News broke earlier this week that Goldman Sachs will enter the online lending space, likely first with small, unsecured personal loans that compete with the likes of Lending Club and Prosper. A number of analysts lauded the move because consumer lending is a huge market and online penetration of the market is still very small. However, the choice of small, unsecured consumer loans is a surprising market for Goldman to target given that many other areas of online lending would seemingly play into Goldman’s business strengths, be more synergistic, and likely reap higher returns.
Goldman’s greatest competitive advantage over most existing online lenders is its access to capital, with a market cap of $90 Billion and close to $1 trillion of assets managed. Given this dominant position, Goldman could be a price setter in uncompetitive parts of the lending system that marketplace lenders do not have the funding or track record to attack. These areas include auto loans, which have almost no online lending competition, and mortgages, where the competition from marketplace lenders is much more nascent. More niche areas of finance, such as accounts receivable finance or agricultural finance loans, could also offer Goldman the opportunity to be price setters in the online lending market. Further, given the secured nature of some of such asset classes, these markets may indeed offer a superior risk-adjusted return.
Unsecured consumer credit is a competitive space with established companies that have access to capital. Lending Club is public and with both Avant and Prosper inching closer to IPOs, the existing lenders in the space already have access to retail and institutional capital. They also have the experience of acquiring, underwriting, and servicing borrowers efficiently in this space. Goldman will have a significant operational challenge to catch up rendering it fair to wonder if it may be more profitable and less operationally challenging to be a major buyer on the existing platforms where returns are north of 11%.
The main reason for Goldman to enter consumer lending versus just funding loans, mentioned above, is likely due to a desire to own the customer relationship and potentially cross-sell other services. The consumer service that Goldman currently offers with the most synergies with online lending is its large private wealth management business. Assuming Goldman targets the typical unsecured debt demographic, it seems the immediate cross-sell opportunity would be less likely. Those consumers more likely destined to require private wealth management services would typically be more high-end borrowers in other verticals of online lending, such as student loan refinancing and mortgages. The securitizations of student loan refinancing so far have shown the average borrower to have a credit score in the mid-700s with average income well over $100K.
Despite the skepticism on the choice of vertical Goldman has decided to enter, from the consumer’s perspective, this announcement is great news. Additional lenders in any sector usually result in good things for consumers in the form of lower rates and improved customer services. Given all the opportunity and white space in online lending, it will be interesting to see if Goldman is able to carve out a niche in the most developed, competitive sector.