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Another industry Amazon plans to crush is small-business lending: Op-Ed

Amazon will mark its 22nd year in business this summer. During this period, the e-commerce site has transformed retail. Today it announced the purchase of Whole Foods for $13.7 billion. The company took advantage of technology, used an aggressive growth strategy and disrupted the entire industry. Amazon Marketplace enabled small companies to sell their products across the globe while at the same time providing customers with a reliable online platform and ease of payment. In doing so, Amazon connected buyers and sellers quickly and efficiently.

The result has been that time-strapped consumers learned to enjoy the convenience of shopping at home rather than facing the throngs at the malls. Now a whole generation of consumers has grown up knowing they can purchase whatever they want via their phones. Meanwhile, anchor stores such as Macy's, JC Penney-and Sears are struggling, and the mall business in America is dying.

Amazon's entry into small-business lending could transform the banking industry in the same way that the web-based retailer revolutionized retail. It started as an online seller of books and CDs in 1995 and has amassed sales of more than $400 billion. Being bold is what helped Amazon rise to the No. 4 company in market capitalization and a top 10 ranking among U.S. employers.

Just recently, Amazon announced that it has made $1 billion in small-business loans to more than 20,000 merchants in the United States, Japan and the U.K. during the past 12 months. Since Amazon Lending launched in 2011, it has surpassed $3 billion in loans to small businesses. Further, more than 50 percent of the companies eventually take a second loan from Amazon.

This is a very shrewd move by Jeff Bezos; his company will earn interest on the loans. Meanwhile, his third-party retailers will sell more products on his site and thus add to Amazon's earnings. Flush with a high valuation and lots of cash to lend, the online retailer has fairly easily tapped into a lucrative marketplace. The loan program is invitation-only, however.

Amazon Lending offers short-term business loans ranging from $1,000 to $750,000 for up to 12 months to micro, small and medium businesses selling on Amazon to help them grow their business. With access to more than 300 million active customer accounts worldwide, Amazon provides small businesses the opportunity to quickly reach customers in their neighborhood and in more than 130 different countries across the globe.

Additionally, the company has indicated that it would expand to other countries where it operates marketplaces. Potentially robust opportunities exist in places such as Canada, France, India and China.

Expanding its reach on Main Street

"We created Amazon Lending to make it simple for up-and-coming small businesses to efficiently get a business loan, because we know that an infusion of capital at the right moment can put a small business on the path to even greater success," said Peeyush Nahar, vice president for Amazon Marketplace, in a company announcement. "Small businesses are in our DNA. Amazon is providing capital to small businesses to help them expand inventory and operations at a critical period of their growth. We understand that a small loan can go a long way."

Traditional lenders shied away from small merchants after the 2008 financial crisis, which created an opening for other sources of financing, including marketplace lenders and other FinTech companies. Amazon has the advantage of being less-tightly regulated than banks and having near real-time data on sellers' businesses and access to their customer reviews. Having this wealth of data minimizes credit risk and is quite important in deciding whether to make a loan.

"Amazon announced that it has made $1 billion in small-business loans to more than 20,000 merchants in the U.S., Japan and the UK during the past 12 months." -Rohit Arora, CEO, Biz2Credit

Banks have reason to worry. Many of them, although aided by name recognition, are burdened by the cost structure of the branch system. Today's small-business owners are time-strapped and want the best deals quickly. The internet enables them to accomplish those goals. Millennials are much more interested in conducting transactions on their phone than walking into a branch of a big-name bank.

Further, many banks — even some of the largest ones, with resources to invest — have lagged in setting up online loan applications. I believe Amazon Lending is going to be a game changer for the entire small-business lending industry — not just for the banks but also for other online credit marketplaces. If banks do not change their way of doing things, the players in the industry could meet the same fate as traditional retailers that are simply unable to compete with the pricing structure, speed and customer service that Amazon provides.

Banks should also be concerned that Amazon won't stop at small-business loans. The company could get into setting up deposit accounts or eventually getting into mortgage lending and other types of loans. Furthermore, Amazon can do it without the regulatory compliance that banks must meet. If the banking industry remains complacent, Amazon has the potential to transform finance in the same way that it upended retail.

— By Rohit Arora, CEO and co-founder of Biz2Credit.com, a leading online marketplace that connects entrepreneurs with small-business loans

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