Goldman Sachs Group Inc., the firm synonymous with Wall Street, is venturing onto Main Street.
Goldman’s well-off traders and lenders have for decades concentrated on huge business and large investors, but the company is now planning to draw in consumers and small businesses. If it is going to work, Goldman Chairman and Chief Executive Lloyd Blankfein stated last month, the company will need to “establish brand-new muscles.”
In recent weeks, Harit Talwar, a previous credit-card executive, has actually been putting together a group of about a half dozen workers to manage the push. Mr. Talwar, who was worked with in May from Discover Financial Solutions, is drafting a strategic plan he will certainly quickly present to a group of senior Goldman executives, people knowledgeable about the matter stated.
The moves belong to a broader Wall Street shift toward consumer and company lending. At big banks, those companies are growing more vital as regulation and capital rules crimp profit at other units, most notably trading.
On the other hand, the financial-services industry’s march towards digitization has made business of handling customers more rewarding than it used to be– developing opportunities for a bank like Goldman that does not have physical branches.
The Wall Street firm’s effort stays in its infancy, with key choices still to come on how it will brand the venture, whether the platform will likewise draw deposits, and how big it must be. Mr. Talwar decreased through a spokesman to comment.
However Goldman has actually narrowed the focus to individual and business loans, unsecured by security and targeting customers with good credit, individuals familiar with the matter said. Business is unlikely to pursue automobile loans, a growing area that has drawn examination from regulators because of its reliance on consumers who have struggled with financial obligation, someone said.
Goldman already lends to ultrarich individuals through a network of wealth advisers. But making direct contact with retail consumers would mark a leap for Goldman, given its traditional concentration on multinational companies and deep-pocketed individuals.
“We’ll want people who previously didn’t know where we were,” Mr. Blankfein said at the firm’s annual meeting last month, speaking of customers not familiar with the company. “So that will, over time, cause us to have to establish new muscles.”
Undoubtedly, it wasn’t long ago when Goldman executives were privately criticizing the firm’s rival, Morgan Stanley, for moving away from their shared history as investment-banking powerhouses in favor of a strategy heavy on retail wealth management.
In a sense, Goldman is merely following the money into a new market. The kind of customer and small-business loans Goldman has in mind for its venture have grown more lucrative than some of the firm’s other activities, according to people knowledgeable about the firm’s thinking.
Consumer loans are capable of producing a return on equity of more than 20 %, the firm’s executives have estimated. In recent years, as the firm changed to new regulations, Goldman’s return on equity dropped to about 11 %.
Goldman’s newfound interest has left other online lenders scratching their heads– and curious what exactly the firm will bring to the market. “My response was, ‘Wow, this business is now really mainstream,'” says Kathryn Petralia, co-founder and chief operating officer of Kabbage Inc., a privately held online lender to small businesses.
Goldman may find it difficult to discover its own specific niche in a market that has already grown crowded. In recent months, investments have flowed into the dozens of online lenders. LendingClub Corp. and OnDeck Capital Inc., two of the biggest, both offered shares to the public for the first time last year, fueling more interest in the burgeoning industry.
Indeed, Ms. Petralia said many in the industry think it is “really weird” that Goldman is launching its business now.
Goldman officials privately dismiss such concerns, arguing in part that it has considerable advantages, including lower borrowing expenses than the start-ups, since the firm has access to client deposits and can avoid raising debt. The firm also doesn’t have the expenses associated with the branch networks of the big commercial banks.
The seeds of the effort came during the financial crisis in 2008, when Goldman became a bank holding company in a step that steadied the firm’s finances and gave it continuing access to government lending facilities. The change imposed more regulations on the company, but it also allowed the bank to take in more customer deposits than it could have as a securities firm, then only running a small Utah-based banking division that supported loans to companies and wealthy clients.
Deposits with the firm’s banking arm, GS Bank, have more than doubled from $32.7 billion in 2009 to $73.1 billion in 2014, giving Goldman more range to expand profitable lending operations. Most of the cash has originated from customers of Goldman’s wealth-management division and from other consumers taking GS Bank certificates of deposit, or higher-yielding cost savings accounts, through third-party brokers.
Goldman “backed into a big opportunity,” Mr. Blankfein noted of the conversion in a 2012 Wall Street Journal interview. “It is a no-brainer that we’ll build our banking business.”
In early 2014, Mr. Blankfein turned to Stephen Scherr, a veteran Goldman investment banker, to figure out how to get more out of the bank’s growing deposits.
Mr. Scherr, who later in 2014 became Goldman’s head of strategy, concluded the firm would be best served by initially staying focused on lending activities where Goldman enjoyed an edge, specifically in its financial investment bank and wealth-management unit, people knowledgeable about the matter said.
The idea of reaching consumers and small companies directly required more study, one person stated. While the effort had long had fans within the firm, creating more direct relationships with consumers would bring thorny questions on how the company is perceived by the basic public and consumers.
Goldman is still repairing a track record singed by crisis-era habits and is still spending for the wave of legal and regulatory actions that followed.
Mr. Scherr also talked with Goldman executives at the company’s merchant-banking arm, which invests directly in outside companies. The executives, Richard A. Friedman and Sumit Rajpal, were watching the rapid growth in a series of online startups, the person added. The concept got momentum, and Mr. Blankfein gave the team a thumbs-up to proceed and work with someone to run the new effort. Through a company spokesman, Messrs. Friedman and Rajpal decreased to comment.
Described by people who know him as capable, risk-averse and a skilled marketer, Mr. Talwar supervised the united state credit-card business at Discover, which he signed up with after a long run at Citigroup Inc.
“More of the activities of lending are being done in a more digital kind of way that kind of is consistent” with Goldman’s traditional businesses, Mr. Blankfein said in San Francisco last month. Some of the lending typically handled by banks with large branch networks “might be transferring to a place where we’re particularly well-suited to do that.”