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.
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.
Exactly what I was thinking, and why I thought a 13% rate was outrageous. They should be able to offer much lower rates to at least some of their sellers and still make a nice return.
Edit: for comparison I can get a signature loan from my credit union for < 10%.
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.
I don't know if this is true or not, but if it is it's bloody brilliant.
So this seems like a great strategy to improve market discovery for Amazon.
Amazon used that strategy to figure out which furniture manufacturers to carry. Drop-ship selling of furniture was quite big a few years back and when Amazon realized that they invited furniture retailers to join the marketplace. Once they had an idea of which items sold well, the return rates on those items, margins, etc. they formed relationships with the manufacturers and undercut the retailers by selling the same items themselves at lower prices. So it is both brilliant and very true.
On the other hand, he's piggybacking on Amazon's marketing clout, branding, and large customer base to sell his products if he's going through Amazon. The thing about going it on your own is that no one knows about you and your products. It takes lots of marketing to build up your site.
>So this seems like a great strategy to improve market discovery for Amazon.
I am guessing if walmart does something similar, it is not brilliant, but in fact evil. I don't understand the enthusiasm for things like this if it is a brand that we like.
Remember walmart tried to open its own bank, guess what happened?
I've seen this myself. I was a seller last year and whenever I found a product to sell with a good profit margin, Amazon would eventually come along and undercut me.
Since they can buy in much higher volumes than I, they win.
I recommend that nobody ever sell their products on Amazon. Yes, it's a great market and you will get sales. However, all of their seller support is automated and if their automated scripts somehow think you are violating one of their rules, you get kicked off forever.
I was kicked off after selling for 8 months with a near 100% track record and great customer service. Why? Amazon couldn't tell me.
Their answer was: "Due to the proprietary nature of our business, we can't disclose the reason". They held over $5000 of my money for 90 days. It's lucky I had savings or I would have been in trouble.
The customer is also king. I had multiple scammers order over $100 in items, file a claim and get their money back without ever sending the item back to me. Amazon (unlike Ebay) doesn't allow you to ban a scamming user nor do they care.
I made them thousands of dollars in my time there and they couldn't even give me the decency of a person to talk to. I'm disgusted by their business practices.
"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..."
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.
Wonder what their protections are/how they will deal with defaults?
I take a completely different view. If these sellers are only lacking capital in order to see growth, wouldn't they be getting it from others by now, even in a tight lending market? I look at the wording: "pre-qualified for a loan up to <XXX see below>" and then "If approved, the funds will be advanced" and it reads just like every junk mail credit application ever. You are "pre-qualified" because you made it onto the suckers list, and you'll be approved if you're gold plated. Here comes the internet lending bubble?
Thing is, Amazon is in a different game than your normal lending agency. Proper lending agencies make their money from the interest, and thusly, they have a desire to make your interest higher. Amazon on the other hand makes money from direct sales- they might have interest there to discourage people from borrowing without reason, but they can also chance it at a lower rate because of the possibility of making more money via real sales.
Let's say that Amazon lends money to a high volume seller. And we know that Amazon is going to take a cut of sales. But, let's say, hypothetically, that all of this is a wash, in the end it ends up netting Amazon zero direct profit. Has Amazon lost money on this effort then?
Consider the indirect benefits to Amazon. By increasing the amount of business flowing through the site they further cement their brand and they increase the network effect of using the site. They bring more customers to the table who then become repeat customers due to a good experience on the site. Or they bring additional business as people buy related or unrelated merchandise on the site, perhaps in the same order. And they increase the potential customer base for buying Amazon gift certs. All of these things tie together and help bring Amazon more business.
Now, in reality Amazon is going to make sure it makes money on these loans and on direct sales as well, but it doesn't have to make a very high margin on such things because of the indirect effects I mentioned which provide additional margin.
> If these sellers are only lacking capital in order to see growth, wouldn't they be getting it from others by now, even in a tight lending market?
