Amazon’s financial power is well understood. The ecommerce and cloud-computing giant is a juggernaut, straddling a multitude of categories. Less well understood are Amazon’s plans for expanding into new lines of business.
That is the subject of a new CB Insights report that concluded Amazon is aiming to disrupt five industries in the next five years (including pharmacies, online groceries, and fulfillment and delivery) and seven other lines of business likely to be targeted during the years beyond that (including luxury goods and services, brick-and-mortar retail, smart homes, home and garden, media and entertainment, and handcrafted goods).
More concerning to readers of this publication is the likelihood that Amazon will target several financial services, including small-business lending, payments, and insurance.
Says the report: “Since 1999, Amazon’s disruptive bravado has made ‘getting Amazoned’ a fear for executives in any sector the tech giant sets its sights on. Here are the industries that could be under threat next.” It also quotes Amazon CEO Jeff Bezos of having famously said, “Your margin is my opportunity.”
To wit: Amazon has already disrupted businesses ranging from books, music, toys and sports to shoes and clothing. It also dominates the cloud-computing business, its biggest profit center.
In the near term, meaning in the next five years, CB Insights expects Amazon to assert itself as a small-business lender.
“Amazon took its first steps into commercial loans back in 2011, when the company began offering small-business loans to merchants participating in its Amazon Marketplace via its Amazon Lending arm,” the report notes. “At that time, conditions were well-suited for Amazon’s entry into the commercial lending sector: the global financial crisis of 2008 had shaken confidence in even the largest commercial banks, initiated a credit crunch, and left millions of small businesses struggling to secure the capital they needed to survive. Since then, the company has doubled down on its lending efforts.”
Amazon has about 2 million third-party merchants that are small- and medium-sized businesses using its platform, and the percentage of Amazon sales transacted by third-party merchants has increased during the past 20 years from 3 percent to 56 percent, the report says. Amazon Lending gives its third-party sellers access to up to $1 million in loans or credit for inventory management, product-line expansion or product promotion through a partnership with Marcus by Goldman Sachs. It also provides loans to merchants through a partnership with Bank of America.
Commercial lending boosts Amazon’s fortunes on two fronts: (1) By underwriting its customers sales operations, it helps grow the merchant’s business, which enhances Amazon’s commission on the merchant’s sales through its site, and (2) Amazon collects interest from the loans it approves.
What’s more, the report says, Amazon’s small-business lending practice requires less time and friction because, unlike traditional lenders, the ecommerce giant has a streamlined application system and automates its loan repayment process, taking the owed money out of a merchant’s Amazon sales income. The application system, based on pulling metrics from a merchant’s Amazon account, makes it easier for small businesses to access financing, the report reads. By contrast, it costs a bank a similar amount of money to process a $50,000 loan as it does to process a $1 million loan, but the anticipated profit of the smaller loan is much lower. Given that credit needs for small businesses tend to be for smaller amounts, banks can see them as being less-profitable opportunities.
What’s more, banks want collateral to back loans, which often is nonexistent for ecommerce businesses that possess virtually no hard assets. That situation puts small ecommerce players at a disadvantage. No so with Amazon, which already has huge amounts of data on the merchants that use its platform, meaning it doesn’t need the extensive documentation required by many commercial banks. While banks often rely upon credit scores and personal financial documentation to determine the risk, Amazon comes to prospective borrowers already armed with information such as revenue history and future earnings projections, inventory data, and sales data, according to the report.
Currently, Amazon Lending offers small-business loans ranging from $1,000 to $750,000, with repayment plans of three to 12 months, and interest rates from 6.0 percent to 19.9 percent, which the report says is within range of the average rates from other online and alternative lenders. Interestingly, merchants must be invited to participate in the Amazon Lending program, as Amazon extends these invitations based on an algorithmic evaluation of a merchant’s business, based on the popularity of their merchandise and their inventory cycles, among other factors — a calculation that helps Amazon mitigate its lending risk.
This also means Amazon can offer loans quickly, typically approving loan applications within 24 hours and without charging borrowers origination fees, or penalizing them for prepayments.
All of this has made Amazon’s lending program popular. From its launch in 2011 to first quarter 2019, Amazon reports that it issued $5 billion across more than 20,000 businesses in the United States, Japan and the United Kingdom. For the year ended May 2020, Amazon loaned more than $1 billion to U.S. small businesses alone, says the report.
With all the business relationships, data, automation and other advantages Amazon brings to the process, it poses a threat to commercial banks and local and nontraditional lenders. The speed and ease of getting financing means a superior customer experience.
Amazon has been building out a presence in the payments space for years, according to the report, with products such as:
- Amazon Pay, a payment management system that allows third-party merchants to sell their products on their own sites, but use Amazon’s payment technology to receive orders, which also streamlines the payment experience for customers.
- Amazon Cash, a service that allows consumers to deposit cash without any fee into an online Amazon account by scanning a special barcode at partner retailers.
- Amazon Visa debit/credit cards
- Amazon Reload, which gives Amazon Prime members the ability to transfer money from their bank to their Amazon accounts
- Amazon Go, a cashier-less convenience store where consumers can walk in, grab items off the shelf and walk out. The customer’s Amazon account is billed for the purchase when they leave the store.
- Amazon Fresh, a chain of grocery stores that uses the same “just walk out” technology as Amazon Go
- Amazon One, a contactless payment and identity verification service that relies on palm recognition.
