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Will Amazon Lending Disrupt, Displace, or Prop Up Banks?

Amazon Lending

Twenty-two years ago, when Jeff Bezos launched Amazon, no one ever thought the e-commerce startup would transform the retail industry landscape. In June, it made a statement-making purchase by buying Whole Foods for a staggering $13.7 billion. The company took advantage of technology, used an aggressive growth strategy, and disrupted the entire industry. It started as an online seller of books and CDs in 1995 and now the “everything store” has sales of more than $400 billion.

Amazon’s Lending Business

The company is virtually omnipresent in all businesses, be it furniture, electronics, food or entertainment. In 2012, it added yet another service to its stable: Small business loans.

Considering Amazon enables millions of small companies to sell their products across the globe, having its own lending arm was a no-brainer. Amazon’s entry into small-business lending could transform the banking industry in the same way it revolutionized retail. Just recently, the Seattle-based e-commerce giant announced that it has made $1 billion in small-business loans to more than 20,000 merchants in the United States, Japan, and the UK during the past 12 months. Since Amazon Lending launched in 2011, it has surpassed $3 billion in loans to small businesses. Further, more than 50 percent of the companies eventually take a second loan from Amazon.

Launching its own lending arm is a stroke of genius by Amazon, the company will earn interest on the loans while retailers (with the aid of the loans) will be able to sell more products on the Amazon website and thus will add to Amazon’s earnings. Its big pockets and negative working capital mean it has lots of cash to lend; a mammoth retailer database means it is fairly easy for Amazon to tap into the lucrative space.

“We created Amazon Lending to make it simple for up-and-coming small businesses to efficiently get a business loan, because we know that an infusion of capital at the right moment can put a small business on the path to even greater success,” said Peeyush Nahar, vice president for Amazon Marketplace, in a company announcement.

How Does Amazon Lending Work?

Amazon’s loan program is by invitation only. It offers short-term business loans ranging from $1,000 to $750,000 for up to 12 months to micro, small, and medium businesses selling on Amazon to help them grow their businesses. Loans are approved within 24 hours and, usually, loan money is used for inventory financing and business expansion.

Unlike traditional lenders, which use lengthy loan applications and require a host of documents, Amazon uses internal algorithms to invite sellers to the program based on the popularity of their products, inventory cycles, and other factors. It does not charge an origination fee or prepayment penalties. Furthermore, after establishing its foothold in SME lending, the company plans to branch out  into other markets where there are a lot more opportunities, such as Canada, India, France, and China.

To Be or Not To Be: A Bank

For now, the lending business is relatively a small part of its operations. But considering its vast resources and huge database, it will be interesting to see whether Amazon scales up its credit business and applies for a banking license.

According to a survey of 32,715 people in 18 countries conducted by Accenture, 31% of the respondents would switch to Google, Amazon, or Facebook for banking, if these companies offered financial services. In another report by CB Insights, Amazon has the highest customer satisfaction at 86% compared to Citi (82 percent), Capital One (80 percent), “all banks” (80 percent), TD Bank (79 percent) and Bank of America and Chase (each 75 percent). With more and more millennials opting against traditional banks, becoming a full-fledged financial institution does seem like a viable option. But will Amazon follow that path?

Regulatory Backdrop

Ever since marketplace lenders gained prominence in the financial circle, there has been a debate raging on whether or not to grant technology companies special banking charters that will allow them to compete with banks nationwide. Right now, the situation is vague with regards to regulations for technology companies. Wal-Mart, in 2006, applied for a banking license to establish an industrial loan company (ILC) in Utah. Eventually, lawmakers and banking groups blocked future banking efforts by Wal-Mart and tried to prohibit commercial companies from obtaining new ILC licenses.

Amazon can cause a similar backlash for itself and would rather want to concentrate on other aspects of its business than deal with the headaches of being a bank. Moreover, providing financial services is merely another avenue for plugging companies into the Amazon ecosystem. So the lending arm (as a non-bank) fits nicely into the overall scheme of things.

The Real Threat of Amazon

Amazon really doesn’t want to displace banks as they are one of the main consumers of Amazon Web Services (AWS). Rather, it wants to disrupt banking services. Amazon Web Services is the biggest provider of cloud computing and controls 45 percent of the global cloud infrastructure market. It is used by most of the major businesses and has become an absolute necessity for the financial sector.

“Amazon Web Services (AWS) is forming the backbone of the financial services ecosystem, with a diverse set of firms – from JP Morgan to startups such as Xignite – adopting AWS for data storage and processing,” a consulting report stated.

Apart from this, legacy banks are losing direct interaction with their customers. For example, USAA and Capital One are both experimenting with Amazon’s digital assistant Alexa as a new consumer banking channel. Amazon is not taking any direct market share from banks; rather, it is becoming the customer interface for banks and putting them in the background.

It will be interesting to see how Amazon shapes its lending business with enterprise AWS contributing a sizeable chunk to the bottom line. But with hundreds of millions of customers and merchants on its platform, you can bet it will be at the vanguard of online lending.

Authors:

Written by Heena Dhir.

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