As an ex bonds guy, I can say for sure that the lending market isn't close to efficient. One anecdote - the Fed has extended a ton of credit to banks (large and small) in the last 4 years. They've also been concerned in the process because those banks have hoarded the capital to cover loan default losses.
Small and Medium sized businesses are often unable to get capital because a. there's far too much friction in the application process, and b. banks often use the same metrics to evaluate large and small businesses, but oftentimes the credit of a small business aligns better with the credit of it's proprietor, than it does with any other factors.
Amazon has more information about these companies' business than anyone else in the world. They'll have an edge in knowing whether a loan is a good investment or not.
Agreed. I have no worries about Amazon covering themselves. They will surely benefit from this. Will the sellers? Will the customers? This is what I'm wondering about.
I think it may be a lot easier for sellers doing most of their business through Amazon to get better loan terms. Traditional banks are harder to convince on this type of business model.
I suspect these Amazon loans are secured, with inventory as the collateral, 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.
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.
And this gives the incentive for sellers who don't use amazon's warehouses incentive to use them.
Really , when you think about that ,classically sellers/wholesellers have the following roles:
1. Finding people/stores willing to buy stuff
2. Financing of buying stuff from many manufacturers(until getting paid)
3. Storing said stuff
4. Distributing said stuff to stores, online stores and users
5. Prediciting demand
6. Marketing to users/stores.
It seems that amazon is attacking/replacing all those roles, and probably doing a better job. The end game seems simple: To skip the sellers(for products sold online), and deal directly with manufacturers(like their doing with ebooks).
It's not unique to them, walmart already did it. But amazon sells almost everything.
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.
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.
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).
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.
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.
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.
13% is not that high a cost of capital for a business - venture capital is far more expensive yet still a smart choice for many companies. To put it in perspective the cost of equity for the S&P 500 has historically been at least around 13%.
That's the ex-post return on equity, not the cost of equity. You could argue that the former is an approximation of the latter, but they are not necessarily the same.
Anyways, it's not really relevant for a small Amazon Seller who may get a _loan_ at which rate a huge S&P 500 business can get _capital_ (if a S&P 500 business wants a loan, I doubt it would typically even pay 5% these days).
That's CAPM cost of equity assuming a market of rich and emerging market stocks and bonds and a risk-free rate of gilts or Treasuries, whichever cheaper; the average ex-post return of the S&P 500 for the period (1926-2012) is closer to 10.5%.
Regarding VC one plugs in expectations; VC is modern portfolio mechanics at its most vivid.
This is relevant because 13%, as a cost of capital, is not intrinsically high when even Bank of America today would pay that if it raised equity (it has) and could assume a long-run return on its stock of at least 7.3% (below its targeted ROE). A quick bond search shows that several S&P 500 members, BofA included, paying over 13% on at least some of their bonds (no doubt the riskier ones).
Therefore 13% isn't usurious and probably a fair cost of capital for a small business.
Credit Cards are almost definitely going to have an interest rate much higher than 13%. How would that be better than a loan from Amazon? If you need to take months to arrange the line of credit, then I understand your argument, but Amazon seems to make the process pretty easy
Yeah, it's more about how easy it is to get the credit. Applying for a business credit line tends to be a relatively formal process and often requires a personal guarantee anyway so there's often no liability advantage for a business credit line, at least if you actually need one. In fact it may be worse if you eventually fail and you happen to be less broke than your partners since likely you'll have jointly taken on the guarantee. I think you could keep your interest costs down by playing the 0% balance transfer game and pay only transfer fees.
It's common for publishers to give authors an advance on sales of a book - effectively a loan, paid back via royalties. If Amazon gets deeper into traditional publishing it wouldn't be crazy for them to do some version of the same.
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).
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.
Not just Sony: many Asian consumer electronics companies are really part of much larger conglomerates. Samsung is the largest provider of life insurance in South Korea, and they also run a large ad agency (Cheil) as well a other service based subsidiaries.
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.