Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

There wasn't a ton to get excited about in Goldman Sachs's earnings report on Tuesday.

Sure, per-share earnings beat analysts' estimates, but how excited can you get over beating an estimate that dropped like this? 

The Beat Goes On
Goldman Sachs became the latest financial firm to beat lowered earnings estimates
Source: Bloomberg

Revenue recovered from a nasty dip in the first quarter but wasn't enough to inspire much confidence that the bank's glory days are thundering back.

Downtrend
Revenue at Goldman Sachs has been trending lower in recent years
Source: Bloomberg

Like the banks whose earnings reports preceded it, trading revenue from the fixed-income, currencies and commodities desks was a bright spot -- jumping 20 percent to $1.9 billion -- and helping the institutional client services segment post a slight increase in revenue:

Of course, that could likely be a Brexit-induced "brief reprieve" in a longer-term downtrend for that business at Goldman and elsewhere.

However, there was a tantalizing detail or two offered on the conference call by Chief Financial Officer Harvey Schwartz about the firm's intriguing efforts to tap into the Main Street customer base. Schwartz said that the bank would roll out its consumer lending platform this fall after surveying thousands of consumers on what they would look for in such a thing. The bank developed one product involving unsecured loans, Schwartz said as way of teaser, telling analysts to standby for more information in the fall. 

This may not end up being a big enough business alone to return Goldman's revenue to record highs, at least not in the short term. Rather, the intrigue lies in its potential to disrupt the disruptors -- the online startups that have pioneered the brave new world of peer-to-peer or marketplace lending.

LendingClub, one of the trailblazers of providing unsecured loans quickly and easily over the internet, and others have demonstrated consumer demand. LendingClub originated $2.75 billion in loans in the first quarter of this year and about $19 billion since inception. Its revenue has swollen from $2.3 million in 2010 to a current pace of about half a billion dollars:

Club Banger
LendingClub's revenue has expanded exponentially since 2010
Source: Bloomberg

Yet the company has been caught up in a series of high-profile stumbles, starting with the resignation of its founding chief executive officer, Renaud Laplanche, amid disclosures of assorted monkey business including that it had altered dates on some loans to make them eligible for purchase. What was highlighted by that scandal, and a subsequent downward revision in its weekly loan-sales numbers, was that the risk to the explosive growth in the business model wasn't so much demand from consumers to take out loans but rather demand from investors to fund the debt and keep it off the company's balance sheet.  

And so here comes Goldman tiptoeing into the business with what Schwartz calls a "very deliberate and methodical approach" as LendingClub's reputation lies in rubble -- indeed with the reputation of the entire fintech marketplace-lending startup world still somewhat covered in its dust. Goldman has the experience and contacts to securitize consumer loans and sell them to investors if that's the route it wants to take. And with 20,000 customers opening up new savings accounts on top of the $16 billion in deposits it acquired from General Electric's online bank in the second quarter, Goldman theoretically should be able to fill in the gaps easily at times when investor demand gets skittish.

Still, LendingClub, which has close ties to Morgan Stanley, made a wise move to protect its turf. On Monday, the company announced it had hired Patrick Dunne as chief capital officer to work with the individual and institutional investors who fund the company's loans. Dunne's resume contains about 25 years of work in the investment fields at BlackRock and Barclays, which should help complement CEO Scott Sanborn's experience on the marketing side.

But the larger question lingering in the air is whether marketplace lenders like LendingClub can continue to grow swiftly as standalone companies now that they have helped build the industry to a size where the Wall Street establishment is taking notice. As such, it's likely that Goldman's investors won't be the only ones interested in that announcement this fall.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects spelling of LendingClub CEO's surname in 11th paragraph.)

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net