News last week that Wall Street’s premier investment bank, Goldman Sachs, is working on the launch of an online lending platform that will target consumers and small businesses has prompted plenty of comment to the effect that “there goes alternative finance”. It’s bad enough that institutional money is flooding in but if the sharpest banking suits in the room are entering the market, what’s left of the movement’s original vision?

 

This is a good question, and one that everyone involved in alternative finance needs to answer. In trying to do that, it’s first worth asking what Goldman’s planned move is really all about.

 

For all the anguished commentary about the end of P2P, this is clearly not a P2P operation. Goldman will fund its loans via its New York-based bank, which it set up during the worst of the financial crisis in order to benefit from Federal Reserve support for deposit-taking institutions, should the need arise. To its customers, the operation that Goldman is planning will look a bit like a P2P player in that it will be an online lending platform that uses technology similar to the P2P to help assess borrowers’ creditworthiness, and then advance them loans. But the money that goes out will be bank money and will therefore be regulated as bank money, meaning that Goldman will have to hold capital against the loans it makes in line with its obligations under the Basel rules.

 

This matters because the real issue here is not that Goldman is launching something that will compete in the same market as the P2P lending movement (although it will definitely do that). The bigger point is that Goldman is experimenting with digital-only distribution of retail bank lending to consumers and SMEs.

 

Banks all over the world can clearly see that the future is digital. Transactions via mobiles now account for about half of the total in the UK and that percentage will only rise. Visits to branches are falling, bringing nasty diseconomies of scale for those banks with large branch networks. Doing what the P2P movement does is very likely indeed to be a big part of the future of certain sorts of banking, particularly small-ticket lending to individuals and businesses.

 

So the conclusion is clear. Goldman is not becoming an alternative finance provider: it’s becoming a 21^st century retail bank with all the cost advantages that pure digital distribution can provide.

 

But given that – to its customers – it’s probably going to look and operate quite like an alternative finance platform, and given also that Goldman won’t have objected to all the extra publicity its venture gained by being compared to the big names of alternative finance, a critical question for the P2P movement remains: just what makes you alternative when digital banking really gets going?

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  Will your technology set you apart?
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  Will the key be a marketplace where the ebb and flow of supply and demand set prices in real time?
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  Will your transparency and accountability to your lenders and borrowers be the thing?
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  Will you be better, faster and cheaper than a bank? 
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  Will you lend to people the banks don’t want to service or on terms they decline to match?
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  Will you have products that they can’t or won’t offer?
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  Will you insist on remaining pure “peer-to-peer”, with individuals funding your loans?
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I make no pretence that the above is a complete list and I also suspect that the major British banks may be not be in such a rush to follow where Goldman is leading partly because of nervousness about being seen to try to squash the alternative finance platforms by  competing so directly with them. But now that Goldman Sachs is starting to suggest one version of what digital bank lending might look like, the spotlight shifts back to the Alternative Finance insurgents. What is it that will make them look alternative a few years from now?