trading. Regulations instead tend to reward old-school banking activities such as … well, banking, and lending in particular. Financial technology companies, meanwhile, have figured out that you don’t need to build brick-and-mortar locations to attract consumers anymore—an app and a website can reach customers who probably don’t want to visit a storefront anyway.

Fintech firms got there first, but Goldman has now figured it out as well. According to Blankfein, many of the trends fit right into Goldman’s wheelhouse—things like using algorithms for risk management, or digital distribution. Yes, it has a big skyscraper in Manhattan, but not a chain of legacy storefront branches.

And consumer lending is a big market. Harit Talwar, Goldman’s head of digital financial, said last year that there are about $1 trillion of US consumer loans that are financed mostly through credit cards. Often times, cash-strapped Americans take on the debt because of an emergency. Newer fintech companies have given them a way to refinance that debt at a cheaper rates, and now Goldman is, too. Given the margins, Blankfein says there’s plenty of room for the bank to make a solid return.

While Goldman is ramping up, some online lenders face growing problems. Prosper Marketplace, LendingClub, and Avant have seen borrowing costs increase, and some have seen loans go bad faster than they had expected, according to Bloomberg News. Promise Financial stopped making new loans and is instead licensing technology to banks. Its founders said traditional banks are better suited for digital lending since they have a lower cost of capital.

Blankfein said Goldman is moving slowly, as it wants to make sure it’s doing a good job. That makes sense, given Goldman probably also wins the title of Wall Street’s most scrutinized firm. In the meantime, the financial technology set should move quickly if it wants to stay ahead.

home our picks popular latest obsessions search