Goldman Sachs: FinTech Banker?

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Includes: GS
by: John M. Mason

Summary

Goldman Sachs is moving into electronic banking, not only on the deposit side but also on the lending side.

Can Goldman pull something like this off as critics imply that big banks are not nimble enough to compete in this area and are "too clumsy to innovate.".

This is the way the world is moving and the big banks have to do something...it's just that it will be hard to predict winners in such an environment.

Questions were raised last week when Goldman Sachs Group, Inc. (NYSE: GS) reported that net income was down 60 percent from a year ago and produced a return on equity of 6.4 percent.

The question pertained to the concern that Goldman had tried to retain, for too long, its old business model. The world had changed and Goldman had not.

This week, all attention seems to be falling on the effort Goldman is making to get into consumer banking…and not only consumer banking, but also online consumer banking.

Seems as though this effort got going last year as the bank hired Harit Talwar from Discover Financial Services (NYSE: DFS) made him a partner and put him in charge of "spearheading a move into online banking."

Typical of Goldman Sachs, they did not cut back on any thing else, they just added, "universal banking" to their menu and, in order to help finance this new business, acquired $16 billion in deposits from GE Capital.

This past week, GS Bank began offering a 1.05 percent interest rate on savings accounts or 2.00 percent on five-year certificates, "chart-topping" offers.

Now, the online lending comes into play, where high return consumer lending can be booked against a cost of funds at less than 2.00 percent.

Of course, this puts Goldman Sachs against successful online lenders Lending Club and Prosper.

The question the skeptic's raise is about whether or not a large organization like Goldman can be nimble enough to compete against their startup rivals.

The question I think we should ask is whether or not this move will be represented in the future as the "tipping point" in the financial industry's move toward electronic banking.

The day was always coming when the "big banks" actually committed to an electronic future. It just was a matter of time before the competition heated up sufficiently to accelerate the transition.

The changes have been occurring at shorter and shorter intervals. Not only do we have the online lenders, but with the move by Apple Inc. (NASDAQ: AAPL) into ApplePay to compete with PayPal the pace picked up.

So, the issue is not that electronic banking is coming, but what is the new structure of the banking industry going to look like and who are going to be the major players in banking.

Steve Case, co-founder of AOL and chairman and CEO if Revolution LLC, believes that the third wave of the Internet revolution will become ubiquitous over the next decade and will become integrated into our daily lives in ways that we won't even be aware of.

Mr. Case is quoted as saying "Third Wave innovators will need to learn the lessons of the First Wave: the importance of partnerships…. They'll need to engage with governments, as regulators and often as customers."

If there is a question that big banks may not be nimble enough to compete within this environment, it will certainly be true that the smaller banks will be totally out of the game due, not only to technological expertise, but also due to scale.

But, how this ends up, right now, is anybody's guess.

The Goldman Sachs situation is certainly one to keep an eye on. But, the idea that this "third wave" is going to become ubiquitous means that one must be alert to a lot more that is going to go on in the banking area than just what Goldman is doing.

Here one needs to be aware of what is going on at the periphery because, according to Mr. Case, the big banks are "too clumsy to innovate."

Investing in banking over the next several years, I believe, is going to be highly uncertain…in other words, risky. Technological change oftentimes produces results that cannot be predicted beforehand. If one is to invest in banks over the next two- to three-years, be careful!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.