Does Goldman Sachs' Recent Move Mark The End Of Traditional Banking?

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At the end of 2016, Goldman Sachs launched a new online lending platform called Marcus. The move into online lending by one of the most successful investment banks in the world is a telling move for two reasons.

First, it’s a good indicator of the post-financial crisis banking industry. Since Goldman Sachs turned into a bank holding company at the height of the financial crisis in 2008, the bank has been forced to navigate through greater regulatory oversight.

Second, rising compliance costs—combined with over seven years of zero-interest rate policy from the Fed—was a bad environment for bankers.

The new normal of low interest rates and restrictive regulations have forced banks to adapt in order to turn a profit.

For Goldman Sachs, that has meant a push to grow its investment management business line and to diversify its earnings with new retail banking efforts such as Marcus.

The End of Banking as We Know It

Goldman’s entry into the online lending market is a telling sign of how technology is transforming the banking industry.

The online lending market, also known as peer-to-peer lending, was in its infancy when the financial crisis hit in 2008. While many businesses crumbled during the financial crisis, peer-to-peer companies not only survived, the industry has actually seen explosive growth in the wake of the crisis.

Peer-to-peer lending has grown from nothing a decade ago to be a $26 billion industry in 2015. However, it still only accounts for 2% of the market for unsecured consumer credit.

A report by Transparency Market Research forecasts that the global peer-to-peer lending market could grow to $897 billion by 2024.

And Goldman Sachs wants a piece of the pie.

“Bank within a Bank”

Goldman Sachs is using Finacle, a software program owned by Infosys, to run the Marcus lending platform. With this software, Marcus customers will be able to fully customize their loan parameters within guidelines set by the bank.

Marcus will offer personal loans with rates ranging from 5.99% to 22.99% APR and loan terms ranging 24 to 72 months.

Gone are the days of negotiating with a banker on loan terms. The Finacle software is fully automated and will process the transactions in real time. It’s a fully operational “bank within a bank” that only relies on approximately 200 Goldman employees, according to Bloomberg.

There are a few key differences with Marcus than the other online lending platforms, such as Lending Club and Prosper.

Marcus is not a peer-to-peer lending platform. Instead, Goldman will be making loans against its own balance sheet. This will give the bank more flexibility with setting competitive loan terms and fees.

Unlike its competitors, the Marcus platform will charge no fees. No sign-up fees, no prepayment fees, and no late fees.

The Disruptive Nature of Online Lending

There is a reason that Goldman Sachs is willing to waive fees to entice customers to the Marcus lending platform. That’s because peer-to-peer lending has proven to be a disruptive technology to the banking industry, offering lower interest rates for borrowers while at the same time offering higher returns for investors. (Learn how to earn yields on your savings that are 10 times higher than what you’re earning in money market funds in our free report, Welcome to the Bank of You. Download the report here.)

Online lenders have a major advantage over brick-and-mortar banks due to significantly lower operating costs.

Goldman Sachs

Chart Source: HJCO Capital Partners Investment Research Report

Goldman Sachs

According to a Morgan Stanley report published in 2015, the effective annual interest on the peer-to-peer lending platforms analyzed was on average 6.8% lower than those offered by banks.

The value appeal for borrowers is obvious: lower rates and quicker, simpler access to credit.

For investors, peer-to-peer investments have less volatility and a low correlation to stock and bond markets.

As you can see in this table, the correlation of P2P lending (labeled as MPL for marketplace lending) to other asset classes is very low.

Goldman Sachs

Chart Source: HJCO Capital Partners Investment Research Report

Two asset classes that have perfect correlation would equal 1—meaning a 5% move in one asset class would mean an identical 5% move in the other asset class.

P2P lending only has a 0.19 correlation with US stock markets, and it actually has a negative correlation to US bonds. This means that as US bonds have lost value, P2P loans have actually appreciated in value.

All the while, P2P lending platforms have historical net annualized returns between 5% and 10%. (Learn more in our free special report, Welcome to the Bank of You.) Compare that to investing in a 5-year US Treasury note that yields less than 2% today, below the reported rate of inflation, and can you see why Goldman Sachs got involved with online lending.

While Marcus may not be open to outside investors, the good news is there are several very easy ways for retail investors to get involved in peer-to-peer lending.

Free Report Reveals: How to Join the P2P Lending Revolution and Earn Yields of as Much as 10.39%

The P2P lending technology is turning the traditional banking industry upside down. With almost no effort and risk, you can join the revolution in minutes and earn market-beating yields on high-grade P2P loans. Grab our free report, Welcome to the Bank of You, and learn everything you should know about P2P lending to get started. Click here to download.

Article by Jake Weber, Garret/Galland

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