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The Future of Finance
Goldman Enters the Consumer Loans Game

Goldman Sachs, the storied investment bank, is taking a page out of the start-up script, rolling out a new consumer-facing unit that will leverage the internet to achieve lower prices:

While the new consumer lending unit is still in the early planning stages, Goldman has ambitious plans to offer loans of a few thousand dollars to ordinary Americans and compete with Main Street banks and other lenders.

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. Without the costs of bank branches and tellers, Goldman can lend the money at lower interest rates while still making a profit. The company hopes to be ready to make its first loans next year, according to people briefed on its plans, who spoke on the condition of anonymity.

Your local bank branch loan officer may need to start looking for a new job, but for everyone else this is a heartening development. The Amazonization of finance is surely coming; other institutions will follow Goldman, and we will see some of the same consequences for retail banking that we saw with bookstores. (Though we sincerely doubt there will be as much nostalgia for the old timey bank branch as there is for the local book store.)

What also needs to happen is for these cheaper loans to start going to small business start-ups, and not just to consumers looking to consolidate debt or remodel their kitchen. In an age when industries are transforming and jobs are disappearing, America has no choice but to become a start-up nation itself. Cheaper credit is one of the ways that the emergence of a new wave of small business can be encouraged.

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  • Kevin

    I have my doubts that this will work well but I wish them luck. The economy coukd certainly use more financial products aimed at Main Street and the real economy instead of exotic plays aimed at circulating money around the financial system.

    (In the long run I wonder if the trend towards using data to qualify borrowers rather than a loan officer talking to you and looking at you in the eye while they go over your plans is better -I suspect it helps some get credit and hurts others. Would a c otitis who moved away from the data driven trend spot new underserved but creditworthy borrowers?

    • fastrackn1

      “In the long run I wonder if the trend towards using data to qualify borrowers rather than a loan officer talking to you and looking at you in the eye while they go over your plans is better”

      No….

      It was tried by heavily relying on FICO credit scores (data) several years ago and we all know how that turned out.
      I have been using many different type of loans for over 30 years and there is nothing like going into a small local bank and talking to a loan officer for getting things done.
      But maybe for small easy loans their idea will work fine. Time will tell….

      • Josephbleau

        if you have a sufficiently large number of customers you can accurately predict the mean of your population and accurately predict the service fee needed to give you a profit of x, even though many or most of your customers default.

        • fastrackn1

          Very true.

          As the customer base grows I am sure Goldman will tweak things along with it until they work out all the kinks.
          I am sure Goldman either owns many of these PayDay Loan type places under some distant corporation, and have a pretty good idea where the numbers will be regarding profit and loss, or they have done massive research into the business to get an idea where the numbers should be once they start.

  • Fat_Man

    I really want to owe money to the Vampire Squid.

    /sarc

  • FriendlyGoat

    You have to know that some institutional lenders have looked at the vast numbers of payday and title-loan lenders making an absolute fortune in unregulated places and asked themselves: “Can we fashion a product that is not quite as abusive, not quite as seedy, and capture some of these margins?”

    I’m going to bet that the Goldman product will not be necessarily aimed at competition for traditional banks and not necessarily cheaper than a bank loan.

    • Laurence Levin

      Payday loan companies are not making tons of money. Although each loan is highly profitable the overhead costs are high. This causes the overall profitability to be low (it may have been high once but competitive pressures reduced it) in a fragmented industry. This does provide an opportunity for a larger firm like Goldman to offer a highly profitable product at a lower cost. I am not sure that most of the Pay Day loan customers would be that cool with a mobile app. I always thought Wal-Mart would end up taking this over since these are their customers.

      • FriendlyGoat

        I live in a state where they say we literally have more of these loan shops than we have fast food restaurants in the whole state. Somebody is making some money, or they wouldn’t be maintaining thousands of these things across the country.
        The competitor we should be creating for this is the U.S, Postal service, which we know already has the storefronts it needs.

        That aside, Goldman won’t be doing exactly what the payday and title loan lenders do. But loans with slightly lower standards than banks for somewhat higher rates than banks? Seems to me that would be tempting for a big institution to try.

        • Kevin

          I suspect the USPS would loose a ton of money very fast if it tried this. The political pressure to approve dubious loans would be immense and their personnel practices would prevent them ever getting the workforce needed to do this. (Making no or limited collateral, no or limited credit score loans requires delegating authority to the loan officer as well as loan officers who know the community and market conditions – the USPS culture would not handle this decentralized authority to give away cash well at all. If you’re going to rely on objective measures like credit scores it can all be done remotely over the web like in this GS proposal. ) Storefronts are readily available if you have the business model that works, without the latter storefronts are pointless.

          • FriendlyGoat

            You have a point, yet there is a market for something more reasonable than what we see operating in the old used gas station buildings. I would be more than willing for USPS to give it s try, and I think the main reason this hasn’t happened is lobbyists for the existing lenders.

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