How lending products are bringing the fintech ecosystem 360
GE, Amazon, Shopify & Mindbody - highlighting early movers in fintech innovation by non-fintechs (Part III)
For decades, banks have owned the customer relationship end-to-end — meaning that they have better access to the associated data end-to-end, too. We’ve covered before how historically this has been a key competitive advantage, enabling them to deliver an array of financial products while positioning them to easily cross-sell. Over time, however, this moat has been eroded. In some cases, merely because new upstarts were willing to take less (or perhaps even negative) margin. Novel platforms and companies with true workflow advantages may actually have better data — or else a deeper understanding of their customers’ needs and how to make use of it with a fuller picture of their finances and behavior to make decisions.
This is particularly critical in lending, which hinges on understanding prospective borrowers’ ability to pay to inform underwriting decisions. Deep relationships — soft information — plus financials, gives an edge. Of course, the new establishment doesn’t necessarily have a moat of its own, but their UX and attractive fees have been somewhat of a wedge.
As in the rest of this series, where we covered payments and banking, in this piece we’ll focus on innovation by non-fintechs and takeaways for the broader industry. Like the literal payment gateways, payments have essentially acted as the gateway for embedded fintech, a stepping stone of sorts to other more complex financial products — like lending. Providing access to capital unlocks unprecedented growth for customers, and, of course, the lender of choice. As these customers grow, so does their willingness and ability to pay for the core platform, process more payments, etc. Perhaps even more so here than in traditional financial services.
Today, we’re going to unpack how building lending products has transformed the business and categories of a handful of non-fintech companies: GE, Amazon, Mindbody, and Shopify.
Bringing lending to life: GE
In business schools across the country, General Electric may forever be placed on a pedestal as the company that spawned the modern conglomerate. So here’s an age-old example of a non-fintech — one that predated the fintech era itself — getting into lending. When GE started GE Capital, its relationship with its customer could hardly have been closer, financing GE’s own industrial products, in addition to lending to SMBs and consumers. While GE Capital shrank after a series of spinoffs and was basically felled by the 2008 financial crisis, it remains an important study in the value of adding lending services.
GE Capital began life as a little-known small consumer-finance business. It was founded in the 1930s with a clear purpose: to provide consumers with credit to purchase GE appliances. It was meant, much as retail credit cards did and do, to deepen the relationship with customers while helping get GE goods in their hands faster. This drove the general bottom line, but also opened up new revenue streams.
The broader potential as a profit center was something Jack Welch seized on, and over time, GE Capital grew in the way that businesses used to, before embedding and building became commonplace: through acquisition. It’s worth noting that before the emergence of embedding infrastructure, acquisition acted as embedding 1.0. In many ways, it was the only path for companies that wanted to offer novel financial services products. (This remains true in financial services more broadly, though less specific to lending as the space has matured; consider that Toast acquired a payroll company, while Walmart has steadily bought businesses to facilitate banking, etc,)
The takeaway: GE generated billions of dollars on its own, spawned business units, and helped the GE parent company writ large grow, too, because the more capital customers had, the more they used it to spend on GE products.
The seller marketplaces: Shopify and Amazon
Shopify and Amazon are two very different businesses, but they’ve both been transformative for the small business sellers they serve. And, perhaps most interestingly for this series, they’ve taken a pretty similar approach to offering capital to their customers.
The Everything Store has long wanted to be, well, everything. Its financial services strategy looks like it’s patterned after its investments in logistics, an attempt to encompass not just what people buy and how they receive it — but also how it all gets paid for.
When it launched its inventory financing solution, Amazon Lending, a decade ago, it seemed like a grand experiment; today the competitive advantages are so clear it has now been replicated by countless marketplaces. Advantages include its symbiotic relationship with merchants that enable them to grow. (It also doesn’t hurt that Amazon has historically enjoyed a simpler regulatory framework than what financial institutions or even fintechs face.) But the real advantage is that Amazon has unprecedented access to data, aka understanding of its merchants. Instead of a lengthy, clunky, and patchwork data gathering process, Amazon essentially knows everything it needs to know about how a seller’s business is doing, especially if that seller is using Amazon’s 3rd party fulfillment. Amazon knows whether financing additional inventory would help — and compound for all involved. Plus, it hardly has to worry about payback periods: Because of where it sits, it can automatically garnish repayment fees from the seller's Amazon account, and recently even rolled out lines of credit via Marcus.
Shopify saw financial services as a way to deepen relationships and align incentives with customers early on, too. It debuted its financial services arm, Shopify Capital, in 2016. A couple years ago, I actually had the chance to sit down with Kaz Nejatian, then GM of Shopify Capital, now VP Product and COO of the whole company, to pick his brain on the strategy. He explained Shopify Capital as “our attempt to answer the following question: What can we do to unblock growth for our merchants?”
In fact, that question underpins much of Shopify’s approach: They started with storefronts, and inventory, and then added payments (via a partnership with Stripe in 2012) — ticking along the line of the next hard thing they could uniquely solve for merchants to get them unblocked. Though the result has been a profit center, the approach grew out of a desire to solve customers’ problems. And it works because trust is built in: Both from the merchant, who runs their business on Shopify, and Shopify itself, because all the info it needs to underwrite a loan, or even spot who might need financing, is part of the platform.
The takeaway: Amazon and Shopify demonstrate how lending doesn’t simply unlock revenue streams in a b2b world. Ideally, it helps create a flywheel that supports broader business growth. It’s obvious that data is the key to delivering good outcomes in lending, but the marketplaces drive that point home further.
The vertical SaaS approach: Mindbody
SMBs have faced a credit crunch for decades. Their accounting info tends to be a patchwork of Excel files and manual calculations, and often operate in niche areas that credit departments might deem risky. The rise of vertical SaaS has changed that, digitizing the workflows of SMBs. Not incidentally, this digitization has made it easier to apply for traditional forms of credit. But this is really just the tip of the opportunity iceberg: Who better to extend a loan than the platform on which the entire business runs? And how easy for the platform to gain confidence in extending credit thanks to the deep relationship with customers. It’s why lending in vertical SaaS has rendered credit checks, personal guarantees or collateral for such small business owners moot.
Instead, these are merchant cash advances, based on sales history, and paid back based on a percentage of future sales. This reimagines the typical cash advance because incentives are aligned, rooted in the durable customer relationship. There’s a reason Mindbody extends this type of financing, though, unlike that of Amazon, which has focused just on inventory financing. Instead, the Mindbodys of the world take a longer view with its financing approach that is tailored to the services (i.e. inventory light) businesses it serves. As long as it’s a business expense, it qualifies, because whether the business is hiring, buying equipment, doing renovations, it all represents investments that in theory accrue value to the platform too.
In some ways, Mindbody is a quintessential example of the path of maturing a vertical SaaS business. It was also something of a pioneer in embracing lending as a strategy. It waded in carefully, initially through a reseller / referral program that directed customers to Lending Club. This proved to be a compelling MVP — and once Mindbody rolled its own embedded loan product, it was able to unlock real value in the space.
The takeaway: Mindbody’s trajectory shows that there’s still immense value in taking an incremental approach to offering financial services, particularly ones as complex as lending. With referral as an MVP, it’s not as black and white as a build vs. buy decision. What’s more, Mindbody shows the wisdom of taking a whole-of-business approach to offering capital, reimagining merchant cash advances in a way that works far better for its merchants than straight inventory financing.
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