With the fintech revolution underway, it may seem a little strange that major tech giants have not done much to take advantage of the opportunity. That is, until now. It was only a matter of time before Amazon and similar companies jumped on the fintech bandwagon.
According to Karen Mills, a senior fellow at Harvard Business School who previously advised President Obama on small business issues, Amazon is no longer merely dabbling in small business lending. Instead, Mills believes that the company and others like it are set to disrupt the small business lending industry entirely.
Earlier this year, Amazon reported having already lent small businesses more than $1 billion in loans. Although online business loans are nothing new, the fact that such a major player in the tech industry is becoming involved should get the attention of others in this line of work.
Mills points out that these types of companies have a major advantage when it comes to evaluating whether or not a company is worthy of a loan. “If you think about what Amazon already knows about its merchants, and then you think what Google knows about everybody who is buying and selling through its platform, one can imagine a world where they have much more information about both on the credit side but also on the small business itself,” she stated.
Traditional banks cautious about lending to small businesses
In the wake of the financial crisis, many experts believe that traditional banks have become much more cautious about loaning funds to small businesses. They must carefully assess the business they’re considering lending to before they can decide if doing so is safe.
Companies such as Amazon certainly accept the same risk when making loans, but they also have the ability to use the vast amounts of information they already have about their merchants to make more informed decisions. This makes them particularly threatening to banks and smaller lending companies.
As Mills said, “If you look at the small business hierarchy needs, they need access to cash, funds, they need time, and they need more sales… And what if you were able to provide an efficient system that gave them more time to do all their work, access to capital and something that boosts their sales line? You could see how that player could win over a traditional player or even a new fintech.”
An opportunity to disrupt the lending industry
Amazon already has an opportunity to disrupt the lending industry. As things stand now, there’s a good chance that the company’s leaders may soon recognize just how significant this opportunity is.
That being said, with new players (both big and small) getting involved in small business loans, regulatory issues become even more complicated. Currently, there isn’t much oversight over these businesses. The problem is, without proper oversight, there’s room for predatory lenders to join the fray. Moving forward, clear, effective regulations will be needed to prevent these companies from taking advantage of merchants.
While it’s unlikely that a major company such as Amazon would take a predatory approach to lending, its smaller competitors may not be so ethical. In a paper she co-authored for Harvard Business School, Mills points out that establishing and enforcing the proper regulations is something of a balancing act.
On the one hand, no one wants predatory lenders to gain a foothold in the industry. However, if regulations are too strict, then it could be difficult for new, alternative lenders to supply small businesses with the necessary funds that they need.
At present, fintech lenders can use the massive amounts of data that they already have about merchants to determine whether lending money to them is actually a safe bet. As a result, this provides small business owners who might not otherwise qualify for a bank loan with the opportunity to grow their business, which in turn will help to boost the overall economy of their communities.
Lawmakers must find a solution
Obviously, lawmakers will have to find a solution to this problem. If companies such as Amazon continue to provide small businesses with even bigger loans, lawmakers may need to work more quickly to respond to massive industry disruption. Although smaller alternative lenders have already disrupted the industry to some degree, they haven’t had the kind of massive impact that Amazon could potentially have.
Perhaps it will be a good thing if Amazon dominates the loan industry. If the tech giant does begin to overshadow smaller alternative lending companies, at least those people seeking loans will have a reputable company to which they can turn.
As with so many fintech journeys, the ending to this one isn’t yet clear. However, it may, foreshadow the increasingly larger role that established tech companies will play in fintech.