Over the past year, in particular, it seems that Amazon is untouchable.
Credit cards. Prime Day. Cloud computing. TV shows. Bookstores.
Now, as Wall Street focuses on Amazon’s announced acquisition of Whole Foods, there is another component of the Amazon empire that may start to garner more attention.
Amazon’s lending business.
Over the past year, Amazon Lending has made more than $1 billion in small business loans to sellers on its marketplace.
Since 2011, when Amazon launched its lending business, Amazon has made more than $3 billion in small business loans to more then 20,000 Amazon sellers in the U.S., United Kingdom and Japan.
“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 statement. “Small businesses are in our DNA. Amazon is providing capital to small businesses to help them expand inventory and operations at a critical period of their growth. We understand that a small loan can go a long way.”
How Amazon Lending Works
On an invitation-only basis, Amazon offers short-term business loans from $1,000 – $750,000 to micro, small and medium-sized businesses that sell products on the Amazon platform. Amazon does not disclose interest rates, but they tend to be lower than credit cards.
Merchants can be approved for a loan within 24 hours, and tend to use the loan proceeds for inventory financing and business expansion.
Unlike traditional lenders that may have lengthy loan applications that require all types of documents, Amazon uses internal algorithms to invite sellers to the program based on the popularity of their products, inventory cycles and other factors.
Loans are typically repayable in less than one year, and borrowers use sales generated on the marketplace to repay Amazon in fixed monthly payments, which are deducted from the borrower’s Amazon account. There are no origination fees or prepayment penalties.
According to Amazon, more than 50 percent of the small businesses that Amazon lends to take a second loan from Amazon.
Amazing Lending: How Amazon Benefits
Among others, this business provides several benefits to Amazon:
- Amazon earns interest income from lending to merchants
- Third party sellers can sell more products, which adds to more commissions for Amazon (since Amazon takes a portion of merchant sales)
- Amazon earns extra revenue by charging sellers who want Amazon to provide storage, packing and delivery services
- Amazon can mitigate credit risk by accessing its own real-time data on seller businesses and customer reviews
Will Amazon Look More Like A Bank?
Although a relatively smart part of its business today, will Amazon scale its credit business and look more like a bank?
According to a survey of 32,715 people in 18 countries conducted by consulting firm Accenture, 31% of respondents would switch to Google, Amazon or Facebook for banking, if these companies offered financial services.
In a separate report, CB Insights found that Amazon has 86 percent customer satisfaction. This 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).
The financial crisis led many traditional banks to curtail small business lending, which gave rise to alternative sources of capital from both FinTech and marketplace lenders such as OnDeck, Kabbage, Lending Club and Prosper.
Companies such as PayPal and Square use data from their payment businesses to offer credit options to merchants who may not have access to traditional forms of lending. Collectively, Square and PayPal have loaned billion of dollars to merchants on their respective platforms.
Issues For Consideration: Expansion Into Banking
The potential for further expansion into financial services raises several questions, among others:
- The banking business is high touch. Can Amazon continue to replicate its business model built on “customer obsession” in financial services?
- Whole Foods will represent a major entry into a bricks and mortar business. If Amazon expands its lending business to other financial products, would Amazon consider bricks and mortar bank branches?
- Do Amazon merchants want to diversify their dependence on Amazon and seek alternative sources of financing, or do they prefer a one-stop shop for selling, lending, inventory management, packing and delivery?
Keep an eye on Amazon Lending. This synergistic business may play an increasing role for Amazon in years to come.
Zack Friedman is a keynote speaker and Founder & CEO of Make Lemonade, a personal finance comparison site that helps you save money and live a better financial life.