Why Amazon should thank 'open banking'

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Amazon's alternative lending program has underwhelmed, but regulatory changes in Europe should give it a boost.

Under PSD2 regulations, banks must provide customer-transaction data to third parties. With the implementation underway, Amazon and other alternative lenders will soon have unprecedented access to businesses’ credit data.

As the tech giant restructures and reinvents its current lending program, it must take advantage of this increased access to borrowers’ banking data to strengthen and inform its lending decisions.
Despite its impressive track record over the past eight years, reports show Amazon Lending’s growth fell to 4.7% in 2017, and to only 2.6% in 2018. Once pitched as an attempt to "disrupt an entire industry,” Amazon’s alternative lending venture has fallen short of that ambitious vision. This failure to meet expectations stems from Amazon’s one-dimensional assessment of fundability, which neglects data that is critical to making informed lending decisions.

Though Amazon’s marketplace analysis provides rich insight, it only accounts for performance on a single platform—not the most accurate reflection of a business’ overall health.

There are a number of factors to consider when determining fundability: total monthly revenue (including revenue earned through non-Amazon affiliated avenues), business age, number of monthly deposits, and credit score, to name a few. Even if an Amazon merchant performs well on the marketplace, they may have a bad credit history, multiple debts, and other skeletons that would disqualify them from obtaining a loan. This added layer of data is crucial when it comes to making wise funding decisions.

Taking a more comprehensive approach that weighs data from a broader range of sources allows Amazon Lending to better identify successful loan candidates. And it’s not just the Amazon sellers that win out. A smarter vetting process can help protect against high-risk candidates, who, if unable to repay their loans, could throw a wrench into the whole lending operation.

Even companies who provide alternative lending services need to exercise caution. This means evaluating credit history, assessing total sales data, and analyzing bank records.

Thankfully, new EU banking regulations, known as open banking in the U.K. and PSD2 in the rest of Europe, enable Amazon to improve its ability to vet data for its alternative lending service.

The new regulations enable Amazon to do just that.

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