Embedded lending has become an increasingly important component of digital commerce, enabling businesses to access financing directly through the platforms they use every day. By combining transaction data with streamlined underwriting, marketplace lenders can provide faster access to working capital than many traditional lending channels. Amazon Lending illustrates how embedded finance is transforming small business lending by helping marketplace sellers secure the capital needed to grow their businesses.
Two million active sellers on Amazon is a strong base to launch a lending business. When coupled with Bank of America’s long history in small business loans, plenty of room for growth and market disruption.
In his shareholder letter two years ago, Amazon CEO Jeff Bezos said he was looking to team up with banks that could help his company expand its lending program for small businesses that sell on Amazon’s websites.
Partnering with Bank of America allows Amazon to reduce its risk and access capital specifically to provide credit to more merchants so they can acquire inventory.
If Amazon keeps up with the same output quality that they’ve done with everything from books to videos, taking a pause before digging deeper into the potential exposure is appropriate.
Amazon Lending is an invitation-only program that makes loans of $1,000 to $750,000, with terms of up to a year, for companies that may have difficulty landing traditional business loans. In June 2017, Amazon said it issued more than $1 billion in loans during the previous 12-month period, compared to $1.5 billion in combined loans for the four years before
After almost doubling to $661 million in 2016, outstanding loans just barely increased last year to $692 million, according to Amazon’s annual report earlier this month.
One person familiar with the program said there was a deliberate effort by Amazon to slow the expansion in 2017 as the company attempts to better understand the credit risks that come with a large-scale lending practice.
Long term, this will be another winner for Amazon, though they are not alone. PayPal is certainly strong in this arena, as is Square, and when the businesses mature, there are plenty of alt-lenders.
As embedded finance continues to mature, partnerships between technology platforms and financial institutions are likely to reshape the small business lending landscape. By combining digital marketplace insights with established banking expertise, embedded lending solutions can expand access to capital while helping businesses manage inventory, cash flow, and growth opportunities more efficiently.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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