Garnet Capital Advisors Blog

Take a drive into town, and the one thing you won't see is a branch of Goldman Sachs. That's because the financial institution has always been about wheeling and dealing on Wall Street, not Main Street. 

That is starting to change, however, as news broke that Goldman Sachs recently purchased $16 billion in online deposits and unveiled plans to build its own online loan platform for small business and consumers, on par with the average bank and marketplace lenders, American Banker reported.

But why the change in strategy for the Wall Street top dog?

Regulation spurs action
The news of Goldman Sachs's shift to a more commercial bank rather than an investment bank comes on the heels of increased regulation in the industry.

According to CNN Money, these changes are due, in part, to the financial crisis of 2008. The Dodd-Frank Act, the Volcker Rule and other regulations are all limiting investment banks like Goldman Sachs from gambling on Wall Street. If they want to succeed, they'll have to confine to stricter capital and liquidity guidelines than in the past.

As a result, Goldman Sachs is becoming more commercial. Following the financial crisis, the financial institution became a federally chartered bank, CNN Money noted. Recently, it also sold off Colombian coal mining assets. Now with the news of the deposit purchase and interest in loans, Goldman Sachs may finally be moving toward a more commercial banking structure.

Commercial banking can be cheaper, more profitable
There's no question that Goldman Sachs has been incredibly successful as an investment banker. But much of that success came before the financial crisis and subsequent regulation. A new strategy may be needed to continue to grow today.

According to American Banker, that strategy is afforded through a commercial banking focus. Todd Baker, managing principal at Broadmoor Partners, told the news source that deposits are cheaper than other types of funding options. 

"Deposits are a good, stable source of funding," he explained to American Banker. "Since you have the whole regulatory burden, why don't you take advantage of that burden?"

Regulations favor commercial banking
In relation to what Baker noted, the increased regulatory scrutiny since the financial crisis as favored commercial banking over investment banking. Many of the new rules and guidelines were created to curb the "fast and loose" tactics of some investment banks. Now, a more commercial-focused Goldman Sachs could find new life in the industry.

While the financial institution is certainly established, its move into commercial banking could take some time, American Banker pointed out. That's because it was only an investment bank prior to the crisis. Other firms - like Morgan Stanley - that are making a similar switch had other businesses already in place, like wealth management. For Goldman Sachs, it takes some time to figure out the best way to grow.

And right now, it seems that way is through online lending and deposits. Should you have any questions about trends in the industry, please reach out to loan sale advisory firm Garnet Capital Advisors.