Goldman Sachs has long dominated the hedge fund and private wealth businesses. Now, the giant Wall Street bank wants to take on the little guys. Using an online platform, Goldman Sachs reportedly plans to launch a consumer-lending unit, which will directly compete with local banks and credit unions in communities across the country.
According to the New York Times, the consumer-lending unit would make loans of a few thousand dollars to everyday Americans, a new audience for Goldman Sachs, which has traditionally made a name for itself servicing the needs of millionaires and billionaires. With this new venture, Goldman Sachs will roll out a customized mobile app or website, through which consumers can apply for loans and get financing. By eliminating the costs associated with banks and tellers, Goldman Sachs hopes to offer lower interest rates than the banks located in a given community. This sort of mentality at first glance seems promising for borrowers looking to get the best rates, but in the long run, the big-bank thinking could leave our communities and our borrowers short-changed. By eliminating face-to-face interaction, consumers could be giving up some of their power – to a bank that doesn’t have the best track record.
1. Relationship banking
Community banks and credit unions find success in part by building relationships within their communities. They judge each client individually because they can see what the client does in the community and the environment the client comes from. In other words, local lenders approach each client with a personalized solution to their needs, rather than the sort of streamlined, one-size-fits-all approach that helps big banks serve a global portfolio of clients. This sort of “relationship banking” can make all the difference when it comes to financing small businesses and individuals.
The Institute for Local Self-Reliance (ILSR) points to Centinel Bank in Taos, New Mexico, as an example of this relationship banking. Centinel, a family-owned bank now run by its third generation, makes lending decisions largely based on its relationships. As a result, local businesses and local families get approved for financing through Centinel, even though they might not qualify under a big bank’s one-size-fits-all approach.
2. Commitment to every day Americans and small businesses
Support for small businesses and small borrowers characterizes community banks and credit unions across the board. Over the years, credit unions have made it easier for individuals to be eligible for membership, and they guarantee memberships for life, regardless of what happens to your original qualifications. Credit unions and community banks also provide a majority of small business loans, despite having a smaller share of the market and fewer assets than big banks like Goldman Sachs. In 2014, these lenders provided 60 percent of small business loans, while holding just 24 percent of all banking assets, according to ILSR.
3. Minimizing risk
Big banks boast that their numbers-based success makes them more qualified to serve borrowers of all sizes, but they don’t have the track record to prove it. In 2010, Goldman Sachs agreed to pay a record-breaking $550 million fine to the Securities and Exchange Commission after the SEC claimed that the bank misled investors prior to the housing market’s collapse. In March, the Wall Street Journal reported that Goldman Sachs and some of its giant competitors were at risk of losing tens of millions of dollars thanks to bad loans made to the energy industry. If Goldman Sachs can treat its wealthy investors and corporate clients poorly, there’s little hope for the little guy.
On the other hand, community banks and credit unions, despite their smaller share of the market, prove extremely adept at judging risk and following industry best practices. Small banks and credit unions boast a lower percentage of bad loans than giant banks year after year, according to ILSR. When bad loans reached a peak in 2010, they accounted for more than three percent of giant banks’ lending. At the same time, though, bad loans represented just about one percent of small banks’ lending.
When it comes to banking, as in business, bigger isn’t always better. If Goldman Sachs really wants to compete with fair, responsible community banks and credit unions, it will have to adopt a new strategy for wooing consumers. Making bad loans and taking the interpersonal element out of financing shouldn’t suffice.