Amazon revealed last week that it loaned $1 billion to merchants on its marketplace in the past 12 months. Square and PayPal have adopted similarly successful models. As of November, Square’s two-year-old lending arm had lent $1 billion to businesses. PayPal’s small business lending is growing at a rate of $4.5 million a day.
These tech giants’ emergence and momentum in this burgeoning industry might be the boost online lending needs to become a mainstream option for small businesses. With the knowledge that customers increasingly prefer online experiences, these large tech companies see an opportunity and are seizing it.
They’re well positioned to succeed for a few reasons. First, the tech giants have massive, active customer bases; Amazon has 2 million potential lending customers already selling products on its own marketplace. These small businesses need money to grow and the tech giants need their customers to grow. By lending money, the tech giants are enabling their customers to get more use out of their core products. This means more products for Amazon’s sellers to move, and more transactions for Square and PayPal to process.
Second, while there are certainly well-known players inside the online lending space, from OnDeck to Lending Club, there’s no direct lender that’s a household name. It’s hard to know who to trust, and rightfully so—there have been multiple instances of shady practices. With Amazon and PayPal (and to some extent Square), trust is not an issue. They are some of the most recognized brands in the world. And since small businesses are active users of their products, there’s an added familiarity.
Third, companies like Amazon, Square, and PayPal know who they’re lending to. Since their core business model encompasses their customers’ business transactions, they know exactly how much money their customers are making and when that money comes into their business. This information makes the tech giants better prepared and more likely to underwrite loans for businesses that might have been denied elsewhere.
Lastly, nothing can beat the ease these companies are offering their customers. Amazon, PayPal, and Square each provide a product that requires users to login often and view their dashboards. There’s no heavy lifting to fill out the loan application, since they already have access to their customers’ sales and cash flow. This experience is light years ahead of any bank loan application—and in many cases, banks don’t even offer an online application.
The tech giants certainly have the potential to dominate online lending. But if they want to challenge traditional lenders, their current rate structures could hold them back. While Amazon’s pricing is particularly attractive, with estimated annual interest rates between 10.9 and 12.9%, PayPal’s annual percentage rate (APR) is estimated to be between 15 and 40% and Square’s is estimated between 30 and 35%. This pricing is competitive for short-term loans, but if business owners have larger, longer-term, or revolving credit needs, they could qualify for more cost-efficient options.
Amazon has shown that there is an opportunity for big tech brands to take advantage of their strong reputations and established customer bases to create additional revenue and offer products that their customers need to grow—creating compounding benefits for both big brands and small businesses.
Meredith Wood is vice president of content at Fundera, an online marketplace for small business loans that connects business owners with 30 lenders with one common application.