Major tech players including Amazon, PayPal, Shopify, Intuit Quickbooks, and Square are going after data-driven small- and medium-sized business lending to fuel their primary business units and redesign the space.
Some of the biggest names in tech and e-commerce have small merchants at the core of their business. The success of Amazon, Square, PayPal, Intuit Quickbooks, and Shopify then is very much tied in with the success of their small business clients.
Small businesses have one notable challenge — obtaining financing. According to a Federal Reserve study, 52% of businesses five years or younger applied for external financing in 2016. Of those applicants, 69% received less capital than they applied to borrow. Businesses cited insufficient credit history as the main reason for being underfunded.
Recognizing this, these 5 tech companies are using the trove of data they’ve accumulated on their merchants to reinvent traditional business-lending models and provide capital to their clients.
By automating collection methods and improving underwriting techniques, Amazon, PayPal, Intuit Quickbooks, Shopify, and Square pose a major long-term threat to traditional lenders, as well as newcomers in the alternative lending space that rely on credit scores and “manual” payment collection to determine whether to give out loans.
Instead, tech companies are using machine learning and artificial intelligence to sort through mass amounts of internal and external data they have on small businesses. They are creating personalized underwriting algorithms, and new models for determining businesses’ creditworthiness.
In this post, we will analyze how five tech platform lenders — Amazon, Square, PayPal, Intuit Quickbooks, and Shopify — are utilizing three major long term advantages to quietly disrupt the business lending space:
- Private data fueling their underwriting algorithms: With billions of private internal data points about merchant’s business operations, platform companies are able to use machine learning to study past trends and train algorithms on how to predict future creditworthiness.
- Lending with aligned interests: Since platform companies rely on third-party merchants to fuel their revenues, the success of the two parties is interwoven. Therefore, platforms are providing funds to merchants with the main hope to spur third-party growth on their platform.
- Business models allow platforms to overlook interest revenue or potential loses: Because the long term goal of platform companies is to grow their main business units (i.e. Amazon’s marketplace), they are able to focus on long term goals and look past interest revenues and potential loses.