NEW YORK, Sept 15 (Reuters Breakingviews) – Back when Goldman Sachs (GS.N) was the vampire squid of the financial world, few would have guessed it would end up financing hair replacements and kitchen renovations. The $2.2 billion acquisition of GreenSky (GSKY.O), a buy-now-pay-later specialist, takes boss David Solomon’s firm in a new direction. Like most fintech deals, though, it’s really a novel way of doing an old thing.
GreenSky brings Goldman something all banks want: borrowers on a plate. The company arranges financing at the point of sale, without paperwork. That makes it similar to other buy-now-pay-later operators like Afterpay (APT.AX), which is being bought for $29 billion by payment firm Square (SQ.N), but with a bigger average loan of around $10,000 thanks to a skew towards relatively expensive things like home improvements and medical procedures. For now, partner banks make the actual loans, but soon that will be Goldman’s job – aided by its own expertise in differentiating good borrowers from bad.
Buy-now-pay-later is the new shiny thing for banks from JPMorgan (JPM.N) to Barclays (BARC.L), and for good reason. First, the financial benefits rival those of credit-card loans, which with returns of 20% or so are one of the most attractive kinds of lending for big firms. But consumers are less likely to feel preyed upon than they do by peddlers of plastic, because the interest rates they see are lower. Merchants using GreenSky pay around 7% per transaction for the privilege of closing the deal, which effectively subsidizes their customers.
Second, whereas credit card companies bombard households with unsolicited mail to drum up business, buy-now-pay-later firms get someone else to do the grunt-work. GreenSky’s biggest merchant is Home Depot (HD.N). Once borrowers are funneled through a retailer's metaphorical sluice gates, the $136 billion Goldman can then try and woo them with its upstart consumer bank, Marcus, which offers loans, credit cards and savings products.
If it works, investors in Solomon's company will see profitable additions to the bank's consumer business and a reduction in its dependence on the other squid-like activities that still make up most of its profit. That's the motivation behind Goldman's first takeover of a listed company since the Wall Street firm itself went public in 2000, and at a premium above 50% to GreenSky's closing share price on Tuesday. But in the overall picture of banking, it’s just another lucrative way to play the middleman.