Forget about fintech startups and challenger banks: the real threat to conventional trade finance comes from the likes of Amazon, Paypal and Alibaba. Sanne Wass reports.
It’s no coincidence that 2018 has been claimed to be the year of the Bank of Amazon or Google. More than ever, the world’s tech giants are moving in on the banks’ turf.
According to a recent report by the World Economic Forum and Deloitte, the competitive landscape in banking is not being shaped fintech, but rather by what it refers to as “high tech” – companies like Amazon, Google and Facebook – which are causing the greatest disruption to traditional players’ value propositions.
With huge amounts of data about their customers, the funding to rapidly increase their scale and international reach, and having already harvested great trust amongst their users, these internet giants are perfectly placed to provide banking services.
And they already are. Just take the range of digital wallets on the market: Apple Pay, Google Pay and Alipay are all examples of tech titans actively encroaching on the payments space.
The business lending space is also fair game, with the WEF report noting that non-ﬁnancial platforms are “emerging as an important source of underwriting data and a point of distribution for credit making”.
Amazon, Paypal and Alibaba have all established lending arms to target their own merchants, using sales data to assess performance and manage risk.
Amazon, one of the world’s biggest e-commerce companies, has since 2011 extended short-term credit to businesses selling on its marketplace across the US, UK and Japan, through its Amazon Lending programme. The internet giant said last June it had originated US$3bn in loans, US$1bn over the previous 12 months, benefitting more than 20,000 small businesses.
Amazon’s loans, which must be used by businesses to expand their inventory, are automatically deducted from the seller’s Amazon account, and if a company can’t pay them back, the marketplace can ultimately seize the inventory as payment.
Leveraging the extensive data it holds about its merchants, the tech titan can better assess the risk of providing a loan – while also making the application process remarkably quicker than conventional banks. Amazon has previously said it aims to “bring the one-click shopping experience to lending”.
“Instead of going to a bank, having interviews, audited financial statements, a three-week process, and then only a small fraction of people gets approved, our process is literally three fields and three clicks,” the company said in a video in 2014.
A quick search on the internet, however, reveals that Amazon isn’t keen to share much information about its lending programme. It has no official webpage, does not publicly share details about its interest rates, and loans are offered on an invite-only basis.
Amazon politely declined GTR’s request for an interview, saying they “don’t have new details to share” about the programme.
PayPal, meanwhile, was willing to submit answers in writing. The American tech firm, which operates as a payment processor for online vendors and e-commerce sites such as eBay and Shopify, launched PayPal Working Capital in the UK in 2014.
According to Norah Coelho, director of PayPal Working Capital UK, the lending arm is “responding to genuine need among the small business community”: the launch came after the tech firm saw a growing demand “for a more flexible form of business funding” from the businesses it works with – firms that “don’t always fit the more rigid criteria of the traditional lenders”.
PayPal’s strong relationship with its business customers, she says, enables it to offer cash advances of up to £100,000 in the UK against a business’ future sales. Since its launch, the tech firm has advanced over £400mn to 22,000 British small businesses.
Approvals are based on PayPal sales history, meaning that no credit checks are run against the business and funding can be approved and issued within minutes via an online application. Repayments are taken as a fixed percentage of a business’ PayPal takings when they make sales, with no interest.
Reaching new market segments
The efforts to bring financing to their online merchants doesn’t end with the tech giants’ own lending programmes. Amazon and PayPal both partner with specialised lenders to provide sellers with customised financing solutions.
As e-commerce has grown rapidly over the last couple of years, so has the number of specialised e-commerce lenders. Currenxie, for one, offers trade finance solutions – from inventory to logistics and receivables financing – to vendors on Amazon, eBay, Shopify and ZoodMall, with more marketplaces to be added in 2018.
For a number of years, the Hong-Based firm has been providing forex and cross-border payments services to merchants, and then entered the trade finance space last year after seeing “a big gap in finance availability for e-commerce”, explains Yochanan Zvezhinskiy, the company’s head of e-commerce.
