The maths behind Goldman Sachs move into retail internet finance
As it has done many times in its past to survive and to thrive, Goldman is in the process of reinvention. This explains Marcus, its new online lending business named after the company’s founder, Marcus Goldman, along with GS Bank, its online savings account business with no minimum balance requirements. After all these years, Goldman Sachs has suddenly discovered retail banking. But it is not out of altruism or charity, nor is it nefarious. It is all about making money from money, which has always been Goldman’s specialty. In fact, GS Bank and Marcus fit together elegantly in helping Goldman find new sources of profitability.
And here’s why: In the zero-interest-rate environment that the Federal Reserve has carefully curated for eight years, Goldman and other banks can gather up money — the raw material they use to make more money — at virtually no cost. By opening an online bank, Goldman can gather up billions of dollars in consumer deposits without the cost of a physical branch and pay its customers close to nothing for their money. Goldman is offering to pay savers 1.05 percent annually. That may sound like close to zero, and it is, but the rate is also nearly 17 times more than the 0.06 percent annual interest rate that JPMorgan pays me on my savings account.
Goldman’s idea is to get people like me to move my money, of course. Sure, the 1.05 percent is a teaser rate, created to attract billions of dollars to Goldman’s new venture. And it will no doubt work. Since April, GS Bank has collected $1.8 billion in deposits, essentially by word of mouth.
Goldman will then take that raw material and use it to make more money, in large part by lending it out through its online lender Marcus, which aims at consumers looking to borrow around $20,000. Goldman will charge plenty more in interest for these loans than the 1 percent it is paying savers at GS Bank. Although its terms will not be known until Marcus rolls out officially in October, assume for the moment that the going rate for consumer loans of this nature – if both Lending Club and Prosper are useful guides – is around 12 percent. That difference – the 11 percentage points – is what Goldman will largely rake in as profit.