A recent report from McKinsey on the global banking industry addressed the threat banks face from technology firms. Amazon stock jumped 13% on earnings and reporting that Amazon is increasing its lending footprint. Tune into Bloomberg Radio archive to hear more about this topic as PeerIQ’s CEO discusses the threats and opportunities of big technology with Bloomberg’s Lisa Abramowicz and Pimm Fox.
In securitization news, CommonBond closed a $248 Mn securitization and received their first S&P rating (AA). Similar to the first deal on the shelf, the senior tranche had a fixed and floating-leg. The fixed-leg priced 18 bps tighter than the prior deal at a 72 bps spread.
The Wall Street Journal reported that LendingClub’s asset management business is closing five of its investment funds totaling $376 Mn and rebranding from LC Advisors to LendingClub Asset Management.
This week we consider the aspirations of Amazon and other big tech firms in financial services.
Summary of Amazon’s Lending Business
Amazon finances small businesses that sell products through the Amazon marketplace on an invitation-only basis. Interest rates range from 6 to 15%, tenor ranges from 4 to 6 months, and loan size is up to $750K.
Although there is no segment-level P&L reporting for the lending unit, loss-rates according to Amazon’s Peeyush Nahar have been “very, very small.” Amazon’s lending makes up a small part of their business (e.g., $3 Bn in loans to date vs. Amazon’s $136 Bn annual revenue). Amazon is also not directly financing the consumers indicating substantial opportunity to grow.
Amazon is lending to capital-constrained small business sellers on Amazon’s marketplace where unique data including inventory turnover, customer satisfaction, and pricing data create an underwriting advantage. As Amazon is focused on its own channel, Amazon is not in direct competition with OnDeck, Kabbage, Square, and other small business lenders.
Silicon Valley is (Still) Coming…
We can glimpse into the aspirations of the tech firms by looking at the policy positions of Financial Innovation Now (FIN). FIN is a policy association representing tech giants including Amazon, Apple, Google, Intuit, and PayPal.
FIN’s policy goals include: “Streamlining Rules for the Online Lending Marketplace” and “Leveraging Technology to Reduce Barriers to Financial Services”. FIN has oriented their policy statements around the concepts of financial inclusion and innovation – two pillars that would resonate with bank regulators and policymakers.
The big technology firms have also seen the playbook of Alibaba and TenCent’s chartered online banks – MyBank and WeBank – and the success of their global tech rivals.
Owning the Customer
The most compelling advantage big tech has outside of data and customer acquisition are the creation of entirely new channels that banks cannot easily replicate.
A few examples:
- In-Home: Large consumer tech firms occupy the most intimate space of consumer through services such as Amazon’s Echo, Google’s Home, or Apple’s Siri. These platforms represent a trojan horse for delivering new products and services in a highly personal and exclusive manner.
- Personal assistants that are increasingly anticipatory and have access to the calendars, preferences, and daily lives of consumers.
- Mobile and virtual wallets which shift the battleground from legacy “share of wallet” and “primary card” concepts to mobile platforms and virtual wallets
- Virtual spaces created via social media including Facebook or services such as Lyft or Uber which enable unobstructed access to the consumer.
Current Regulatory Framework Favors Partnership
Today, a significant regulatory bulwark prevents big technology firms from directly taking on the big banks. Although that may change with a FinTech charter, by and large, most tech firms will find it easier to partner than to shoulder the significant regulatory burdens of operating as a chartered deposit-taking national bank.
Amazon, for all its customer reach and data prowess, partners with JP Morgan Chase to extend affinity credit cards. Barclays announced this past week a deal with Uber that combines the card issuing and underwriting expertise of the former with the customer reach of the latter. Leading technology firms partner with banks such as Cross River Bank and Web Bank to offer lending and payments services.
Overall, it’s a great time to be a consumer and benefit from the transformation of financial services that lies ahead. We’re excited at the prospect of continued innovation, and our own role in creating transparency and standards for the sector as a whole.
- Ram will speak on a panel this Thu at 2:25PM titled “Investing in Digital: Emerging Opportunities for Community Banks” at American Banker’s Digital Lending & Investing Conference.
PeerIQ in the News:
- Amazon, Tech Companies, Are Challenging Big Banks: Ahluwalia (Bloomberg Radio, 10/26/17)
- Job du Jour – PeerIQ (Untapt, 10/20/17)
- U.S. fintech industry jealously eyes U.K. regulatory scheme (AmericanBanker, 10/23/17) One theme that emerged at Money 20/20 is that the push and pull between federal and state agencies is serving as a barrier to the kind of regulatory experimentation that the U.K. is pioneering.
- LendingClub Closes Chapter on Fintech Funds (WSJ, 10/25/17) Lending Club sold assets in five funds for $376 Mn.
- LoanDepot Announces Agreement with Artificial Intelligence Real Estate Technology Company, OJO Labs (PRNewswire, 10/23/17) LoanDepot announced an agreement with OJO Labs to act as the mortgage provider of its machine-powered assistant known as “OJO”—the combined offering will allow house hunters to access real estate and mortgage information, and get pre-qualified, through an entirely digital, mobile-first experience.
- Will JPM’s millennial-app experiment grant access to new markets? (AmericanBanker, 10/24/17) JP Morgan Chase rolled out their mobile-only app, Finn by Chase, which is targeted at millennials and lets people sign up for a bank account within minutes and also helps manage their spending.
- Affirm’s new mobile app lets you borrow money for almost any online purchase (TheVerge, 10/23/17) Affirm’s new mobile app acts as a virtual credit card that can be used as a line of credit for the majority of online purchases.
- OnDeck Collaborates with Ingo Money and Visa to enable real-time Loan Funding to Small Businesses (PRNewswire, 10/23/17) OnDeck will use Ingo Money to disburse loan funds to customer’s small business debit cards in real time.
- Synchrony allays fears about rising credit losses (AmericanBanker, 10/20/17) The rise in customer defaults in the U.S. credit card business were generally in line with Synchrony analysts’ expectations.
- SoFi held talks for possible $8bn sale this year (FT, 10/22/17) Schwab was among the parties interested in buying SoFi—had it progressed to a sale, it would have been the largest acquisition of a venture-backed company since the $22 Bn sale of WhatsApp to Facebook in 2014.
- Quicken Loans now offers one-step financial information validation (Inman, 10/26/17) Homebuyers and refinancing homeowners using Quicken Loans will now be able to submit their financial information in one step, thanks to Fannie Mae’s Single Source Validation pilot program which will use that data to identify consumers’ employment and income information by reviewing direct deposit information from their bank account.
- Banks Need to Fear Amazon’s Finance Ambitions, McKinsey Says (Bloomberg, 10/25/17) E-commerce giants can emerge as banking rivals, report finds.
- Large banks make terrible partners, fintechs say (American Banker, 10/23/17) Fintech leaders have expressed increased frustration about working with bank partners.
- Ten Clever Tech-Themed Halloween Costumes (Business Insider, 10/30/2013)