Amazon counts more than 1.9 million small and medium-sized businesses among the sellers in its stores. All told, they represent nearly 60% of the big tech’s retail sales volume. And Amazon knows precisely — up to the second — how well each merchant’s goods are selling. What traditional business lender wouldn’t want a direct data feed like that about their business borrowers’ performance?
And that’s exactly what the sellers’ relationship with the ecommerce giant represents, a great opportunity to lend with complete transparency. Amazon has been making loans to selected sellers for some time now, and a good idea of the size of the operation can be gained from a reliable source — the Business Lending page on Amazon.jobs. The header for this part of the company states:
“Amazon Lending has lent millions of dollars to small and medium businesses selling on Amazon. We are passionate about enabling the growth of these companies by removing a critical barrier to success, access to capital. We offer a streamlined and superior customer experience to financing allowing business owners to focus on their trade rather than worrying about capital.”
Okay, so they’re passionate about lending. But it goes on…
“To support our mission, we are expanding our Engineering, Operations, Research, Finance, Product Management, Marketing and Data teams. We are working together to extend the global reach of Lending and launch the next generation of products and customer experiences.”
In mid-May 2021 the company had six openings posted, five for jobs as software development engineer and one more for a marketing program and analytics manager.
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This doesn’t sound like a company that is merely dipping its toe into business lending, does it? Nor does it sound like one that is backing away, as some had suggested, from lending in favor of its relationship with Goldman Sachs, launched in mid-2020, to make Marcus business lending available to Amazon sellers.
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Consider that Amazon has made no open bid for a bank charter — some speculate that there’s no way that they’d want the regulatory burden. However, FDIC’s 2020 liberalization of policy regarding federal deposit insurance for industrial loan banks has already opened up this state-chartered avenue to banking. Industrial banks, an entity permitted in 11 states but most prevalently in Utah, have appeal because they provide broad banking powers but keep the parent company out from under the Bank Holding Company Act.
Among the organizations pursuing industrial bank charters and federal deposit insurance is Rakuten, which is often described as “the Japanese Amazon.” Some suggest that that lending, not deposit-gathering, is of much more interest to Rakuten, and potentially to Amazon should it take that route. (dig deeper)
Even without some kind of charter, the potential for Amazon Business Lending potential is staggering. “Lending could be a lucrative opportunity for big tech,” states a report by CBInsights, “with the global SMB lending market alone estimated to be worth $3.4 trillion by 2022. With extensive amounts of data on merchant business operations and consumer spending, tech giants are well-placed to make inroads with lending products and train algorithms to predict creditworthiness.”
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How Amazon Business Lending Works
While Amazon has been building its own business lending capabilities, it has also pursued partnerships:. In the U.S. with Marcus, to offer credit lines of up to $1 million to Amazon sellers, and a deal with Germany’s ING for business loans to sellers, according to CBInsights’ report. There are others in other countries.
It’s not quite like having Amazon open a business branch across the street, however.
To traditional lending institutions, the process for borrowing under either Amazon Business Lending or the Goldman Sachs program will seem unusual. Instead of borrowers reaching out for credit at some point, selected businesses receive offers from the two programs to apply for credit.
You can’t simply apply for an Amazon-connected business loan — Amazon or Goldman must reach out to you.
In fact, there are no credit checks, because Amazon already knows a great deal about a seller through their record of sales. However, as Armada Labs notes in a review of the Amazon Business Lending process, after a company is selected to be eligible to apply for a loan, it must still go through an application process.
“Amazon loans are relatively easy to qualify for and are provided at low interest rates and with no extra fees,” states the Armada Labs review.
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Amazon Business Lending Is a Very Different Creature
Armada Labs makes the point that Amazon’s relationship to a seller is not quite that of a traditional lender and not quite that of a traditional business partner.
“At some point, companies that sell on Amazon find themselves struggling to maintain their own brand,” the site says. “Well, this is the price for attractive loan terms; Amazon focuses its advertising on the product you sell rather than your business. And it works; buyers remember that they bought the products on Amazon but less likely that they purchased those from you. Getting a loan from Amazon will only weaken your control over the brand.”
Amazon Business Lending is not a direct replacement for traditional financial institutions — right now it is pretty much a one-trick pony.
“Amazon Lending remains a unique lending option and very specific at the same time. Here, Amazon doesn’t take the market from other lenders; rather, it sets the scene for those who operate mostly or entirely on its marketplace,” the review adds. “Outside the Amazon marketplace, other lenders still have their piece of the pie.”
Loan repayments are deducted automatically, each month, from the proceeds of the seller’s sales on Amazon’s platform. And sales revenues on the site also collateralize the loans.
How does a seller wind up getting a credit offer from Amazon? The Fundera website notes that these standards have never been published, but it pieced together the following points from threads on the forum that Amazon itself operates for sellers.
- Selling history of at least a year on Amazon.
- Sales of at least $10,000 in the previous 12 months.
- Satisfactory customer ratings on the site.
- No serious complaints from buyer for the previous six months.
- No outstanding complaints regarding copyright or trademark issues.
Both Fundera and Armada Labs make the point that using the program isn’t as straightforward as using a bank loan. Proceeds must go toward production of what is sold on Amazon. Amazon Business loans can’t be used to set up a new office, for example.
Banks anticipating competition from Amazon can take some comfort from what they’ll read about the loans on the sellers’ forums.
A quick review of seller comments portrays a program that is highly automated in which it can be hard to reach a human if there is a serious problem or question. One seller commiserated with a disgruntled seller who couldn’t reach anyone about their loan and suggested sending messages to the program’s Twitter account until someone responded.
This suggests that traditional institutions that still provide loan officers and branches — plus additional business banking services beyond credit —still have a shot at competing with Amazon.