To me, the big news last week was Goldman Sachs will launch a brand new online lending business to compete with startups like Lending Club.

The event was covered widely in the press but didn’t get a lot of buzz or discussion in FinTech circles – perhaps since a large incumbent taking on the startups doesn’t fit a disruption narrative.

It may also be since of the few of the FinTech opinion leaders writers know Goldman; I’m a in a position to comment since my former boss and CIO of Morgan Stanley’s Global Wealth (and Advisor & Client Technology Head) both went to Goldman, along with some other former colleagues.

Market Opportunity

Why did Goldman Sachs make a bold move into online lending at this time? I believe the expansion can be understood partly by the general growth of new lending businesses. The success of startups and new credit providers, like SoFi, Prosper, Kabbage, Patch of Land shows the market opportunity.

By entering this market, Goldman also opens a new chapter by expanding from a focus on institutional markets (which have been reduced in appeal due to changing regulations) to the consumer and small business market.

Impact on Business and Brand

The strategy mirrors that of Morgan Stanley, which clearly pivoted to more balanced business (with more recurring revenue driven by growth of wealth management and purchase of Smith Barney from Citi) post the financial crisis.

Recruiting talent from institutions like Stanford has become more difficult.

An online lending business will help its brand, reputation and recruitment.

Will It Work?

Goldman Sachs is very competitive and has deep pockets to make it succeed, but I see the move as partly symbolic and partly a longer term effort to shift its business mix. It’s unlikely to change the culture right away, but it helps tell a story of Goldman diversifying its business and workforce culture.

I’ve been told by former colleagues that to thrive at Goldman Sachs, you to have deep vertical experience; it’s not a firm of generalists. Its performance-driven culture is unlikely to change. I can’t see it doing anything like Capital One (with its Capital One Labs, speed and almost tech firm culture).

Overall, I am skeptical Goldman will bring innovation or differentiation in online lending terms of Product, User Experience (UX), or certainly digital marketing – which are key success factors in the online lending space.

And they will have resistance in terms of its brand, which has like many of its rivals on Wall St. has been tarnished by the financial crisis and doesn’t resonate with consumers or small businesses.

But online lenders face their own challenges.  A recent survey found few Americans are familiar with P2P lending. People confuse Lending Club with Lending Tree. Bottom line: the startup brands are really not that strong.

More importantly, online lenders who rely on hedge funds for funding of marketplace loans (such as Prosper and Lending Club) face risks that their borrowing costs may increase, and not be reliable over the long term.

Goldman is undoubtedly better than the recent crop of FinTech startups at finding the lowest cost of capital – and at managing risk, so the bank has some competitive advantages.

Beyond this, who better to come in and buy one of the big online lenders? This would have the benefit of addressing the brand problem, since I am confident the bank would retain the consumer brand of any startup it acquires. Imagine this:

Prosper is a Division of the Goldman Sachs Group Inc.

Why Not Wealth Management?

Looking at Goldman Sachs enter online lending, one question is is why it didn’t enter the digital wealth business?

In many ways, it would have been logical (even predictable), given Goldman is associated so strongly with investments. But the fact is that Goldman now operates a small private wealth banking unit. So going into the robo advisor segment would just represent going down market within a current business line.

Adam Nash, CEO of Wealthfront, told a group recently: “Every major investment firm, I promise you, is doing a build/buy/partner evaluation” of digital wealth management.

Who knows – maybe after developing its online lending unit, it could then expand its wealth offering  under the same brand.

In retaining the Goldman Sachs brand for its institutional and the high net worth, it would follow the same approach of Jamie Dimon segmenting Chase vs. JP Morgan. When it’s ready, it could make an acquisition. Or it could license a product like Trizic.

Given the best online lenders, such as SoFi, are expanding to wealth management, these products could operate co-exist in a common platform or brand at Goldman, so it might be its long-term strategy.

At the end of the day, I admire startups, but welcome innovation from anywhere.  If they want to put the consumer ‘in its corner’ as its advertising said, I’m all for it.

Follow @fintechblogger