One year ago, the FDIC-backed hedge fund and central banker incubator known as Goldman Sachs prompted some head scratching when it announced that it would become an actual bank following its purchase of GE Capital Bank's online deposit platform, allowing ordinary retail depositors to park their cash with the bank. The reason for the confusion was simple: with a $900 billion balance sheet, Goldman did not need the extra funds. Just as confusing, Goldman was paying one of the highest interest rates in the country: at 1.05%, this is more than virtually any other comparable bank or financial institution was willing to give depositors every year they parked their savings with the bank. Superficially, it would suggest Goldman urgently needed the funds which, at least as of this moment, could not be further from the truth.
In any case, now one year later, we wonder how Goldman's experiment at online retail banking depositor funds has performed?
Thanks to the WSJ have the numbers: since the closing of Goldman's acquisition of GE Capital's banking unit this April, Goldman has netted $1.8 billion in new deposits thanks to its overly generous 1.05% interest rate which as noted above is among the highest on offer anywhere. Some 33,000 people who’ve opened accounts, although since Goldman does not have any retail branches or ATMs, these new depositors can’t write checks from their accounts or take cash out of ATMs.
So far, the online platform is just a blip for Goldman, which had $124 billion in overall deposits and a $900 billion balance sheet as of June 30. However, it is rapidly gaining popularity.
Still, as the WSJ puts it, deposit gathering is "something of an odd cultural fit. Goldman is known for high-touch services, doling out merger advice to big companies and helping hedge funds place exotic bets on things like foreign currencies and commodity prices." It is perhaps best known for making terrible trading recos and then trading against its muppets clients.
As the WSJ correctly points out, it is "not clear that mom-and-pop customers want Goldman Sachs products, or would think to go looking for them."
But maybe Goldman is simply prudent, and realizes that if the Fed is forced to drain some $2.2 trillion in reserves, bank cash balances will collapse to just a few hundred billions, as we have shown in the below chart netting out excess reserves from bank cash balances.
Whatever the reason, having launched a deposit business, Goldman will soon match it with the corresponding balance sheet asset: this fall the bank will start offering an unsecured personal loan. Similar loans from lenders like SoFi and LendingClub charge about 11% interest on average, according to BankRate.com, a healthy margin over Goldman’s cost of deposits.
Unlike with deposits, Goldman will have a far tougher time penetrating the loan market and finding willing creditors just because it is far too late to the loan game. Rivals like Bank of America, with 33 million online-banking users in the second quarter, have huge advantages in the race for depositors. And on the lending side, Goldman will be competing against peer-to-peer companies that have a head start with borrowers.
Still, the hedge fund hopes to thread the needle. Its balance sheet can provide a stable backstop of funding for its loans, which peer-to-peer lenders lack. And it won’t have the expense of a big network of brick-and-mortar bank branches that weighs down bigger rivals.
“There are benefits that online lending platforms provide to consumers, and there are benefits that large commercial providers of credit provide to consumers,” Chief Financial Officer Harvey Schwartz told analysts last month. He said Goldman could “bridge the gap between those strengths.”
No matter the outcome of Goldman's lending efforts, the confusion still remains: why tempt depositors with such abnormally high rates of interest? We ask, because the last time a "healthy" bank was such a substantial outlier to its peers (a JPM High Yield checking account currently yields about 0.01%) it ended up tempting depositors with the following irresistible product...
... before it had to be bailed out.