Amazon is stepping up its plans to disrupt the finance industry, by enhancing its small business loan activities in partnership with Goldman Sachs. The move looks set to broaden the options for entrepreneurs in search of funding. Article by Nick Green.
Amazon and Goldman Sachs may soon be working together to provide loans to growing businesses. The online retailer and the banking giant are close to a deal that could transform the lending market for small and medium-sized enterprises (SMEs).
Amazon has in fact been providing business loans since 2012 via its Amazon Lending service. Currently it has over $863m of outstanding loans on its books, provided exclusively to businesses that sell through its platform (and which account for more than 50 per cent of total trade across Amazon sites). Loan rates range from 6 per cent to 17 per cent.
However, Amazon Lending has not yet proved to be one of the company’s success stories. Since 2016 its growth has been slowing, and it has pulled out of Japan. Critics have blamed its inadequate understanding of credit risk, along with the company’s over-reliance on its own, limited customer data. Up to now, Amazon has made quick-decision loans using only the data it holds on each business’s cash position. It seems that although Amazon’s algorithms have been excellent at guessing what consumers want to buy next, they have proved shakier at determining whether a business will repay a loan on time.
The Goldman partnership, if it happens, looks likely to change all that. The bank will be able to provide the necessary lending expertise and additional credit data, in exchange for access to Amazon’s vast pool of business clients.
The effect of ‘Open Banking’ or PSD2
A key factor that makes the Amazon-Goldman partnership viable is the introduction of new EU rules on banks’ customer data, which took effect from September 2019. Called ‘Open Banking’ in the UK and PSD2 elsewhere, the rules allow banks to share customer data with technology companies if customers give consent. This would allow, for instance, Amazon to monitor things like repayment history and other financial records for the businesses it lends to. At present, it is not clear what effect Brexit will have on this rule, but if the UK chooses not to diverge on financial services then SMEs should still be able to benefit from it.
The main incentive for Goldman Sachs in this relationship, other than the sheer size of the client base, is Amazon’s great strength in processing and analysing customer data. Access to financial data that it was previously denied is in turn likely to give Amazon Lending the boost it has been searching for.
John Cronin, an analyst at brokerage Goodbody’s, said that Amazon’s slow start in this space demonstrated the complexity of underwriting decisions. ‘The reality is that while Amazon and other Big Tech firms have access to substantive customer data, what they do not have is credit history data. This is a major gap in the context of lending decision-making,’ he said. Commenting on the Amazon-Goldman partnership, he suggested Amazon could ‘significantly extend’ its SME lending ‘without any associated credit risk of regulatory obligations’.
Currently over 1.9 million small businesses sell through Amazon. If the deal with Goldman goes ahead, Amazon may not need to restrict its lending to businesses on its platform, since it will no longer be relying solely on its own data for underwriting.
What does this mean for small businesses?
The Amazon-Goldman partnership will turn up the heat another notch in the already competitive market of business finance. Paypal and ecommerce site Square have been active in the business lending space for some time, and back in June EBay partnered with Santander to offer cash-flow loans to the SMEs using the Asto app. The partnership allowed Santander (which owns the app) to access EBay data to help make decisions on lending.
This increased competition should help to improve lending terms for small businesses, especially for those customers who can demonstrate strong performance through these online platforms. For some, it may also be easier. Whereas applying for a business loan normally requires presentation of business accounts and a strong business plan, in the case of a platform such as Amazon or EBay, the ‘lender’ already knows virtually everything about your business. This could save a good deal of time and effort, if the business is trading well. However, if business is struggling, the reverse may apply – as there will be nowhere to hide.
More lenders entering the market may also improve the overall terms being offered on business finance. One thing, however, is unlikely to change: a business needs more than ever to be able to demonstrate that it is a safe lending prospect.