Amazon Challenges Banks, Ramps Up Lending To the 2 Million Businesses In Its Marketplace

Google Wallet? Apple Pay? The banking industry has so far survived all the technologically-driven hits on its franchise. But Amazon, as is its wont, has been at this quietly for six years. It is coming in underneath the big wholesale banks, aiming at the 2 million small and medium sized businesses that use its services. But it has never, ever, suffered constraints to its services when opportunity appeared.

Maybe this will be one of its small legion of failures. But money is a commodity. It is fungible. It is already deeply dependent on technology and data. And no one has made money for long betting against Amazon. JL

Ben McLannahan reports in the Financial Times:

Having done $3bn of originations in total and $1bn within the past year, Amazon is expanding to more of the 2m businesses on its platform. Independent sellers, which pay Amazon to store, package and ship merchandise to customers on their behalf, account for half of Amazon’s total units sold worldwide.Amazon  funds from its own balance sheet within 24 hours, then deducts payments every two weeks from the seller’s account. The move is a sign of a broad shift away from big bricks-and-mortar banks. Amazon could offer more bank-like services in future.
Amazon is planning to expand its lending to small businesses in the US, the UK and Japan, in a direct challenge to the big banks which have historically dominated.
The Seattle-based company launched Amazon Lending with little fanfare six years ago, offering select sellers on its platform instant loans for up to 12 months at annual interest rates ranging from about 6 to 17 per cent.
Now, having done about $3bn of originations in total and $1bn within the past year, Amazon is expanding offers to more of the 2m or so businesses on its “marketplace” platform. Such independent sellers — many of which pay Amazon to store, package and ship merchandise to customers on their behalf — account for about half of Amazon’s total units sold worldwide.
Amazon supplies funds from its own balance sheet within 24 hours, then deducts loan payments every two weeks automatically from the seller’s account. If the account runs dry, or if sales suddenly dip, Amazon can put a freeze on any merchandise held in its warehouses until the seller pays up.
“It’s a ‘can’t lose’ proposition for Amazon,” said Jordan Malik, a Las Vegas-based publisher, noting that the company has a near-perfect view of any seller’s cash flows. “It’s a very clever thing they’ve done.”
The push into lending is a mark of the ambition of Amazon, whose New York-listed shares broke through the $1,000 barrier for the first time last week, just over 20 years on from its initial public offering at $18 a share.
Brayden McCarthy, vice-president of strategy at Fundera, a small-business lending portal, likened the effort to sidelines such as the Echo or the Kindle. None of those “will ever be core to how [Amazon] makes money,” he said, but will “continue to enmesh customers and merchants in the company’s web, reinforcing one another and strengthening Amazon’s grip”.

It’s a ‘can’t lose’ proposition for Amazon. It’s a very clever thing they’ve done

Jordan Malik, Las Vegas-based publisher

The move is also a sign of a broad shift of power away from the big bricks-and-mortar banks — which have pulled back from small-business lending under tougher post-crisis rules on capital — and from newer online challengers such as OnDeck and Kabbage, which have spent heavily on lead-generation and marketing to unearth creditworthy borrowers.
Peeyush Nahar, vice-president of Amazon Marketplace, noted that most sellers used their loan proceeds to buy more stock and negotiate bulk discounts with suppliers. Losses so far had been “very, very small”, he said, without offering details.
He added that Amazon could offer more bank-like services in future. “We started when we heard that capital was a big constraint for sellers. We’ll have to see what else is constraining them,” he said.
Amazon Lending is a “pretty great” experience so far, said Bob Martin, president of BlockBuster Costumes of Tonawanda, New York. His business had been well supplied with credit from PayPal but he accepted a loan offer from Amazon a few months ago “to gain a little bit of credibility” with the company.
He took $12,000 — about one-twelfth of the maximum offered — to buy in-demand items such as Nasa space helmets and Belle’s dress from Beauty and the Beast.
“If they ever start looking at who has taken [Amazon] up on this thing, we’ll be in their good books,” he said.