Is Amazon Secretly Building a Bank?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
By now I’m sure you’re used to seeing both your mail box and inbox inundated with credit card and loan offers from every financial institution imaginable. They promise that you’re already prequalified for the money, all you need to do is fill out the form and your capital needs will be fulfilled. That’s why I wasn’t even the least bit surprised to see that Amazon (NASDAQ: AMZN) is launching their own initiative to inject capital into their clients bank accounts.
According to the Wall Street Journal, Amazon is quietly offering loans to their top sellers through Amazon Capital Services. The program is designed to fill the gap between banks who don’t want to lend to riskier small business and Amazon who wants their top sellers to sell even more.
This isn’t even Amazon’s first foray into ensuring their customers have access to capital. They’ve long offered a branded credit card through JPMorgan’s (NYSE: JPM) Chase unit. That card is a very sticky way to keep customers loyal. Every time you shop on Amazon you earn three times the point and those points can be used as cash credits to reduce a future bill.
A branded card is one thing; there isn’t any risk to the firm. They are responsible for marketing the card and JPMorgan Chase manages the receivable side of the business. In offering a commercial lending solution they’re enabling their customers to access capital more quickly than they could from a bank but are taking on the risk that banks turn them down.
In the article they gave an example of one small business owner who was turned down from a bank for a loan to fund merchandise only to be approved to take out two loans from Amazon totaling $51,000. In total Amazon has made loans between $1,000 and $38,000 to a number of their top sellers at interest rates ranging from 1% to 13.9%. These sellers are becoming an increasing part of Amazon’s revenue.
While Amazon sells most of their goods at razor thin margins, as they evolve their business model to sublet space within their marketplace they’ll see ever higher margins. As the WSJ article points out they collect between 6% and 15% worth of sales commissions on items sold through their marketplace. In addition, they charge larger sellers a monthly membership fee as well as collect credit card processing fees from those merchants using their platform.
This is where eBay (NASDAQ: EBAY) should be just a little bit concerned. With a gross margin of 78.5% and EBITD margins of 32% the past five years they crush Amazon’s puny 24% gross and 5.3% EBITD margins the past five years. There's no doubt Amazon's investors would love to see those type of margins. This is why as Amazon starts to add more services and grow their online marketplace they’ll do so at higher margins and at what could be at eBay’s expense. Both companies are slugging it out on mobile with eBay reporting 13 million unique users bought products through their platform in June while Amazon was just a million behind. While Amazon’s not directly competing against their golden goose of PayPal their pushed into financing shouldn’t be ignored.
It’s estimated that Amazon’s online marketplace sales could grow from the 9% to 12% of sales last year up to 55% in the next five years. These merchants also pay Amazon to store, pack and ship the merchandise to their customers which is one factor in considering the risk to Amazon loaning money. They can hold that merchandise as collateral if necessary. Still, is the risk worth the reward from Amazon or would they be better served by partnering as they do with JPMorgan on credit cards?
One company that has extensive experience with retail credit is CIT Group (NYSE: CIT). While their typical customer ranges in size from $2 million to $1 billion in annual sales if given Amazon’s stamp of approval you’d think that they could offer a similar asset-based lending program to Amazon sellers. Amazon could instead collect a fee instead of putting their own capital at risk.
It’ll be interesting to see how this plays out over time. This could be another sticky way to give their customers access to capital which will keep driving revenue higher. It might just go away as secretly as it’s arrived on the scene. Either way, it’s just another innovative way that Amazon is enabling more product to be pushed through their platform and over time more dollars to their bottom line.
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