Goldman Sachs’ Marcus is winning the personal loans arms race

Marcus by Goldman Sachs said it was going to lend $2 billion to customers by the end of this year. As of late Monday, it had already done that. The announcement follows a gloomy earnings season for online lending companies, whose personal loans rival Marcus'. Lending Club has reported losses exceeding $200 million over the last six quarters; Prosper has lost $210 million since the start of 2016, despite various cost-cutting measures, and lost its unicorn status. Even OnDeck Capital, which focuses on small businesses, is struggling to become profitable, having reported losses over eight consecutive quarters. On top of it, the Cleveland Federal Reserve Bank laid into such companies in a report Thursday, calling "peer-to-peer" lending a "predatory" business requiring more regulation; though it has since admitted its data sample doesn't distinctively separate different types of online lenders. Even though Goldman launched Marcus about a decade after online lenders emerged, Marcus has had a head start in the personal loans race all along. The Lending Clubs of the world addressed a need when people couldn't get access to loans from traditional banks following the financial crisis; they were technology companies invading the financial sector promising access to loans and a better, faster customer experience for higher rates and more fees. But for Goldman, it's taken a fraction of the time to set up a sub-brand and begin accepting customer deposits from everyday customers. And that's not just to rival JPMorgan, Citi or Wells Fargo, but to challenge "new" consumer lenders. (Earlier this month, however, it announced its online-only consumer deposits business, currently branded GS Bank, will be folded into Marcus by the end of the year.) Marcus passed $1 billion in loans this summer. Online lending companies match borrowers with investors and tout faster approvals and access to credit for people who have difficulty getting it from traditional financial institutions. According to the Fed, however, borrowers don’t use the loans to refinance pre-existing loans, credit scores go down for years after borrowing from an online lender and the loans don’t actually go to those underserved by traditional banks. Marcus, which offers personal loans to consumers between $3,500 and $30,000, has obvious advantages over its Silicon Valley competitors: a household name brand like Goldman Sachs behind it, the ability to raise FDIC-insured deposits as a deposit-taking institution and deep relationships with institutional investors that purchase consumer loans — like Goldman Sachs, which helps fund Prosper loans and is effectively competing with its own customer. Goldman sees a $13 billion lending opportunity with Marcus over three years, CFO Marty Chavez said Tuesday in remarks at the Bank of America Merrill Lynch Future of Financials Conference. All year, Marcus has been marketing itself as the Goldman Sachs offshoot that's more relatable to the masses. Its first campaign focused on de-stigmatizing debt, one of the most personal and sensitive topics for people. Since late October, it's been pushing an anti-fee campaign scripted to show how frequently and commonly people accept fees without fully understanding why the fee structure is in place in the first place and perhaps even highlight the fee structures at competing companies; namely, Lending Club, one of the largest players in online lending with more fees in place than its peers.

"Don’t Get Fee’d is a big part of our new campaign to create awareness," said Dustin Cohn, Marcus' chief marketing officer, at a recent event unveiling the campaign. "Once you understand personal loans can be a better option for you, [you see] many other lenders charge fees — origination fees, late fees, fees for paying down your loan early." Marcus was built with and for Main Street customers -- a new customer set for the global investment bank -- on the pillars of value, transparency, simplicity and the ability to customize. Specifically, that means charging no fees ever, giving customers the ability to choose monthly payment amounts and select payment dates upfront and change them as well as an automated, jargon-free online application, according to Cohn.

The biggest change to the online lending industry since it first boomed is the increased customer expectation for transparency, according to Craig Schleicher, a senior manager in PwC’s consumer finance group.

"A no-fees option is designed to minimize consumer surprises around origination, late fees and other fees they might not expect," he said, not addressing Marcus specifically. "Customers really value knowing exactly what their financial commitment is through the life of the loan."