The Amazon Advantage
Many know Amazon as the e-commerce giant that has dominated nearly every sector of retail, but most don’t know them as a notable financial service provider. Amazon has been dabbling in the financial sector since the early 2000’s with products like Amazon Prime Visa and Amazon Pay. Recently, there has been buzz around Amazon Lending, a platform that has been operating since 2011. So what is it and why is it relevant now?
When Amazon lending was introduced, it began as a partnership with Bank of America to offer short term working capital loans to small businesses selling on Amazon. This program was great for experienced Amazon merchants looking to increase their inventories during times of high demand like holidays. Up until mid 2020, when Amazon partnered with Goldman Sachs, Amazon’s program was very niche and did not serve as a large revenue driver for them. This new partnership allows Amazon to offer up to $1 million credit lines to sellers using Amazon merchant’s sales data. This agreement is notable because this will be the first time Amazon is allowing access to seller data to a third party to qualify for a loan. This process is extremely efficient as it avoids many of the grueling processes of getting a traditional bank loan or credit line. By qualifying merchants using sales data, Goldman Sachs can expedite this process and prequalify merchants before even applying. This dramatically decreases acquisition costs for issuing new loans that traditional bank models face. Amazon’s process is fully automated and can get a merchant the funds for a loan or credit line within 5 days of acceptance. This allows merchants to be very flexible with their inventory to handle large fluctuations on demand and have easy access to working capital.
Amazon is currently only servicing loans for about 20,000 of its 6 million active sellers, which is a very small revenue stream for Amazon and Goldman Sachs. This can lead investors to believe Amazon will open their lending platform up beyond Amazon sellers and into the general consumer market as it tends to make small-arm Amazon products into highly profitable segments. An example of this is in the early 2000’s when Amazon launched Amazon Web Services (AWS), formerly known as merchant.com, as a platform to help 3rd party merchants to start e-commerce stores. Fifteen years later and it is now a $10 billion per quarter cash cow. If Amazon follows in its past footsteps, and expands Amazon lending outside of its current niche, it may very well be a major player in the banking industry in its own right. New lending options can range from personal loans to Amazon prime members based on their shopping habits or business loans to non-Amazon sellers using analytics on similar business types. eBay and Shopify have also adopted similar lending models like existing Amazon’s platform using partnerships with their own respective banks. Will this become the new model and even change the way we bank in the future? Only time will tell, but if the past is any indication, Amazon will be at the forefront.
Sources: Amazon, Forbes, PYMNTS.com, Tech Crunch
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