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.


PeerIQ in the News:

Industry Update:

  • 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.

Lighter Fare: