Courting the underbanked: Amazon is changing the game for the banking industry


Amazon has dipped their toe into the banking industry “water” by offering select merchants who sell on their site short-term business loans. While this is just a small segment of the overall market we all know what could happen if Amazon jumps in all the way. After changing how we buy books, shop for groceries, and explore entertainment, this foray into banking, or bank-like experiences is another opportunity for Amazon to support customers across income brackets.

Since launching their loan program in 2011 Amazon has reported lending over $3 billion to over 20,000 merchants worldwide. Facilitating the success of the small businesses selling in Amazon’s marketplace further integrates Amazon into sales and go-to-market strategies of these growing businesses, cementing warehouse storage fees and inventory growth. Amazon has positioned themselves very well if or when they decide to move even further into the banking industry.

It’s not just Amazon though. PayPal, Square and other merchant gateways are able to offer cash advance like loans – they just don’t have the same access to robust data and predictive analytics.

What does this mean for traditional lenders?

As bank relationships become more transactional and commoditized, Amazon’s offerings are a real threat to the traditional lenders. While Amazon currently only offers cash advances, the company’s ability to target and identify pre-qualified borrowers via Amazon sales data ensures that there is a steady flow of loans at every stage of the cycle. Their model of pre-qualifying businesses also eliminates the process of applying for the loan entirely – making the ease of doing business almost irresistible.

Small and even medium sized businesses are struggling to obtain loans, especially since the financial crisis. Over the past seven years, small business lending has shrunk by more than 30 percent. Many long established financial institutions found them to be too risky or too expensive to on-board as a result of outdated systems and processes. This underserved market is a critical piece of the overall economy. Finding a way to get more small businesses the capital they need to be successful benefits the entire economy.

As Peeyush Nahar, vice president of Amazon’s marketplace shared in a June Bloomberg article, “we give them access to capital when others don’t because we get their business model when maybe others don’t.”

How can traditional lenders compete?

For lenders who understand the impact of relationship banking, commoditization isn’t as much of a risk. Traditional lenders must still ensure that they are providing a best-in-class experience, access to credit and transparent terms. More than 70% of small business banking customers, millennials included, value the experience and convenience of being able to use the bank branch.

Traditional lenders can compete and win if they provide both the ease of doing business and modern technology that companies like Amazon and PayPal provide as well as the face-to-face relationships people desire. This means many banks and credit unions need to upgrade their technology and processes.  For example, Tompkins Financial, a traditional community banking business, partnered with Mirador, a technology company, to create a web-based commercial loan application system earlier this year called “Lightning Loans.”

Mirador streamlines the up-front aspects of applying for credit and tailors its process to the needs, policies, and credit practices of their clients.  The new “Lightning Loans” program has been well received with some customers completing their application in as little as 9 minutes and receiving approval in just 20-30 minutes.

Will there be a Bank of Amazon?

While it’s unknown whether Amazon ever intends to become a financial institution, it’s certainly not impossible. It’s clear that Amazon does not operate within the borders of just one or two industries – they see no boundaries. Amazon is known to not only dominate an industry they set their sights on, but completely flip it upside down. With Amazon lending over $1billion just this year it’s clear they are starting to ramp up for something.

The lending business is ripe for change. If it isn’t Amazon that pushes lending into the 21st century another company will. Traditional lenders that don’t accept this will find it very hard to compete. Banks and credit unions are still an important piece of communities across the United States. They can continue to be the partners people trust if they can just find a way to make doing business easier.