Data, capital, a captive audience and trust are some of the reasons high street lenders should be scared of the technology giant.
As anyone from the book, music, electronics retailing or cloud computing industries can tell you, having Amazon’s tanks parked on your lawn usually spells seriously bad news.
Now the American technology giant, which has been dubbed the “Walmart of the web” for its enormous breadth of stock and diverse operations, has added another market to its shopping list: small business lending. When it launches in the UK tomorrow, Amazon Lending will be an invitation-only service. The company says “thousands” of sellers that use its marketplace to sell their wares will be offered short-term loans.
While it may be a fairly modest service to start with, banks should be feeling decidedly jittery about the move, argues Stian Westlake, policy director at Nesta, the innovation charity, and an expert in finance for small companies.
Mr Westlake believes that the world’s largest online retailer is in a strong position to build a significant lending business should it so wish.
“It’s very scary news for large banks. Amazon has a few powerful attributes that would help them get into this business. One is capital; they are scary because they can scale. They also have very good relationships with customers in most aspects of retail, which will generate trust and sales channels,” he says. “Lead generation for loans is something banks invest a lot in, and Amazon has a captive audience. It also has the data [on businesses] so it can model the risk. For banks, it would be like trying to race against someone who has been an athlete for years.”
Small companies will be offered unsecured loans of between £1,000 and “hundreds of thousands of pounds” with a fixed term of between four and six months.
Amazon has a reputation for battling fiercely on price, and its small business lending service is characteristically competitive. Loans will be offered at the same rate for all sellers: 5.9 per cent plus a 1 per cent arrangement fee. There’s no early repayment fee, and monthly repayments will automatically be taken from sales proceeds.
It will make an Amazon loan significantly cheaper for small companies seeking credit in most cases than alternatives such as online peer-to-peer lending or invoice factoring, which advances cash against sales ledgers, and competitive with bank loans.
Chris Poad, who runs Amazon’s UK marketplace, fulfilment and new lending operations, says the service is being launched partly because many sellers are struggling to get finance from conventional sources. “For many businesses, particularly those that are quite new and have quite rapid growth, getting access to working capital is difficult. A typical example is they have the opportunity to buy stock that they know they can sell for a profit, but they just can’t access the cash.”
A growing proportion of Amazon’s global revenues, 44 per cent at the last count, comes from products traded by its two million third-party marketplace sellers rather than items that it sells itself. Amazon believes that providing loans to these companies, the vast majority of which are small and medium-sized, will allow them to buy more stock and diversify their ranges. That should mean they make more money for themselves and for Amazon, which charges commission of up to 15 per cent on sales.
Amazon sellers, Mr Poad says, are often young businesses that lack the credit history to get a conventional bank loan. The raft of data Amazon has on its sellers makes it much easier for it to decide who is creditworthy than it is for a bank, he adds. “We can see data from sellers from this morning. Are they shipping on time, are they doing returns properly, are they growing healthily? All of these things allow us to make a decision where it would be difficult for a [conventional] lender.”
Speed is also a crucial factor, he says, something high street banks are unable to offer. “If you’re offered a loan, we mean it: you are more than likely eligible so more than half of the loans will be issued on the same day, and many of them will be issued in seconds. The opportunities are short term so we will move quickly. It takes weeks to get a loan through [conventional] channels.”
Ben Vallance is a director at Veho, the electronics manufacturer and Southampton Football Club sponsor. Partly thanks to Amazon, nine-yearold Veho now sells into 100 countries. While it has traditionally supplied Amazon directly, it is considering launching its own Amazon marketplace operation. It also works with a number of small traders who resell Veho products in this way.
He said: “I think [Amazon Lending] will really help the fledgling traders who buy stock directly. Our trading partners on the marketplace are often restricted in how much stock they can buy from us because of cashflow, particularly around holiday season. Amazon generally pays its bills in 30 days, so this is like an early drawdown of funds. It will be a really interesting proposition for small businesses.”
There will be nervousness among some entrepreneurs selling via the marketplace, though, about the prospect of handing over another pillar of their businesses to Amazon.
Mr Westlake says: “From a small business perspective there will be questions about how deep you want the relationship to go. If it is your main sales channel, do you want it to be your lender too?”
Amazon Lending has a US operation, and is active in Japan, making the UK the third market it has targeted. The Times understands that almost $1 billion has been lent to tens of thousands of American Amazon sellers since the service was launched in late 2011.