It was the (initially) small FinTech startups that delivered a collective shakeup to the small business (SMB) lending industry. Alternative and marketplace lending platforms promised faster, easier SMB lending than traditional banks could deliver and eventually led traditional financial institutions (FIs) to collaborate with their one-time rivals as they realized they needed to offer more technologically advanced lending experiences to their small business customers.
But there is a new shakeup ahead for the industry, according to some analysts, and the force behind the movement is a big one.
Technology giants like Google and Amazon, which gained their market muscle from non-finance-related ventures, are slowly stepping into the space. Their next target could be small business lending, and according to some experts, it’s fast approaching the market.
Earlier this month, a former President Barack Obama advisor spoke on the issue, identifying Google and Amazon as the technology conglomerates that will initiate the next wave of change in small business lending.
“I think they are going to dominate the market, and that is the next phase that’s coming,” said Karen Mills, Obama’s former small business advisor, during a speech at the LendIt Europe conference, as reported in CNBC. “But the question is, in what form would that come and … under what regulatory authority?”
Amazon in particular is positioned to dominate. The company has already lent more than $1 billion to merchants selling on its platform, and, just as alternative lenders put the pressure on traditional FIs with their quick surge into the market, the Amazons of the world will do the same, Mills predicted.
“When I look at it from a U.S. view and from a global view, the banks are going to come back in full force, including Barclays and others, and then, on top of that, you’re going to have definite presence of Amazon players,” said Mills. “Amazon has clearly signaled they’re going to provide at least financing for their merchants that they know, and that’s very smart.”
Google could be in the running, too, she added.
“If you think about what Amazon already knows about its merchants, and then you think what Google knows about everybody who is buying and selling through its platform, one could imagine a world where they have much more information about both on the credit side but also on the small business [side] itself,” Mills stated.
Chatter Picks Up Steam
Karen Mills’ statements have found new backing in the latest banking report released by McKinsey & Co. this week. New reports in Bloomberg on Wednesday (Oct. 25) said the report identifies Amazon as the newest, biggest threat to the small business lending status quo.
According to analysts, while alternative FinTechs were the initial disruptors, it’s now eCommerce and technology conglomerates that are showing the greatest potential.
“We thought that FinTechs would provide the chief digital threat,” McKinsey’s report stated. But eCommerce firms like Amazon and Alibaba “are reshaping one industry after another, blurring sector boundaries as they seek to be all things to all people.”
The report points to sagging return on equities for the banks, which have not been able to surpass 10 percent since the 2007/2008 global financial crisis. The FIs that collaborate with those FinTechs could boost their return on equities to 14 percent and even higher if they develop their own solutions in-house.
But as conglomerates like Amazon step into the world of financial services, the struggle for banks to stay ahead of the competition has once again amplified.
“You have companies that have hundreds of millions of customers, offer a great customer experience and trade at a currency that rewards revenue, but not necessarily growth profit,” said Asheet Mehta, one of the report’s authors, in an interview with Bloomberg Technology. “They are under pressure to keep increasing revenue, and financial services is a large pool they can go after. We’re starting to see that.”
As Amazon has sunk its toes into the sands of SMB lending, reports said the company is also exploring what it would mean to dive head-first into the financial services industry. American Banker reported in September that Amazon, Google and Facebook have all initiated conversations with financial regulators as they explore an interest in the financial services space.
According to lobbying disclosures, Amazon lobbyists met with the Office of the Comptroller of the Currency in 2016, and again this year, to talk about “issues related to mobile payments and payment processing, financial innovation and technology,” said reports.
Industry experts have highlighted small business lending as a key area in which these corporations could operate as they explore more ways to act like a bank.
But, as Karen Mills noted, there are uncertainties around this shift, including how businesses like Amazon would navigate uncharted regulatory territory.
“I think this is one of the as-yet-untold stories of FinTech,” Mills said of the regulatory response to the Amazons and Googles of the world disrupting the small business lending sector. She described the current financial regulatory landscape as a fragmented “spaghetti soup” of players.
Still, these technology firms’ relationship with customers, and access to troves of customer data, could mean they’re in an even more opportune position than FinTechs to make their mark in SMB lending.
“If you look at the small business hierarchy needs, they need access to cash, funds; they need time and they need more sales,” Mills said. “And, what if you were able to provide an efficient system that gave them more time to do all their work, access to capital and something that boosts their sales line? You could see how that player could win over a traditional player or even a new FinTech.”