“E-commerce is something that traditional lending institutions are not comfortable with, because they don’t have the mechanisms set up where they can leverage assets against the loan,” he tells GTR, adding that the banks’ perceived higher risk of e-commerce firms means the terms and rates they offer – if at all – are not competitive.
“So it was easy for us to compete with traditional lending institutions,” he says.
As an Amazon partner, Currenxie is given access to the marketplace’s API, and, with the permission of the merchants, it can pull anything from sales reports to transactional data and inventory information. It already has access to businesses’ collections and receivables data through its global collection accounts. These two factors, Zvezhinskiy says, create a “very secure environment” whereby the company is “comfortable with taking on the risk”.
The merchants that come to Currenxie, he adds, are typically not able to access a similar type of financing through their bank, but would instead rely on unsecured loans or credit cards.
Another specialist financier utilising the APIs of Amazon and other e-commerce platforms is Payability, a firm that helps merchants with their cash flow by purchasing their receivables.
“Often we see very successful, rapidly growing online merchants running into cash flow problems, which is somewhat paradoxical and very frustrating for good merchants,” Kevin Weeks, the company’s head of business development, tells GTR.
Because Payability has access to merchants’ performance data in real time, it can offer speedy and flexible financing.
“Since we see that real-time data, we sort of constantly underwrite. If a company grows by 10 times in three months, then we’re happy to extend them 10 times of financing. I think that’s something you wouldn’t necessarily see with other financial services companies, who set limits. There’s a process, there’s approvals, and in order to increase your limit, you have to go through that process again. We’re sort of going through that process all the time,” he says.
A threat to trade finance banks?
What all these companies have in common is that they easily master new technologies such as machine learning, big data and APIs to make sophisticated risk assessments and thus provide innovative and flexible solutions to small businesses.
According to the WEF report, these emerging technologies are “becoming critical to the competitive differentiation of financial institutions”. It is also an area where technology giants “have far deeper experience than their financial services counterparts” and where “scale effects will make it difficult for financial institutions to catch up”, the report says.
So, should bankers be concerned about the rise of ‘high tech’?
To the question of whether Paypal Working Capital is posing a threat to the established banks, Coelho notes that “banks will continue to play a pivotal role in the future of business funding” but that technology companies like PayPal are “finding new ways to improve some of the products and services of the past”.
The same response comes from the specialist financiers, who seem to think of themselves more as covering a financing gap of already under-financed firms, rather than poaching the banks’ business.
“I used to work at Bank of America, and I think, at least for now, online merchants are a relatively new and rapidly growing pool of potential customers,” Weeks says. “So I don’t necessarily view it as stealing customers from traditional banks. I view it as a new type of customer that traditional financing companies haven’t ever serviced.”
His comments are echoed by Zvezhinskiy. “Really it’s something new that banks weren’t doing anyway. I don’t think there is a will for them to even get involved in this, it’s not their core business.”
But, he adds, that doesn’t mean banks can just sit back.
“There is a threat because effectively what Amazon is trying to do is to become as vertically integrated as possible, starting from sourcing the goods, logistics, providing credit facilities, and they are sitting on top of the banks’ infrastructure for the transactions that they do, so the next step could be getting their own transactional capability. I would not be surprised to see an Amazon Bank or a PayPal Bank,” Zvezhinskiy says.
While tech giants in China, such as Alibaba, have already taken the step to acquire banking licences, it is still very much open – and highly speculative – what the West’s tech firms will be up to next.
CFRA bank analyst Ken Leon has predicted that Amazon may acquire a small or mid-size bank in 2018 to gain a foothold in the industry. “This may either be a tactical move or a broad strategic jump into banking, as Amazon seeks more stickiness with consumers and small businesses in consumer lending such as auto loans, credit cards and home mortgages,” he wrote in a forward-looking analysis in early 2018.
