Amazon.com is adding a new service, they have a lot of them, but the new one is banking. If you sell goods on their website, its lending program will give you cash you need to expand your business. But is Amazon the best way to go. Joining me now, Eric Best, founder and CEO of Mercent, a company that helps businesses expand online. Eric, thank you for being with us tonight. I was blown away by this, tell us how this works and what the motivation is for Amazon to lend.
Eric: Sure, well in retail of course cash is king and it can be expensive and hard to come by. And that’s true most of all during the holiday season, November through January, when most retailers generate more than half of their total annual sales. So Amazon has launched this program and effectively it provides the retailers, third party sellers, that are promoting and selling products through the Amazon website with access to incremental cash, which of course allows them to buy and ultimately turn around and sell excess inventory.
So Eric, is this Amazon stepping into a vacuum that was left by banks, who are famous now for not lending to homeowners or small business?
Eric: I think the old adage that sometimes in banking, pockets are deep but arms are short, can be true in retail in particular. Retail is inherently, can be a risky business. And among these Amazon third party sellers, many of the merchants that are promoting and selling products through Amazon’s website are the classic entrepreneurial small business owners. And so for them, traditional banking relationships do not fit the bill when they are looking for ways of accessing incremental inventory.
So let’s take a look at some of these (?) out there, and I think one of the most interesting things to really focus in on is the interest rate comparison. Amazon charging 1% to 14%, small business credit cards 13% to 19% on average. How can they do that and in your mind, is that a great deal?
Eric: Yes, so Amazon has a number of important incentives at play here. First of all, 41% of Amazon’s total unit sales are driven by these third party sellers, and this is a case where Amazon does not take inventory or inventory risk, but they are benefiting from the commissions that they earn on the sale of this product. So by providing a lower cost lending instrument to these sellers, not only are they driving more sales through their website, they are also generating incremental margin on these fees that they’re charging, and they are lending the money to sellers that already have an existing relationship with Amazon. So the credit risk inherently you would think is a bit lower than a typical bank.
Well that was the thing that really blew me away, with the number that got this segment on the air frankly is that Amazon raked in $48 billion dollars in 2011 from commissions on this. And what I hear you saying is that Amazon can charge less because they already understand these companies and these businesses.
Eric: That’s exactly right. The sellers win because they have access to that critical inventory, and Amazon wins because they are able to drive additional growth without necessarily taking on that inventory.
All right, is there any downside to this that people should be aware of, because I think everybody and their mother is like 1-800-Amazon, can I get a loan now. So is there a downside people should know?
Eric: Well there’s a key restriction here with the funds of course, and that is that the dollars need to be used to acquire inventory to sell through Amazon’s program. And the one challenge that retailers are going to face is that they don’t always allocate a particular unit on hand to Amazon or a different selling channel. So I think there are some accounting challenges, just some practical challenges on how to allocate the dollars for a typical seller.
Interesting stuff Eric, thanks for bringing it to us. I appreciate your time today.