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How Amazon became a force in SMB lending

Amazon has upped its game with small business lending and credit options for its top merchants, showing more willingness to partner with financial services' biggest names.

Amazon got into small- and mid-sized business lending more than a decade ago -- a move that has rearranged the financial services landscape.

The e-commerce giant's approach -- heavily reliant on analytics and low- and no-interest loans -- encourages participating vendors to increase their sales, while Amazon increases its monthly percentage derived from merchant sales.

Although the nation's biggest financial services companies aren't overly worried about lost revenue or market share, they continue to watch Amazon, and in some cases, form partnerships with the company.

Why SMB lending?

The U.S. SMB market presents a "massive opportunity" for incumbent lenders and alternative lenders alike, said Anisha Kothapa, an intelligence analyst at consultancy CB InsightsDespite the pandemic and a 50% year-over-year decrease in SMB loan approval rates in 2020, the number of SMBs has actually jumped to 31.7 million over the past three years -- an increase of 7%, according to the U.S. Small Business Administration (SBA). The SBA also states SMB lending reached $750 billion in 2020, but most of those loans are still made by traditional lenders like banks or credit unions, Kothapa said.

Amazon's play in credit and lending is more limited, by design. Central to the company's SMB credit services is Amazon Lending, which offers loans to Amazon merchants, ranging from $1,000 to $750,000; interest rates between 6% and 16% (though some big sellers report lower percentages); and no closing costs.

Amazon automatically takes a fixed percentage of gross sales from the seller's Amazon account each month for loan repayment. Payback periods run from three to 12 months, and funds may only be used for inventory management, product-line expansion or product promotion, Kothapa said. Acquisitions, paying down other debt or spending that doesn't contribute directly to revenue generation, are off the table.

Anisha Kothapa, intelligence analyst, CB InsightsAnisha Kothapa

While Amazon offers these loans on an invitation-only basis, some qualifying criteria have emerged, according to Fundera, an SMB financing marketplace:

  • Amazon selling history of at least 12 months;
  • total sales of at least $10,000 in the past 12 months;
  • good customer satisfaction metrics; and
  • no serious customer complaints in the past six months.

Amazon also offers its merchants two different line-of-credit options: revolving and pay-in-full. Both top out at $100,000; the revolving line of credit (intended for SMBs) comes with a 12.99% interest rate; pay-in-full (for larger businesses) has no fees or interest charged if paid off within 55 days. Unlike the invitation-only Amazon Lending option, lines of credit simply require the borrower to apply online.

Amazon's advantage

Unlike traditional lenders, Amazon doesn't subject potential borrowers to an arduous qualification process. After all, the company already has plenty of data about sales (volumes, history), popular products and the overall business health of an applicant. And since it costs banks the same amount of time and money to process a $50,000 loan as it does for a $1 million loan, they tend to view SMBs as less profitable.

SMBs also typically have fewer assets to secure a loan, making them less attractive to banks. "These challenges make small business loans an attractive market for Amazon to disrupt," CB Insights noted in its research.

Amazon also has additional data about a prospective borrower's relative popularity within its vertical and its standards of customer service based upon Amazon user reviews -- information that banks lack. "With all of this information, Amazon may be able to make better-informed lending decisions than the average commercial bank -- and, as the approval system would be data-driven, likely process them faster," CB Insights added.

Why now?

SMB lending is quite ripe for disruption -- there are thousands of lenders, millions of borrowers, lots of brick and mortar and plenty of dissatisfaction.
Robin GasterAuthor

Given its voracious appetite for diversification and disruption, why hasn't Amazon attempted a full-fledged play in the financial services sector? The e-commerce giant is an outspoken foe of regulation, and few industries are as highly regulated as banking, according to Robin Gaster, whose book, Behemoth, Amazon Rising: Power and Seduction in the Age of Amazon, deconstructs the company's strategies and methods.

"SMB lending is quite ripe for disruption -- there are thousands of lenders, millions of borrowers, lots of brick and mortar and plenty of dissatisfaction," he said in a phone interview. "Anything that's regulated at the state level is difficult to scale, so I imagine they will still steer clear of highly regulated areas."

The company's distaste for state and federal regulation isn't the only thing that keeps it from opening the Bank of Amazon. "They have no skills for the underwriting aspect of lending, and it hasn't been a great experience for Amazon customers or their bottom line either," said Forrester analyst Alyson Clarke. Underwriting, whereby a lender or an agent of the lender verifies a borrower's revenue, earnings and other financial information, also includes risk assessment.

Covering all bases

In June 2020, Amazon partnered with Goldman Sachs to offer Goldman's Marcus service to Amazon's SMBs (the two worked together when Amazon acquired Whole Foods). The program is an exponential step-up from Amazon's other lending offers; its merchants can get lines of credit up to $1 million, with interest rates ranging from 6.99% to 20.99%. It's also the first time Amazon has tapped third-party resources for lending.

Perhaps Amazon recognized that it needed help qualifying borrowers at this higher threshold of risk; the deal also helps Goldman better understand lending in the SMB market, which hasn't exactly been the brokerage's bread and butter. "Goldman has deep pockets for the capital requirements of underwriting, which puts them in good stead," Clarke added.

Amazon has also struck partnerships with other financial services companies in the last few years. It's working with American Express, offering corporate credit cards to build its Amazon Business suite and attract new merchants. The cards are intended to give businesses more control over employee spending, and also include analytics tools and Amazon Web Services (AWS) discounts.

The e-commerce giant is also working with Worldpay, an international payments clearinghouse, which has integrated Amazon Pay with the Worldpay platform. This relationship obviates the need for merchants to build Amazon Pay into their websites and payment options. Other deals with Bank of America and JPMorgan Chase are also reportedly in the works. There's also regular speculation over Amazon offering checking accounts to its merchants, but the company remains noncommittal on this prospect.

Amazon, ever the great disruptor, is certainly rearranging the landscape of the SMB lending market. But it's also true that the financial services sector has disrupted Amazon to a degree and has changed how the e-commerce company operates -- not to mention how it continues to grow its own bottom line. Like any smart business, Amazon will dance with a variety of partners for as long as it makes sense.

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