Goldman joins online lenders’ club

Six months ago Goldman Sachs was a lead underwriter on the initial public offering of Lending Club, the biggest and brashest of a new breed of online lenders. Now the Wall Street titan is looking to disrupt the disrupters, launching its own web-based business offering loans to consumers and small businesses.

In an internal memo last month the bank said it had hired a senior executive from Discover Financial Services to lead a new business providing “digitally-led banking services . . . without the burdens of legacy costs and fixed infrastructure”.

In doing so, Goldman joins a cluster of companies using online platforms to provide capital to borrowers quickly and directly, bypassing the traditional bricks-and-mortar lenders. Such online operators have enjoyed explosive growth in recent years, amid rapid development of data-crunching software and a surge of interest from yield-starved investors. San Francisco-based Lending Club is now extending close to $2bn of loans a quarter; its nearest rival, Prosper, is doing almost $1bn.

Goldman’s new business is led by Harit Talwar, who left his job as head of card services at Discover, the direct banking and payment services company, in April. In a mark of the importance Goldman has attached to the move, Mr Talwar has joined as one of Goldman’s 400 or so partners — a distinction rarely awarded to lateral hires and even more rarely to those launching new businesses.

Announcing Mr Talwar’s appointment, chief executive Lloyd Blankfein and chief operating officer, Gary Cohn, said: “The traditional means by which financial services are delivered to consumers and small businesses is being fundamentally reshaped by advances in technology, maturity of digital channels, use of data and analytics, and a focus on customer experience”.

Goldman’s research division published a widely-read report in March on the future of finance and the impact of technology, identifying $1.7tn of consumer and small-business loans that it said could be “served more efficiently through the online lenders”.

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Rather than using a peer-to-peer model — matching borrowers and investors through the online platform — Goldman will look to fund loans directly via its New York State-chartered banking subsidiary, which was set up after Goldman became a bank-holding company in the wake of the 2008 financial crisis. To date, the unit — with $128bn in assets at the end of March — has mostly provided loans to private clients and institutions.

Much of Lending Club’s growth has come from consumers keen to refinance credit-card debt, where the average annual interest rate is more than 17 per cent. A lower cost base and “better risk-based pricing” allows Lending Club to offer three-year loans about 30 per cent cheaper, according to chief executive, Renaud Laplanche.

Online lending can still offer attractive returns to investors, meanwhile, even if delinquencies rise sharply from today’s very low levels. New York-based OnDeck Capital, for example — which has supplied about $2bn of high-interest loans to 30,000 small businesses — has made allowances for losses equivalent to about 10 per cent of its $556m loan book. “If you’re charging 40-plus per cent and your loss rate is 10 per cent, that’s still an extremely profitable business,” said Mark Palmer, an analyst at BTIG.

One senior figure within the online lending industry welcomed Goldman’s entry but said its size was no guarantee of success.

“We’ve seen large groups try to enter nimble markets unsuccessfully; they often end up having to go back and acquire one of the major players to enter the business in a meaningful way,” the person said. “Incumbents have made it look easy — but it isn’t.”