This year retail giant Costco ended a 16-year partnership with Amex. Co-branded cards with Costco accounted for 8 percent of worldwide annual spending and 10% of total cards in circulation for Amex in 2014. Simultaneously, joining companies like JP Morgan, Wells Fargo, and others, Amex has announced a deeper entrance into the SMB credit space with their own in-house venture , poorly named in my opinion, “Working Capital Terms” (WCT).
The 4 approaches to Marketplace Lending for SMBs
One route into the SMB credit space is the partnership approach taken by JP Morgan, Scotia Bank, and Santander. The second route, taken by Wells Fargo is controlling all pieces of technology and client experience under its own house. The 3rd route, as you will read below, and taken by Amex, is to participate into aggregators like Lendio and Fundera under its own brand. And the 4th route, favored by Citi Bank, Deutsche Bank, and Morgan Stanley, is to participate in the space indirectly from the arrears by providing lending capital or securitization services. Which approach will succeed ? If the space is as large as people believe it is most likely all 4 approaches will succeed. Which approach is the most profitable ? One should not jump to conclusion by looking at short term profitability. Real profitability, as companies like AIG demonstrated in 2008, is measured across an entire credit cycle.
Amex’s 3 prong approach, with WTC in addition to their participation in Fundera and Lendio, is in fact quite unique and has the advantage of flexibility, low fixed cost and visibility into the market.
Amex: from Costco to Lendio and Fundera
Ken Chenault, the long-term CEO must have been under tremendous pressure to replace the outgoing business. It is not that the company had not tested the waters of online lending. It had partnered with Lendio in April, an online small business credit marketplace aggregator. The partnership probably served three objectives: to expand its merchant financing portfolio, to perhaps to test the waters for Amex’s own plans in the space and to replace the Costco partnership which had a 20% pie in the total Amex loan portfolio.
The Lendio partnership catered to merchants with at least 2 years of operational history and minimum $50,000 in revenue. The loans range from $5000 to $ 2 mil and up to a maximum tenure of 2 years.
The Lendio partnership was preceded by a different kind of association with Fundera. For customers who want to compare its business charge cards with traditional loans, American Express has featured its charge cards on online marketplace Fundera since February 2016. The charge cards offered by American Express available on Fundera are known as Open cards; they are specifically introduced for companies that need to fund large spot purchases of inventory or raw materials, and each month they can pay off the balance in full. Open cards do not have any interest but there is fixed annual fees. Spending limits adjust with usage and payment history.
Amex’s venture named “Working Capital Terms”
On July 5th, 2015 Bloomberg announced Amex’s new initiative, called “Working Capital Terms”. This new venture is targeted at existing small-business cardholders and will be primarily used by merchants to pay their vendors especially those who do not accept credit cards. Thus Amex is muscling in to capture a bigger pie of the business of the existing clients. This is a smart move as it will ensure that cost of acquisition of customers is almost negligible and the existing relationship is enhanced by offering an additional feature. The loan amount will range from $1000 to $750,000 and the payment will be directly made by Amex to the vendor. Charges will be 0.5% for a 30-day loan and 1.5% for a 90-day loan. The pricing is extremely aggressive especially considering the other online lenders.
In 2014, Amex cards for small businesses funded $190 billion in purchases, up from $122 billion in 2010. American Express is focussing on small-business loans where they already have a strong grip to make up for the revenue they have lost. They think small- business cards have room to grow in near future, unlike consumer spending. It considers cards have immense potential in small-business funding space because small businesses tend to traditionally rely more heavily on cash and traditional loans.
Amex vs Square and OnDeck
It plans to begin the online platform for its small business clients, aiming for the market share occupied by start-ups like Square Inc. and On Deck Capital Inc. The company can leverage its existing clientele and low cost of funds to offer sweeter deals. To grow its presence in small businesses, American Express has made some other moves, like the improvement of its OptBlue program that simplifies the acceptance of Amex cards at small business locations. By 2019, American Express wants to reach its goal of parity coverage to other card networks. They have also teamed up with Mexican mobile point-of-sale (mPOS) provider Clip and German mPOS vendor Payleven. American Express’s entry into the small business lending world is proof that Wall Street believes that online lending is here to stay.
Amex’s future plans ?
In a recent interview with Lendio’s CEO, Brock Blake, Lending Times has inquired about Amex’s revealed plans with the Lendio partnership given Amex’s WTC announcement. Brock has clarified that in his view Amex has no expressed any intention to canceling their partnership with Lendio.
Amex is de factor offering 3 different products, through 3 different venues, Lendio , Fundera and their own in-house WTC. Each of these directions is probably complementary, independent, and do not have large fixed costs. I would, therefore, expect for Amex to use these initiatives as an opportunity to test different products and markets. As time goes we shouldn’t be surprised if any or all 3 of these initiatives that demonstrate traction will receive increase resources and in fact ramp up. In an ideal scenario, having a diversified portfolio of 3 profitable products for the SMB credit space can only help the company.
Wells Fargo’s Transplex
As mentioned at the beginning American Express is not the only big lender that is trying to enter small business lending. In May, Wells Fargo &Co, the third-biggest U.S. bank by assets, introduced their small online loan arm known as Transplex. Other major rivals like JP Morgan Chase & Co., Scotia bank, and Santander are collaborating with On Deck, Kabbage etc to speed up the process of providing loans to the same space. These entrances validate the space, the market, and the approach. One route is the partnership approach, where traditional bank partners with an online lender to grow its books. The second route, taken by Wells Fargo is controlling all pieces of technology and client experience under its own house. Though partnership helps in a faster entry, managing a relationship is fraught with complexities in the long run. On the other side, when you own the entire chain, the bank can decide on how to structure every move. But the question is whether the bank has the tech chops and the start-up spirit to compete with the free-wheeling world of fintechs.
The partnership approach, where traditional bank partners with an online lender to grow its books, is a known tech-vendor/bank relationship which is very standard. It is expensive, involving, extensive and with high risks. It has the advantages of leaving the bank in full financial control and having hardly any regulatory risk.
The second route, taken by Wells Fargo is controlling all pieces of technology and client experience under its own house. It has the full control, confidentiality, and probably the best profit margin advantage. If this approach was easy large companies will never buy startups. It is very difficult for large companies to build news businesses and this is probably the hardest, most expensive and riskiest approach with the most benefits if successful.
The partnership approach is the fastest, cheapest and lowest risk approach and probably the least financially profitable one. Managing a relationship is fraught with complexities in the long run. As an entrepreneur, I strongly believe that it is the people managing these initiatives, and not the approach, who will decide which will succeed and which will fail.