Amazon Quietly Making Online Loans to Merchants

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Amazon is ramping up to break into the lending business nationally by doling out cash to some of its online sellers who need to fund their inventories upfront.

Amazon Lending is being backed by Amazon Capital Services, according to an online forum for Amazon sellers.

The program has been in existence for about a year and reamains in a limited testing stage, however, as Amazon applies for lending licenses state by state and awaits approvals, according to a person with knowledge of it who spoke to American Banker on the condition of anonymity.

The existence of the giant e-tailer's loan program was first reported by Reuters.

"They [Amazon executives] started in beta about a year ago, and they are doing it only to high-volume merchants," this person said.

Firefly Buys, an online retailer of home products, toys and games, among other items based in Suwanee, Gerogia, has a loan out with Amazon for more than $100,000, says Jonathan Katz, the company's senior vice president of strategy and marketing.

Firefly Buys, which operates a 24,000 square-foot warehouse near Atlanta, uses Amazon's fulfillment service, which maintains inventory and ships items once payments are received.

The program does not act like a traditional lending operation, in which cash is advanced upfront and the principal, along with interest, are returned in a lump sum, according to Katz.

"This is more like an installment loan, where you do a six-month term, and you make equal payments every month," he says. "So they advance you the $300,000 and then every month for the next six months, you pay back $50,000 of the principal. It acts like a car loan or a home loan."

Amazon takes its installments directly out of the order payments it processes for Firefly Buys, Katz says.

Amazon initially approached Firefly with a loan at a much higher interest rate several months ago, before offereding a low, roughly 1% Amazon Lending introductory rate about three weeks ago, he adds.

A Firefly Buys employee confirmed the loan amount within the company's Amazon account and then clicked through the terms and conditions.

Amazon's strategy is likely to prove alluring to many of its merchants. The credit crunch has shut out many such firms from dealing with traditional lenders.

Thus, Amazon is aiming to fill a void created mostly by banks, says Aite senior analyst Rick Oglesby.

Amazon "will earn revenue on the sales of the inventory that gets purchased with the loans in addition to the loan revenue, so they get a beneficial compounding effect from it," he says. "They also can secure the receivables flow through Amazon payments. Overall this makes for an environment where they can offer very competitive rates, create value for their merchants, for their consumers and for Amazon."

Analysts say Amazon is attempting to reinvent itself by expanding its ecommerce strategy; it is also working on a mobile payments acceptance device to rival Square's, according to the web site TechCrunch.

"It's a fascinating development, yet right in line with Amazon's plan to become the 'merchant in a box' outfitter of all things infrastructure to online merchants," says Jim Van Dyke, president and founder of Javelin Strategy & Research, in an email.

Van Dyke regards financial services as a natural extension for Amazon.

"From payments to financing, it's possible that we could even see Amazon go further into financial services," he says. That might include include risk management services like authenticating and scoring buyers and sellers, investing in particular firms and becoming more of a merchant acquirer that competes with the likes of Chase Paymentech, according to Van Dyke.

Amazon's lending model is similar to that of Atlanta start-up Kabbage, which won one of Bank Technology News's 2012 Innovator of the Year awards, Reuters points out.

Scott Thompson, Yahoo's former CEO and ex-PayPal president, recently joined Kabbage's board, according to TechCrunch.

The startup provides money to companies that sell products online. Those funds are delivered to merchants in less than seven minutes. Every advance made to a merchant must be paid back within six months.

"We're flattered that they have chosen to emulate our product," says Kathryn Petralia, Kabbage's co-founder and chief operating officer, of Amazon's initiative.

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