Goldman Sachs & Co.’s move into alternative lending appears to be as much about structured finance as it is about making loans.
Goldman’s consumer lending plans were made public today. According to The New York Times report, “The new unit will offer the loans through a website or an app — functioning like a virtual bank in one of the oldest companies on Wall Street. … The company hopes to be ready to make its first loans next year.”
GS appears to be building a full-fledged digital lending venture:
The bank’s push into lending is being led by Harit Talwar, a former top executive at the credit card giant Discover, who joined Goldman last month.
In a sign of how seriously Goldman is treating the new venture, the company approached several top consumer finance executives about the job, which comes with the title of partner, a highly coveted position at Goldman, the people briefed on the matter said. The operation could have a staff of as many as 100 by the end of the year, they said.
The exact lending parameters of the new credit venture have yet to be established, but there is some sense for its underwriting “box”:
In early discussions, the firm has been talking about making loans that would be about $15,000 to $20,000, people briefed on the conversation said. To distribute the money, Goldman is considering issuing a sort of prepaid card that could be drawn down each time the borrower buys something with it.
Are $15,000 consumer loans really Goldman Sachs’s next great financial score? Not exactly. In our view, Goldman is jumping into alternative lending before it gets locked out of its rich data flow, as well as its securitization stream. Yesterday, Santander InnoVentures, the bank’s innovation arm, released an interesting report on Fintech 2.0. The report succinctly expresses why alternative lending has a distinct data advantage:
By utilising customer spending behaviour and supplier performance data, banks could help SMEs manage their cashflow and credit line requirements. Access to regular trade data, via the Internet of Things and point-of-sale systems, could help banks with credit scoring for growth capital and working capital needs. This would allow them to pre-empt SME financing requests so that they can provide real-time credit to match their clients’ needs.
At this point, Lending Club is effectively becoming a securitization machine — the whole nature of the “investing” side of LC’s business gives investors access to structured finance. And structured finance is Goldman’s ‘hood. There’s no way GS will allow itself to be cut out of such structure finance, even if it means originating $15,000 personal loans.