OBSERVATIONS FROM THE FINTECH SNARK TANK
Amazon and Goldman Sachs announced a partnership to provide lines of credit up to $1 million to merchants selling on the Amazon platform. According to CNBC:
“The application process is fully digital and can be done in minutes, and most customers will get approval results in real time. The credit lines will come with an annual interest rate of 6.99% to 20.99%. If users don’t make minimum payments on time they’ll owe late fees and a maintenance fee if they don’t use at least 30% of their credit line. If sellers consent to it, Goldman will use data on businesses’ revenue and tenure on Amazon to determine who should be approved.”
It’s A Clear Win For Amazon
To date, Amazon has issued term loans using a corporate credit facility from Bank of America, an arrangement that is expected to continue. With the Marcus deal, Amazon merchants will be able to get a credit line.
There are two clear benefits for Amazon from this deal: 1) Amazon adds a new source of revenue with the fees from the Marcus credit lines, and 2) Amazon sellers get needed capital to continue selling on the platform.
It’s A Win For Goldman Sachs
Many bankers turn their noses up at retailers’ “receivables financing” and wouldn’t touch this kind of business with a 10-foot pole.
But for Goldman Sachs, it may be just the kind of business a firm with the nickname “Vampire Squid” is perfect for. With interest rates as high as 21%, fees for late payments, and fees for non-usage of the credit line, Goldman is likely to make out nicely on this deal.
Bankers will point to expected high loss ratios on this kind of business, but Goldman Sachs has a tolerance for that—it’s already seeing high loss ratios on its consumer loan portfolio.
And with a near-zero cost of acquisition—the fee Amazon takes being the only real cost—and a low cost of loan processing, Goldman can live with a higher loss ratio than most banks are willing to.
It’s also important to note how the Amazon/Goldman Sachs approach will differ from the traditional bank approach.
Banks hang out their shingle, let the world know they’re available to lend, and wait to see who applies for a loan. Inevitably, they get requests that don’t meet their risk guidelines and turn down some (or many) would-be borrowers.
The Amazon and Marcus approach will be different. Goldman will cherry pick the merchants they want to lend to and send invitations to apply through Amazon’s Seller Central site. This will keep processing costs down.
Banks Won’t Pay Attention—But They Should
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