GOLDMAN Sachs is making inroads into European peer-to-peer consumer lending with investments in Lendable and Brocc, despite a slowdown in consumer credit growth.
Goldman made both of the investments via its Goldman Sachs Private Capital division.
In February the bank also took part in a $20m (£16.3m) funding round for money management app Bud, which offers the Bud Exchange, a platform allowing users to access the Bud marketplace where they can invest in different products, including P2P loans.
Goldman has traditionally been known for its wealth management and investment banking services but has moved into the retail market in recent years.
The investments come after the bank said in 2017 that it was considering launching a consumer lending arm in the UK to compete with the likes of Zopa and RateSetter.
In 2016 it began offering high-interest online savings accounts in the US which could be opened with deposits of just $1 (81p).
Goldman followed this up by launching Marcus By Goldman Sachs, an online consumer lending platform, available in the US and UK.
When asked whether Goldman’s investment into Lendable would compliment its offering from Marcus, a Marcus spokesperson declined to comment.
Goldman is entering an already crowded market in the UK, where growth in consumer credit is slowing after hitting a five-year low in May this year.
Figures from the Bank of England show consumer credit borrowing grew by 5.6 per cent in May, the weakest rate this year and the slowest growth since April 2014.
The consumer lending sector is “pretty crowded but novel propositions can still drive value creation for shareholders,” said John Cronin, analyst at Goodbody.
The consumer is overbanked, he added, with signs of a significant slowdown in consumer credit growth which will put pressure on some of the operators in the industry.
“What we’ve seen in recent years is a sustained downtrend in margins in the consumer lending space,” he said. “We’ve seen the impact of cheap financing for consumers and now it’ll become more testing to maintain and preserve economics as consumer appetite and affordability diminishes.”
Meanwhile, the household savings ratio is at, or close to, an all-time low, Cronin said, and consumer credit is closing in on its peak.
Credit card repayments were at the highest level on record in July 2019, up by 8.2 per cent annually according to industry body UK Finance.
The latest data shows consumers “are managing their finances effectively overall”, UK Finance said.
The level of credit card borrowing also grew by 3.8 per cent in the year to July 2019.
Despite the peak in credit card repayments, the annual growth rate of outstanding balances on credit cards stood at 4.1 per cent in May, continuing the downward trend from its recent peak of 8.3 per cent at the start of 2018.
The Bank of England in July flagged the high level of indebtedness of UK households relative to their income, according to its Financial Stability Report.
“UK households have a high level of debt relative to their incomes, and competition in the mortgage market continues to encourage accommodative lending conditions,” it said in the report.
“But the proportion of very highly indebted households remains low; muted demand has constrained mortgage credit growth; and the Financial Policy Committee’s mortgage market recommendations continue to guard against a material deterioration in borrower resilience.”
The Bank added that consumer credit growth has continued to slow, as lenders have tightened borrowing conditions for credit cards.
In comparison to the UK, the Swedish market is not yet crowded, according to Patrik Gunnarsson, co-founder and chief business officer at Brocc – which announced that it had secured funding from Goldman Sachs earlier this month.
“There are several lenders operating in the sector, but we wouldn’t call it crowded due to the width and depth in the market,” Gunnarsson told Peer2Peer Finance News.
“In fact, the low efficiency of the Swedish consumer market makes it the most profitable in Europe in terms of risk reward.”
Given the number of lenders and the prevailing low interest environment, borrowing should be significantly lower, Gunnarsson said, if pricing were rational.
However, most banks and lenders have expensive cost structures, which prohibits them from lowering interest rates. This gives the relatively young P2P sector and Goldman’s investments one key advantage – a lack of legacy structures dragging on costs.