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THE 99%

There’s only one reason why Goldman Sachs is suddenly interested in banking average Americans

By Ian Kar

Goldman Sachs, which developed a thriving business over the last century catering to corporations and high-net-worth clients, is suddenly getting serious about banking average Americans.

Its recent acquisitions include an Austin, Texas-based startup called Honest Dollar, which helps freelancers and small-business owners set up retirement accounts. Its new GS Bank, based on an online banking platform acquired last year from GE Capital, invites anyone to park their money in an FDIC-insured online savings account or certificate of deposit (CD), with no minimum balance requirement and no transaction fees. And now Goldman is building an online consumer lending business meant to compete with the likes of Lending Club and Prosper.

Goldman’s ability to dabble in businesses more typical of a corner bank branch than a Wall Street powerhouse dates back to a 2008 change in regulatory classification—one that gave the firm permission to enter the same businesses as plain-vanilla commercial banks. But this doesn’t explain why Goldman is just getting interested in the opportunity now. The reason for that is technology, which has come a long way since Goldman, along with its rival Morgan Stanley, got emergency approval eight years ago to become a bank holding company.

That change in designation put two of the last big, independent investment banks under the official purview of the Federal Reserve. The move was meant to make the firms eligible for the same backstops available to commercial banks, and to inspire confidence in a market still absorbing the initial shock of a cascading financial crisis. But it also meant that for the first time, these firms could build their own retail bank branches.

Morgan Stanley nearly went this route—it hired a veteran Wachovia executive to lay the plans for a retail banking business, though eventually it focused on gathering deposits through its wealth-management business instead, building on its 2009 investment in the brokerage Smith Barney.

Goldman Sachs’ intentions were less clear. The firm wanted the safety and security of cheap deposit funding—which would be far more stable than the short-term securities underpinning the investment banks’ giant balance sheets—but no one was under any illusion that Goldman Sachs would be operating bank branches on street corners across America. The idea of the most Wall Street-ish firm on Wall Street going after everyday retail banking customers just didn’t compute.

But if Goldman had wanted into this business back then, the firm would have needed to spend a large sum just buying physical branches and hiring branch tellers. Now, instead of building branches, Goldman just needs to build a website—a much cheaper endeavor.

Consumers are becoming increasingly familiar with the process of paying, borrowing, and investing online and through their mobile devices. And while there are upfront costs of building a new tech platform, the maintenance costs are relatively low.

Roy Smith, an ex-Goldman Sachs partner and a professor at NYU’s Stern School of Business, says Goldman, which declined to comment for this article, has plenty of incentive to put technology to work. “Under the [financial] burden of regulation, firms have to evolve into things that use big technology more than they did in the past,” he says, adding that Goldman CEO Lloyd Blankfein “is also saying [the firm] may get into some businesses that can be operated technologically, without many human beings involved.”

As for the financing, Goldman’s chief strategy officer, Stephen Scherr, told the Financial Times (pdf) that the new online savings accounts could help fund loans from Mosaic, the firm’s fledgling online lending business.

While Goldman’s aiming for retail customers, it’s never going to be the firm’s core business, says Jeff Harte, an analyst at Sandler O’Neill & Partners. But, with an expanding deposit base, it makes sense to use that money to finance loans that Goldman can charge interest on, rather than having the deposits just sit there.