Tech companies invade banks’ territory with customer loans

Stephan Aarstol had a cool product (paddle boards) and a cool equity investor (Mark Cuban, owner of the Dallas Mavericks).

Yet the San Diego entrepreneur, fresh from a 2012 appearance on the hit US TV show, Shark Tank, could not get a single bank to lend him money to order more boards from plants in Thailand and China.

But then he got a $25,000 loan offer from Amazon, where he was selling through the company’s third-party marketplace programme, using its network of warehouses to store, package and ship orders. A few months later came another offer: $140,000.

“Holy cow, this was like, easy money,” says Mr Aarstol, founder of Tower. “They already know what I’m selling, they have a history and a projection of sales, and they have the asset in their warehouses. Why wouldn’t they give me a loan?”

Amazon’s push into lending shows how the landscape of banking has been radically reshaped since the crisis and how traditional banks are facing tough new competition.

Big banks such as JPMorgan Chase, Bank of America and Citigroup have been beaten back by tougher rules on capital and a squeeze on profits from ultra-low interest rates. Many have reviewed loan books and found that serving small businesses — the engine of the world’s biggest economy — is no longer worth their while.

Data from the Federal Deposit Insurance Corporation show that loans of less than $1m accounted for 20 per cent of total loans to commercial and industrial businesses in the US at the end of last year — down a full 10 percentage points since 2007.

Meanwhile, specialists in ecommerce have begun to make use of their vast troves of data, which appear to give them better, deeper insights into customers’ ability to handle a loan than any bank could manage. Amazon has supplied $3bn to sellers on its marketplace platform since launching a lending pilot six years ago.

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“We see the metrics, minute by minute,” says Peeyush Nahar, vice-president for Amazon Marketplace. “Are they shipping out on time? Is the product what they say it is? How well are they serving customers?”

Others such as Square, the payments processing company, and PayPal, the money transfer company, have been piling in, too.

“The power is going to those who have the data,” says Matt Burton, chief executive of Orchard, a New York-based provider of analytics to online lenders. “That used to be the banks. Now it is the retailers.”

Square, whose sleek white terminals sit on counters in shops across the country, has originated about $1.5bn of loans since the public launch of Square Capital, its lending arm, three years ago.

Speaking to investors at a JPMorgan conference last month, Square chief executive Jack Dorsey raved about the combination of lending and other product lines, such as tools for managing inventory and analysing sales.

“We see that when a seller . . . hooks up multiple parts of our ecosystem, it’s just phenomenal,” he said. “It not only helps them run their business and grow their business, but it’s also retention for us because it’s really hard to get all these parts from elsewhere.”

PayPal Working Capital, meanwhile, has supplied about $3bn in loans to more than 115,000 businesses around the world since launching three years ago. The company also runs PayPal Credit, a line of credit which consumers can apply for and use at the point of sale.

“If a consumer uses PayPal Credit, they spend twice as much with PayPal as a consumer who doesn’t use credit with us,” said Dan Schulman, PayPal chief executive, at a conference hosted last month by Bernstein. “And so honestly, I would do credit even if the economics were break-even on it. The great news is they’re better than that.”

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In the first quarter “other value-added services” at PayPal, which is revenues principally from interest and fees on PayPal Credit’s loan portfolio, came to $376m, 23 per cent higher than a year earlier.

One satisfied customer is Tylor Fischer, sales manager at Dave’s Guitar Shop in La Crosse, Wisconsin. He says he has noticed a pick-up in sales of high-end instruments such as Gibson, Fender and Paul Reed Smith guitars since the business began offering PayPal Credit about two years ago. “It’s been a good addition,” he says.

As for Mr Aarstol, he now gets most of his working-capital needs through a $1.5m line of credit from Bank of the West, the San Francisco-based retail-banking arm of BNP Paribas. The bank has come in with an interest rate lower than Amazon’s.

But last year he still accepted about $300,000 of loan offers from the Seattle-based giant.

“I don’t want the ability to borrow to disappear,” he says. “If the banks melt down tomorrow, I want to have that relationship established.”

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