Amazon puts the Spotlight on Banking by Lending $1 Billion to Small Businesses

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Amazon is a company that dominates the headlines from time to time. In recent weeks, Jeff Bezos’ company is on everyone’s lips due to the acquisition of Whole Foods, a supermarket chain of organic products. This purchase is the largest in Amazon’s history, and there are interpretations about the motives of the deal.

But a company like Amazon generates a lot of news and, with the noise of the acquisition, a press release from the company about its business lending business has almost gone unnoticed. The Financial Times, for example, published an article on the subject, “Amazon to ramp up lending in challenge to big banks,” speculating on the possibility that Amazon would become a competitor for traditional banks. The progress of their Fintech initiatives.

Let’s start by understanding a little how Amazon works. According to Ben Thompson in his great article, “Amazon’s new customer,” we are dealing with a service provider that relies on the economies of scale generated by its own activity to increase its offer of those. The number of companies that use the Amazon platform, whether to sell or not, continues to grow. On one hand, every time Amazon enters a new product or service category, it attracts a multitude of sellers from that market to its marketplace.

These merchants become users of the Amazon Web Services (AWS) technology platform, which provides them with robust, scalable and configurable IT services at an unbeatable price. The counterpart is that, as companies subscribe to more services on the platform, they increase the entry barrier of the platform, making it practically impassable for most. If you add the use of Amazon’s logistical systems, the lock-in is almost complete.

The provision of financial services to the users of its marketplace and other AWS customers seems a logical step, in Amazon’s strategy, to retain its business customers. The reverse path is also given. Many companies start using AWS services as a technology provider, and end up becoming members of their sales platform when Amazon begins serving its markets. The result is the same.

This ability for Amazon to scale its services, with minimal marginal cost, and attract a majority of suppliers (if you’re not on Amazon, do not sell) allows you to increase your product offering to end customers and companies. The preference, of course, is to look for those services that generate greater margin and encourage the permanence in its platform.

The company launched its Amazon Lending program in 2011, and to date, has granted $3 billion in loans to 20,000 US companies in the US, Japan and UK that operate on its sales platform. A third of that #3billion was loaned in 2016 alone. It seems that the business is gaining strength, and there is no reason why it shouldn’t increase

Amazon’s strengths to compete with banking for small businesses

Customer knowledge is a basic pillar of the banking business. And for this we need data, something that is not too scarce nowadays.

Immense and growing volumes of information (Big Data) that companies analyze with the aim of extracting value from them is being generated every minute. The problem for banks is that the data is increasingly in the hands of merchants and online sales platforms.

Focusing on business financing, Amazon has a number of strengths that make it a fearsome opponent for banking:

  • A technological platform of reference in the market, robust and scalable.
  • A deep knowledge of the client and an optimized risk management, through the generation of data and the analysis of the same:
  • Real-time tracking of trader operations. Amazon can know, at all times, the evolution of a customer’s sales and its cash generation.
  • Control of sales and margins, comparing with other competitors. Important to detect possible risks.
  • It can track the customer satisfaction levels of companies on its platforms by analyzing opinions and returns. This is a very important indicator, as it is a predictor of the future evolution of a trader on the platform and, therefore, of his ability to pay and maintain / improve his financial health.

Everything said perfects the process of credit scoring, which determines the right product to offer. It also reduces the human intervention component (subject to bias) in front of the bank and increases the speed in decision making. Scoring ceases to be a static tool and becomes a dynamic KPI, from which conclusions are drawn in real time and from which business rules are applied.

More efficient business management:

It is unnecessary to employ a large sales force that must be formed, encouraged and retained if necessary.

Ability to test.

The company can afford to launch pilots with control groups, test new algorithms for selected clients, etc. The ability to segment customers and customize the offer at the lowest cost is difficult to overcome.

The existence of a prior business relationship:

As I said at the outset, getting started with Amazon is very easy. This helps in the cross-selling of services. By the way, Amazon indicated in its note that more than half of the companies that received a loan requested another.

Sellers’ use of logistics services is particularly useful, as it allows Amazon to retain merchandise as collateral (it also retains collections). This is done to ensure the collection of your loans.

To date, approximately half of Amazon’s sales (in terms of units) are made by more than two million independent merchants operating on its sales platform. Amazon has an untapped reef in small business, and it directs its offer with short-term loans (up to 12 months) and a small amount (between $1,000 and $750,000).

On the contrary, this segment(small business) represents a headache for the bank due to the cost of service. According to FT, many banks do not care to attend to this market, and cites as a sample of this trend that company loans of less than 1 million dollars accounted for 20% of the total in that country last year, when in 2007 they accounted for 30%.

Are the banks going to be able to stop this? Tune in tomorrow for part 2


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