“The logic behind this kind of financial ecosystem is clear — if the company can get consumers to put money into an Amazon-owned account, they will ultimately spend more with Amazon,” the report notes. “For example, the Amazon Prime Visa rewards users with Amazon credit. If Amazon can create a payments channel that’s good for Amazon consumers and saves merchants money, it could have the edge it needs to disrupt the payments industry in a tectonic way.”
Amazon’s appetite for payments is whet by the $51 billion in interchange fees charged by credit card companies in 2020, from tapping retailers for 2 percent to 4 percent per transaction. Those fees can dent the bottom line of small businesses, especially those who deal with small transactions.
“But the price isn’t the only factor merchants have to consider when choosing a payment processor,” reads the report, “they also need one that doesn’t negatively impact the customer experience. Especially with the COVID-19 pandemic, adoption of contactless payment options like Apple Pay or Google Pay is rising. By 2025, nearly 60 percent of consumers worldwide will use mobile wallets. If Amazon can find a way to make its own payments options stickier, easier for consumers to use, and cheaper for merchants to accept, it could find huge opportunities in this industry.”
Amazon Pay is targeting merchants in its pursuit of payments, searching for a cheaper processing method. For merchants, working with Amazon means getting access to low fees, Amazon marketing services and, in the future, one-click access to new tools that capitalize on Amazon’s large member base. Adopting an Amazon Pay account could allow merchants to experiment with new retail techniques, from cashier-less payments to improved targeting to better “buy-online, return-in-store processes.”
On the customer side, the focus is on convenience, speed, and perks that encourage consumers to use their Amazon Pay accounts rather than a debit card.
“To make Amazon Pay an attractive option for consumers, Amazon has spent the last several years building additional Amazon financial products and services that complement its value, like Amazon Cash, Reload, and credit cards,” writes CB Insights. “The common theme with all of these products is that they encourage customers to load money onto their Amazon accounts or become more dependent on the Amazon payment system. The more a customer builds up an Amazon balance, the more useful Amazon Pay and Amazon’s other financial features become.”
In 2021, it announced a partnership with Affirm that offers shoppers the option to pay off items in monthly installments. The service is available for purchases that cost $50 or more. Additionally, Venmo digital wallet users will soon be able to pay for their Amazon purchases using their Venmo account, thanks to a new partnership between the companies.
Amazon’s headlong charge into payments endangers the financial future of card processors and online payment providers.
“The companies that should be most concerned about Amazon’s ambitions in the payments space are online payment providers like PayPal and Stripe, and card processors like Chase, Visa, and Mastercard,” says the report. “Today, Amazon Pay’s costs are competitive with other major online payment gateways. With its 2.9 percent transaction fees and 30 cents authorization, Amazon comes in right alongside PayPal Standard when it comes to annual costs.”
Over the longer term, Amazon has already shown some interest in building out its own insurance business, writes the report. In 2016 it launched Amazon Protect, a U.K. service that provides accident and theft insurance on products sold through Amazon.
A 2017 product manager job listing in Amazon’s EU Product Insurance group hinted that the company had definite designs in the insurance space: “We have ambitious plans to significantly grow operations in our current markets and create new, innovative products that will provide excellent customer experience and satisfaction.”
In 2018, it confirmed an investment in the India-based startup Acko, which primarily works on car and bike insurance policies. In September 2018, Amazon made its interest in the insurance market in India even clearer when it filed with the country’s Registrar of Companies to begin selling its own health, life, and general insurance products, according to the report. Amid the COVID-19 pandemic, Amazon began offering free health insurance to its sellers in India, with Acko handling the policies, claims and reimbursement.
Then came September 2019 and a pilot program for Amazon Care, a healthcare service for its employees in the Seattle area. On the Amazon Care app, patients can set up virtual doctor’s appointments, home visits, and schedule COVID tests. Amazon recently expanded the virtual service to its workers and other employers, regardless of their location in the United States. The company plans to launch in-person services in more than 20 cities in 2022.
Amazon is also helping its sellers purchase product liability insurance for protection in case their merchandise causes injury to a customer, says the report. The company requires all sellers who generate more than $10,000 in sales in one month to have liability insurance. On the Amazon Insurance Accelerator marketplace, sellers can buy coverage from established and startup providers.
Merchants based in China can also invest in product liability insurance through Amazon’s partnership with insurance company Marsh.
For home and auto coverage, Amazon has partnered with leading insurers, such as Geico and Allstate Corp. to build Alexa skills that provide policy information and quotes to current and prospective customers. The company has also partnered with The Travelers Cos. to offer home insurance customers.
“Whether offering home insurance, product insurance, or car insurance, Amazon could use its size as an e-commerce retailer and its huge member base to become a major distributor in the United States,” notes the report. “Amazon’s strong brand and customer trust could make Amazon insurance a highly attractive option for customers — especially Prime customers — looking for a more valuable insurance offering.”
The interest is certainly there, considering a recent survey showed that 55 percent of consumers would buy insurance from Amazon.
Notably missing from the report is any intention on the part of Amazon to venture into the investment advisory and products space, a prospect feared by RIAs and broker/dealers. Should CB Insights update this report in the future, it would come as no surprise to read of Amazon’s efforts to undercut the industry’s existing fee structure, boost customer experience, and leverage its massive customer base to carve out a dominant space for itself in the industry.
This story was excerpted from the CB Insights’ report titled The 12 Industries Amazon Could Disrupt Next. Download and read the complete report here.