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Goldman Sachs' new consumer loan initiative is designed to keep the Wall Street giant ahead of the growing number of non-bank lenders making inroads. These firms, like peer-to-peer lenders Prosper and Lending Club, are growing fast. Goldman has some big advantages, though – which make its entry into the consumer loan market undoubtedly a smart move.
As recently as March, Goldman issued a report on the rise of shadow banking, which asserted that banks will be losing market share to an "expanding class of competitors". Shadow banking entities are non-banks that operate without regulatory oversight and advantages such as access to FDIC insurance. They are widely blamed for the credit bubble and subsequent collapse in 2005-2008.
In the past, shadow banking was primarily the purview of hedge funds and independent financial firms that established structured investments like collateralized loan obligations. But now, as the Goldman report explains, increasing regulation on traditional banks, the digitization of finance, and tech-enabled lending platforms, like peer-to-peer lending, are shifting profits into the hands of new players.
In this light, Goldman's new focus makes perfect sense. It aims to get out ahead of these non-bank competitors while maintaining one major competitive advantage…access to the Fed discount window.
Goldman is unique in that its status (as of the financial crisis) as a bank holding company does not encumber it with the physical infrastructure needed by traditional banks, and it retains the agility needed to enter the web-based, direct-to-consumer lending space and undercut more established banks that cannot restructure as readily.
At the same time the firm maintains the credibility and implicit security (read government-backed guarantees) of a giant financial institution.
Lloyd Blankfein and his colleagues are betting they've found a sweet spot here. And they're probably right.