Amazon has recently ventured into the lending world, and I’m throwing a red flag! It’s a program geared toward cash advances to third-party sellers who sell their items on the company’s platform.
According to a press release, the New Merchant Cash Advance Program Provided by Parafin this “secure financing option ties payment on the cash advance to a portion of sellers’ future sales for a fixed capital fee and provides eligible Amazon sellers with easy and quick access to capital when they need it, paired with flexible payment plans. With this program, sellers can access capital in a matter of days with transparent and capped rates, no fixed term, no personal guarantee, no credit checks or excessive paperwork, and no late fees.”
It’s a great idea for Amazon because consumers are paying Amazon money directly, so they already have the cash to pile up to lend back, although they are working through the third party, Parafin, a Fintech that provides the backbone of the lending. We don’t know the details of the arrangement between the companies.
This is a great idea for Amazon because they can take it out of future sales for their sellers. This is a convenient way for sellers to pay back the loan they take out for things like future inventory purchases.
However, there is a big problem I have with this from a banking perspective and from a business advocate perspective.
When dealing with a company this big, where are the checks and balances? Whether it is Amazon who does the lending directly or Parafin, is there a bank involved that is providing security and adhering to regulations?
The other problem is, what happens when a seller defaults on a payback? Will Amazon put that seller’s product listing at the top of the search results in order to get paid back? If so, that is a HUGE conflict of interest and is unfair to other Amazon sellers that don’t utilize the lending service.
From a business perspective, owners need to read the fine print in every line of the agreement before signing up for this service. The last thing businesses want to do is be on the hook for both their products and their cash flow to Amazon. Typically, it’s a bad idea to put all your eggs in one basket, especially for the sake of convenience only. Make sure it makes sense for your business!
Banks can compete with Amazon for lending to online sellers and offer something Amazon can’t. It’s called a relationship and it goes both ways. Banks must strive to know their business customers and understand the nuances of those business models. Likewise, customers need to be transparent about their needs, so their bank can best serve them.
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