Amazon Wades Into Lending To Drive Market Place Sales

Amazon (NASDAQ:AMZN), the leading e-retailer entered the lending business through a new service called, Amazon Lending. ^[1] Through the service, the company will provide its online sellers, mostly small businesses, loans to purchase inventory and thus, enable them to increase their sales on Amazon.com. Since it charges a small percentage of every sale made on the marketplace, the move could translate into more revenues for the company.

See our complete analysis for Amazon

Loans targeted at helping seller scale their operations

Small merchants who generally lack capital to buy the inventory they would like to sell can apply for loans through the service. The merchant whose application for the loan gets approved would have the funds transferred to his/her Amazon Seller Account. After that, a monthly payment will be taken out from their account until the loan gets paid off. The interest rate on the loan would be around 13%. ^[2] The service though expensive wins over other credit channels with a four day clearance period which makes it easier than getting a loan from a bank. However, there are requirements in the loan to deploy the capital through Amazon sales vs. other company channels only.

The service will particularly help the company attract sellers from eBay Inc. (NASDAQ:EBAY) and other online marketplaces. Small merchants who have been frequenting eBay Marketplaces to sell their wares would be attracted by the opportunity to expand as they get access to a quick loan. This could bring in significant revenues for the company. Besides the potential new sellers, the company stands to gain on the increased sales as the sellers can list more items with more capital at their disposal. The company currently charges its merchants 99 cents for every sale and a small percentage of everything they sell if they list less than 40 items. ^[3] However, if the merchants list more than 40 items, they pay the company $40 a month and a revenues share.

Key Risks: Competition from Kabbage

The company will be competing against other services that are in the same business, most notably Kabbage. It operates a similar business model and runs a credit check, looks at activity levels on an applicant’s channel as well as his or her online transaction volume to determine whether or not that person qualifies. Merchants could prefer Kabbage for loans and stay with their current marketplace sidestepping the requirement to use the capital for sales through Amazon channel only.

We have a $222 estimate for Amazon which is 12% below the current market price.

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1. Amazon offering loans to its online sellers, Reuters, September 2012 [↩]
2. Amazon starts loaning capital to sellers to help them scale, ChannelAdvisor, September 2012 [↩]
3. Fees and Pricing, Amazon, October 2012 [↩]