Other analyses are more sceptical of the notion of an Amazon Bank. “Overall, we do not consider tech titans’ current and future lending activities to cause any major competitive threat to banks’ lending activities,” writes Standard & Poor’s in a recent report entitled The Future of Banking: How Much Of A Threat Are Tech Titans To Global Banks?
“We generally consider them as unwilling to fulfil the large number of technical standards and regulatory burdens in conjunction with providing banking services on a larger scale.”
Chris Skinner, an independent commentator on financial markets and fintech, agrees. While he admits that the likes of Amazon and Paypal are already offering “bank-like” services, he does not expect them to open a bank.
“The overhead of compliance and regulatory requirements of doing a full-service banking would probably make their businesses untenable, because it adds a layer of slowness to their operations, which wouldn’t fit that easily into their model,” he says.
But Skinner warns that the tech giants will look to move further into the traditional banks’ territory where it helps them grow their online business. This could mean expanding their own lending programmes as well as their API partnerships. And trade finance is an obvious target.
“All trade or supply chain finance or commercial or retail banking that involves any payment or credit is where they are going to focus. Because it helps get more buying and selling on their platform. This is where the banks should fear these internet giants,” Skinner says, concluding that this will leave banks to “continue what they are doing, but getting much less margin and profits”.
Yet, traditional banks seem more dismissive about the threat from the tech giants.
Michael Vrontamitis, head of trade for Europe and Americas at Standard Chartered, for one, denies the notion that tech giants will take away his business, noting that “large companies have used the extension of finance to support their core business for generations”.
“Infrastructure companies like GE and Siemens, or technology companies like IBM, Oracle, etc, actively support their clients through financing solutions to enable the sale of their product solutions. For me, tech platforms like Amazon and Alibaba are doing the same thing,” he says.
As such, Vrontamitis believes the banks’ core business will continue to be carried out by banks in the future. But the way this will be delivered to clients may well change.
“Will banks be the primary interface, or will that be done through the larger fintech platforms, or will you end up with something that looks very different to what we have today, where banks and fintech companies are co-operating and partnering?” he asks.
New ways of financing
In this context, then, a conversation about partnership, rather than threat, seems more fitting. As the tech giants grow stronger, more financial institutions may choose to partner with them to stay ahead of the game – and vice versa.
“I imagine that tech giants are more likely to partner with financial institutions to leverage their capital to enable them to drive their core business rather than leveraging their balance sheets to transform into a financial institution and all the pros and cons that comes with that,” Vrontamitis says.
This has already started to happen. According to a report in February by CNBC, Amazon Lending has partnered with Bank of America Merrill Lynch, allowing it to reduce its risk and access capital specifically to provide credit to more merchants.
In March, the Wall Street Journal reported that Amazon had put out a request for proposals from several banks, including JP Morgan and Capital One Financial Corp, to power an Amazon-branded checking account. While some see this as Amazon’s move into banking, others have read it as the giant’s decision to adopt a partnership approach instead.
At Paypal, Coelho also emphasises that the firm is “a partner to banks, not a competitor”.
“We’re already working closely with over 20 of the largest credit card issuers in the world, the majority of which have kicked off campaigns to encourage and, in many cases, incentivise their customers to engage with PayPal,” she says.
While banks’ trade finance market share may not be at risk just yet, recent activity may serve as a reminder that ground could easily be lost. Especially in light of open banking reforms in the UK and the EU, financial institutions are more vulnerable than ever to third-party disrupters – be that small fintech startups or large tech firms.
“For me it is about accepting that the world is changing rapidly and being willing to disrupt your current business model. If banks don’t disrupt the model, someone else will,” says Vrontamitis when asked if banks can learn anything from the tech giants. As an example, he says, Standard Chartered has already run tests around using big data and artificial intelligence to improve its risk modelling in its distributor ﬁnancing business in India.
No doubt, the traditional banks are taking some steps towards making themselves relevant in a changing world. The question remains if they are doing it fast enough.