Goldman Sachs consumer exec Stephanie Cohen explains why the Wall Street bank just inked a $2.2 billion home-improvement lending deal

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Goldman Sachs is entering the buy now, pay later frenzy, though not in the typical fast-fashion segment that made the installments so popular.

The storied Wall Street bank has been making a big push into consumer lending, launching its Marcus retail bank in 2016 and inking a flurry of more recent partnerships and deals. The latest came on Wednesday, when Goldman revealed plans to buy home-improvement installment lender GreenSky in an all-stock deal valued at $2.2 billion. 

GreenSky facilitates installment loans and revolving lines of credit for home improvement projects like window replacements and HVAC installations. The Atlanta-based company made its public debut in 2018, with Goldman Sachs serving as lead underwriter. This all-stock deal values GreenSky at about $12 a share, nearly half its $23-a-share listing price.

GreenSky will join Marcus by Goldman Sachs, the bank’s consumer banking division co-led by Stephanie Cohen. A 22-year Goldman veteran and rising star, Cohen served as chief strategy officer before taking on the firm’s consumer banking unit in September last year — a move that dropped her into the discussion as a CEO candidate. 

When the deal closes, GreenSky’s more than 10,000 merchant customers — small construction businesses and contractors, for example — will become Goldman clients, along with more than $9.4 billion in serviced loans. As Cohen explains in an interview with Insider, it’s a deal that gives Goldman immediate access to fees the merchants charge for loans on big-ticket purchases, like a kitchen renovation or orthodontic work.     

GreenSky makes money through charging its merchant customers transaction fees around 6.6%.

“For us to build the GreenSky merchant network, which they have been building since 2006, I think would easily have taken us at least a decade,” Cohen told Insider. And merchants really like these loans, she said, “because they know it helps them grow their business by improving customer conversion.”  

Goldman Sachs advised itself in the transaction, according to a press release, while JPMorgan and Financial Technology Partners advised GreenSky. 

GreenSky also offers financing for healthcare, including dental work and cosmetic surgeries, though it represents less than 10% of GreenSky’s total volume, CEO David Zalik said during the company’s second quarter earnings call. It offers both revolving and installment lines of credit up to $65,000 for consumers who apply for the financing with GreenSky’s merchant customers.

It’s not Marcus’ first play to ink partnerships or make acquisitions as a means to acquire more customers. 

Last year, Goldman won a bid to acquire General Motors’ credit card business for around $2.5 billion. In 2019, Goldman Sachs and Apple announced a partnership to launch the Apple Card. Goldman is also Jet Blue’s installment partner, offering point-of-sale financing for flights to travelers.

Thus far, Goldman’s interest in buy now, pay later-style credit has leaned toward higher value purchases, with GreenSky being no exception. When it comes to smaller purchases, Cohen pointed to Goldman serving as the partner bank for the Apple Card, and its installment offering for Apple products. Goldman is reportedly working with Apple on installment payments via Apple Pay, not linked to the Apple Card.

The deal will also bring a major change in how GreenSky itself does business. 

Currently, GreenSky relies upon a number of partner banks, including Fifth Third Bank and BMO Harris, according to S&P Global Market Intelligence — to fund its loan portfolio. It’s faced challenges in keeping these bank funding partners before. In 2019, for example, Regions Bank chose not to renew a funding agreement with GreenSky when it expired, and Truist cut ties with the company in August after inking a deal with a point-of-sale competitor.

According to Cohen, as GreenSky joins Goldman Sachs, those loans will over time be transitioned to Goldman Sachs’ own balance sheet. 

“Having scale and a balance sheet is a real competitive advantage,” Cohen said. 

Now, Goldman can offer a $1.4 trillion balance sheet to serve as a backstop to loans.

Living under the Marcus umbrella, GreenSky will be able to diversify revenue, which currently comes mostly from merchant fees. Not only will GreenSky have access to its balance sheet, but there will also be opportunities to integrate with the rest of the bank’s services, like transaction banking, Cohen said. 

The deal will also see Goldman build out its presence in Atlanta, where GreenSky and its roughly 1,200 employees are based. GreenSky Chairman and CEO David Zalik will be joining Goldman Sachs as a partner, and Cohen said the firm intends to bring on all of GreenSky’s employees as part of the acquisition. 

As Goldman Sachs and other banks add to their consumer fintech offerings through acquisitions, they also face new consumer protection and regulatory issues. This July, GreenSky settled with the Consumer Financial Protection Bureau in a case that saw the fintech pay a $2.5 million penalty and refund or cancel up to $9 million in loans for taking out loans without customers’ consent.

For Goldman Sachs’ part, Cohen said, the bank “strives to be on the right side of the customer” and “to deliver products that are simple, valuable, and transparent.”

“The culture and ethos of Marcus, of Goldman Sachs, and GreenSky are well aligned,” Cohen said.

Source: https://www.businessinsider.com/