Amazon has used loans and other financial instruments to help businesses grow and customers benefit from their platform. Marketplace sellers in the US, UK, China, Canada, China, France, Germany, India, Italy and Spain can qualify for loans based on performance and invitation from Amazon, while customers in the US and UK can use retailers to add money to their Amazon accounts to make purchases without debit or credit cards. We look closely at these efforts, and what they mean for brands operating on Amazon.
Amazon’s foray into business loans
Amazon is dependent on third-party sellers to provide customers with a selection of products that Amazon does not sell and that could potentially drive revenue on the platform. Since 2011, Amazon has loaned more than $3 billion to micro, small and medium-sized marketplace sellers through its Amazon Lending program, to bring more selection to the platform and drive growth.
Marketplace sellers are often unable to use normal financial instruments such as bank loans as these services are unable to leverage enough information to provide loans with appropriate risk levels. Amazon has access to various data streams on seller performance, and they use algorithms to identify merchants with good selling histories, who are offered loans ranging from $1,000 to $750,000 payable within one year. Sellers that take out loans repay the company through sales made on the site.
According to the company, Amazon Lending provided more than $1 billion in loans in the 12 months prior to June 2017. Amazon hasn’t disclosed interest rates for its loans, but has said they are lower than those found via traditional banking services, such as credit cards and cash advances, that sellers would likely use instead.
The impetus behind Amazon’s lending business is that Amazon will ultimately benefit by helping its sellers grow. The genius of this program is that Amazon provides capital to sellers at low repayment levels to provide products to customers and also leverage other Amazon assets such as Fulfillment by Amazon (FBA), which allows sellers to generate revenue for themselves and Amazon and keep the capital within the Amazon ecosystem.
Banks are on the outside looking in
Traditional banking does not have the tools Amazon has, or an understanding of what selling on Amazon is like. The reality is, the loans Amazon has made to merchants—totaling $3 billion in 6 years—would provide any financial institution with decent returns. By offering this service, Amazon ensures that banks can’t access their best-selling third-party marketplace sellers, essentially keeping these sellers’ credit in-house for Amazon’s benefit. According to CNBC, 50% of these sellers then take a second loan based on repaying the first one with sales made on Amazon.
Banks are largely unable to provide time-strapped Amazon sellers with an online experience that enables them to request a loan. The branch model saddles banks with a cost structure that provides Amazon with an opportunity to provide loans to their sellers without the regulatory requirements faced by banks.
Can you imagine the returns Amazon must be making from these seller loans? This, combined with Amazon’s own large valuation and ability to get loans at great rates in the public markets, should concern banks.
Supporting customers via nontraditional payment options
Amazon, the famously customer-obsessed company, has also created programs for customers that expand the payment options available to them on the site.
Amazon Cash provides unbanked customers with the opportunity to access Amazon’s offerings without the need for a debit or credit card. According to The Verge, the service allows customers to simply display a barcode at a participating retailer and deposit cash into their Amazon account. This process is an upgrade over the previous iteration, which limited customers without a bank card to buy only gift cards or prepaid debit cards.
Amazon Cash is available at a variety of major retailers, including CVS Pharmacy, 7-Eleven, Gamestop, Speedway, and Wegmans. Customers can deposit money (between $15 and $500) in their accounts, whereupon it becomes accessible as credit on Amazon, just like a gift card. Amazon Cash provides an opportunity not just for unbanked consumers but also for payment processors that generate revenue when debit and credit cards are used to purchase items on Amazon.
Amazon also launched the service in the UK as Amazon Top Up In Store, with the major difference that a single partner, bill-paying service PayPoint, is used to accept payments.
The company also offers loans to UK customers looking to purchase higher-priced items via the Amazon Pay Monthly program, which launched in late 2015. According to Amazon, the program “provides our customers with further payment options to suit their needs when shopping on our website, and it is easy, convenient and offers competitive rates and flexible terms.” The lever that Amazon is trying to address here is to ensure that UK customers can acquire larger-ticket items. (There’s a minimum $588 to qualify for the service). Amazon Pay Monthly is facilitated through a partnership with Hitachi Capital, which charges a 16.9% fixed interest rate on these loans without the need for a deposit.
In 2017, Amazon also started providing interest-free credit for Amazon devices bought via accounts that were more than one year old. Once again, this shows Amazon’s propensity for leveraging their vast data about customers and rewarding the ones who haven’t defaulted on their payments.
What these programs means for brands
Amazon’s deep pockets, data-driven nature, and customer focus have made these seller- and customer-supporting financial programs a natural fit among the company’s activities to expand their ecosystem and drive sales.
I suspect that many brands that selling products via a third-party marketplace seller account (in the US, UK, and other markets) have the potential to be invited to join the Amazon Lending program based on Amazon’s analysis of these sellers’ sales and other data. That said, Amazon has provided very little information or details about program, with the exception of positive news. Brands must therefore do their due diligence, including financial modeling, before determining if it makes sense to accept an Amazon Lending offer.