Goldman Sachs moves into online lending

Goldman Sachs has spent 146 years largely as the bank of the powerful and privileged. Now the Wall Street powerhouse is working on a new business line: providing loans that can help you consolidate your credit card debt or remodel your kitchen.

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, people briefed on its plans said.

In devising its new strategy, Goldman is putting itself in league with startups that are similarly trying to use technology to disrupt the traditional business of finance. Unlike the media and retail industries, banking has been relatively slow to shed its bricks-and-mortar business model - a trend Silicon Valley and now Goldman are seeking to exploit. But the new venture carries considerable risks.

After the financial crisis, Goldman was vilified, accused of profiting while homeowners lost their properties to foreclosure. If the bank is too hard on its borrowers - suing a struggling family for unpaid debts, for example - it could revive a popular image as a bank that earns profits at the expense of ordinary people. The lending will also involve Goldman in a relatively risky business in which it has little previous experience, dealing with ordinary borrowers with limited financial cushions.

“Everything Goldman has done in the last 30 to 40 years has all been focused on the commercial side, or things that abut it very closely,” said Chris Kotowski, a bank analyst with Oppenheimer & Co. “I refuse to believe that hiring a couple of programmers and offering to make $15,000 loans online is a highly value-added banking strategy.”

Still, this new type of lending could help burnish the firm’s relevance to mainstream Americans. The $840 billion consumer loan business is facing a shake-up as online upstarts like Lending Club, Prosper and even PayPal have begun offering small loans. These outsiders have captured only a tiny slice of the market so far. But with their low overhead, they are persuading some analysts that they will be able to eat away at the businesses of old-school banks with the legacy costs of branches and bank tellers. Jeffery Harte, a bank analyst at Sandler O’Neill and Partners, said, “Online lending has the potential to be quite disruptive to the way credit is extended.”

Goldman is still considering the details of the loans it will offer. 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. In terms of distributing the money, Goldman is considering issuing a sort of prepaid card could be drawn down each time the borrower buys something with it.

Goldman has not decided whether to attach its name to the loans or market them under another brand.

Consumer loans can be a fundamentally risky business even for a company with a reputation for deftly managing risk. Many people take out personal loans as a last resort to deal with cash flow problems at home or in their businesses. “If you grow too fast in the personal loan business, you can get some bad surprises,” said William N. Callender, a managing director in the financial services practice of AlixPartners, an advisory firm.

Also, Goldman will have to overcome some powerful forces that favor the incumbent Main Street banks. Even if Goldman can offer lower rates, consumers may still favor credit cards over personal loans, simply out of habit. “The biggest thing the banks have in their favor is inertia,” said Clements, the former consumer banking executive.

New York Times