Amazon transformed retail, has shaken the food industry by purchasing Whole Foods for $13.7 billion, and has signaled its willingness to expand into small business lending.
Amazon has made more than $1 billion in small business loans to 20,000 merchants on its Amazon Marketplace during the past 12 months and more than $3 billion overall since 2011. The online giant generates revenue from charging interest on the loans and by taking a fee from the sales of products on the platform.
In the same way that Amazon changed the way people shop, it could alter how small business finance is conducted — especially if it begins lending to borrowers who come from outside of its own marketplace. Millennials, who have grown up in the Internet era, are accustomed to conducting transactions via mobile devises. As easily as they purchase clothing, electronic devices, and other items on the web, they could borrow money to start small businesses. With plenty of cash on hand, Amazon easily entered the small business lending marketplace. Right now it offers only short-term business loans ranging from $1,000 to $750,000 for up to 12 months.
Indeed, Amazon has the potential to disrupt small-business lending in the same way that it transformed retailing. (Since the company began 22 years ago, it has amassed more than $400 billion in sales and has become the No. 4 company in terms of market capitalization.)
“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,” said Peeyush Nahar, vice president for Amazon Marketplace, in a company press release earlier this month. “We understand that a small loan can go a long way.”
The banking industry opened the door for non-bank lenders, peer-to-peer sites and online marketplace lending platforms during the post-recession “credit crunch” of 2008-2011. Thus, FinTech was born. Amazon could take the sector to new levels and will use its advantages (size, name recognition, consumer trust, availability of data in real-time) to crush the competition. Meanwhile, FinTech companies are less closely regulated than banks. This is another huge advantage.
With plenty of cash on hand, Amazon easily entered the small business lending marketplace. Right now it offers only short-term business loans ranging from $1,000 to $750,000 for up to 12 months. What should concern banks is that Amazon could start to set up deposit accounts or even enter the mortgage marketplace and then expand these operations globally.
Many banks have relied upon and are now bogged down by the cost structure of the branch system. Today’s small-business owners – particularly Millennials — are time-starved and prefer conducting financial transactions via mobile devices. They would rather apply for a loan via a smart phone than walk into a bank branch and start filling out reams of paperwork.
Amazon’s success in small business lending is a wakeup call for the banking industry. Many banks have been slow in establishing online loan application platforms. If they don’t change their business practices, today’s lending giants could find themselves on the road to long-term decline. Traditional lenders might event encounter the same fate as traditional retailers that did not quickly embrace online selling.