Wall Street's most iconic investment bank has decided to open its doors to Main Street.
Goldman Sachs plans to start lending money directly to consumers and small businesses, according to an internal memo released to The Associated Press. It would be the first time in its history that the firm has done business with ordinary borrowers.
Goldman's move comes as new regulations have weighed on the firm's other businesses, such as trading. Also, the online lending industry — growing at sometimes double or triple its levels from a year ago — could provide healthier returns without the need for Goldman to build bank branches.
The Goldman name may be well known to Americans, but not its services, which have focused on raising money for larger businesses and providing financial advice to wealthy individuals. Unlike other household names, such as Bank of America or Wells Fargo, Goldman Sachs doesn't run a network of retail banks.
But a shift is underway at the investment bank. Goldman hired an executive from credit card company Discover Financial in May to lead the firm's entry into consumer and personal lending, according to the memo, which was circulated to employees last month.
Goldman did not lay out a timetable for when it would start lending.
The investment bank is likely to enter the consumer lending business by making unsecured, personal loans to borrowers with excellent credit, according to a person familiar with Goldman's plans. He spoke on condition of anonymity because details of the plans are private. The firm may expand its offerings in the future.
Goldman will not open any retail bank branches, according to the source. Instead, it will emulate the nascent peer-to-peer lending industry. The firm will likely do its lending through a web page or through an app.
Peer-to-peer, or online lending, has attracted intense interest from Wall Street the last two years. Online-only companies such as Lending Club or Prosper typically match borrowers with potential investors, acting as middlemen only. But the number of online companies who are lending directly to borrowers is growing. Interest rates on some loans are as high as 37 percent, making it attractive to investors willing to take on risk in exchange for high returns.
The companies at the forefront of peer-to-peer are on a tear. Lending Club, the biggest online lender, went public late last year. Prosper, the second biggest, made $595 million in loans in the first three months of the year, up 200 percent from the year before.
Goldman will likely not create a loan matching service in the mode on those two companies. Instead, it could rely on the firm's own deposits, using its GS Bank division, a source of funds to lend. The bank had $83 billion in deposits with GS bank at the end of last year, according to regulatory filings. Most of these deposits come from Goldman's high net worth clients as well as timed deposits, like CDs.
Other Wall Street firms have gotten into the peer-to-peer lending in various ways. Asset manager Blackrock has been buying loans from Prosper and converting them into securities for other investors to buy.