Amazon has more details on every seller than any bank could hope to have. They know what products they sell, in what volume, they probably know the approximate margins achievable on the products sold and they know the customer service rating of each merchant. With this information, machine learning and the number of merchants they have, they have more than enough to be able to make really smart loan decisions. I bet you they can keep the default rate much lower than any bank could achieve and they can better price their loans interest-rate wise.<p>TBH many of the internet giants (or any company who has grown enough to have enough of their own cash to manage) ends up adopting features of banks. They get the benefits of banks (easy money) with less regulation. Paypal for example promotes the holding of cash in Paypal accounts. Paypal isn't a bank, but all that money from users is cash that they can "loan" to the federal government and other AAA and AA rated companies in the form of bonds.
A colleague of mine commented that he would not sell volume through Amazon, and instead creates his own ecommerce sites. Why? Because, he argued, Amazon uses volume sellers to discover new products to sell, and then Amazon undercuts large sellers after the sellers have done all the market validation.<p>I don't know if this is true or not, but if it is it's bloody brilliant.<p>So this seems like a great strategy to improve market discovery for Amazon.
"Amazon is lending up to $800,000 to some merchants...charging some sellers interest rates of up to 13 percent, but some other merchants are being offered rates as low as 1 percent..."<p>Source: <a href="http://www.reuters.com/article/2012/09/27/amazon-lending-idUSL1E8KRA1020120927?type=marketsNews" rel="nofollow">http://www.reuters.com/article/2012/09/27/amazon-lending-idU...</a>
I suspect these Amazon loans are <i>secured, with inventory as the collateral</i>, which in plain English means that if the borrower defaults, the lender (Amazon) can take the inventory and sell it to payoff the outstanding balance of the loan.<p>If I'm right, given that Amazon manages fulfillment for many third-party sellers (meaning that their inventory is already stored in Amazon warehouses[1]), these new Amazon loans appear to be virtually no-risk.<p>Brilliant.<p>--<p>[1] <a href="http://www.amazonservices.com/fulfillment-by-amazon/benefits.htm" rel="nofollow">http://www.amazonservices.com/fulfillment-by-amazon/benefits...</a>
Huge. Period.
If you didnt already do volume on Amazon, now you will try. Looking back at the start of AWS a few years back, i shudder to think what this does for small businesses nationwide 5 - 10 years from now. Amazon's underwriting the internet with AWS, underwriting small ecommerce cos with its seller programs, and now underwriting the financing side with this lending program.<p>Wonder what their protections are/how they will deal with defaults?
Google has a similar thing for middling successful AdWords advertisers (including me): they've got a deal with a bank for a subsidized AdWords credit card. 8% interest, credit limit is your yearly AdWords spending, works only on AdWords.<p>I was thinking they could go one step further beyond just peeking at my AdWords data and conclude my Internet footprint justifies a $500k limit at 4%. (I.e. Now they're underwriting) And one step further than that would be "Make sure you pay your bill on time, because we wouldn't want anything to happen to those rankings." That strikes me as unGoogley but you never know.
Hm. I really don't know the specifics of this move or its market, but: I believe there are two ways for amazon of getting a benefit out of this, in some way.<p>The first one is setting a reasonable interest rate (13% in this case) and make a benefit out of it (they have spare cash, and a very good interest rate, plus a fairly secure investment).<p>The second one is actually investing at a lower rate (how about 5%) in their mid-sized, strong sellers, to create some growth (long-term) and increase amazon revenue (as I said, that's thinking long-term and sometimes loans won't be administered properly). Amazon can probably estimate the risk of each seller (they have a lot of information about their sellers' sales and additional information about almost everything else too!), so that would be clever for them.<p>It sort of surprises me that amazon is putting such an interest rate, as the only benefit I can see this way (instead of other ways of getting a traditional loan) are probably 'amazon benefits' (if any), as it might be faster / more flexible / less painful than a different kind of capital loan. And for Amazon, it's more of a way to get some easy money out of a pile of cash (which I presume they have), and not another creative way to keep strengthening their business.
Cant' blame Amazon for taking advantage of an opportunity to lend money at 13% but I question the need for anyone with a truly self-sustaining business to borrow funds at such a high rate. If your margins are low and you need the capital to factor your receivables, the interest rate is going to be painful or destructive to you long term. On the other hand, if your margins are high like in software and subscriptions/services you probably get paid quickly and don't really have a need to borrow. The only businesses I've seen use borrowed money for payroll are failing businesses. Admittedly I'm a big believer in bootstrapping.<p>If you're young and have nothing to lose, I think it's a lot more effective to obsessively work on your business and just run up your credit cards than waste time with investors and lenders.
This reminds me of an interesting little fact I learned about how Sony makes money: Life insurance and personal finance!<p>Source: <a href="http://www.splatf.com/2011/11/sony-profits/" rel="nofollow">http://www.splatf.com/2011/11/sony-profits/</a><p>Consumer electronics still generate most of its revenues (about half) - but just like GE, Sony appears to make a lot more profit financing the acquistion of their goods rather than from the goods themselves (GE makes more financing hydro-turbines for governments than from the turbines themselves).<p>Curious to think that the entire PlayStation line might not just be a loss leader for games, but also for the entire Sony financing arm.