Amazon loans just the start for ‘techbanking’
Digital leaders were always going to collide with the finance business
In the pantheon of public sympathy, banks sit some way below bookstores. Bookworms might bemoan the closure of their local literary emporium. But after a decade of financial scandal and billions of dollars of fines, few will care very much if ecommerce giant Amazon ramps up its loans business at the expense of banks.
Retailers have long had sidelines in credit, but it is usually advanced to customers rather than suppliers. More recently, the likes of Walmart, Carrefour and Tesco have set up financial services arms to help to deepen customer relationships. In the commercial world, invoice factorers have for many years lent against invoices coming due.
Amazon Loans extends short-term credit to small and micro business selling on its marketplace. The retailer has lots of data on how its sellers are performing, allowing it to cherry-pick borrowers. Its retail and web services operations generate lots of cash, and if the company wanted more, investors or creditors would happily provide it.
Other technology groups awash with surplus cash could feasibly do likewise. Imagine Apple lending money to app developers, or sending out “artist and repertoire” scouts to find new acts for iTunes. Google financing independent studios for YouTube. Facebook moving into payments. Supporting small businesses neglected by banks is good public relations. And lending increases loyalty; if your bank manager is also your IT provider and your distributor, you are less like to sell via a rival service.
But “techbanking” poses several risks. There are the usual reputational pitfalls of asymmetry: big faceless corporation exploits the little guy. This is exacerbated by patchy regulation of commercial lending, in contrast with fairly well-developed protections for consumers in most countries.
There is the salutary tale of GE Capital, which started out financing the sale of white goods and ended up with a $500bn balance sheet. That transformation took place over many decades and relied increasingly upon risky wholesale funding not surplus cash. But it shows how companies can be seduced by the high returns from unregulated lending — especially if growth in other areas slows.
Then there is credit quality. Amazon’s $3bn of loans are unlikely to cause it trouble. But in a decade’s time? Too much money chasing too few borrowers tends eventually to result in poor lending decisions. Banks are cautious about lending to small businesses for a reason: they are risky.
It will take a while for regulation to catch up with technology, as has been seen in fintech. And as technology companies become ever more powerful and reach into more facets of people’s lives, they will inevitable reach a Standard Oil moment. By that time, people may even be feeling sympathy for traditional banks.