Non-Bank Business Lines of Credit Change the Risk Formulas

Non-Bank Business Lines of Credit Change the Risk Formulas

Google just recently announced the launch of a small business credit card that only allows for purchases of AdWords campaigns.

Along the same lines, Amazon just recently announced it will be offering credit for its online sellers to invest in inventory sold via Amazon.

In Google’s case, they’ve opted to use an issuer, Barclaycard, to process through the MasterCardnetwork. In Amazon’s case, they’re going it alone.

In both cases, the question is: will this be a threat to traditional card issuers or other commercial lenders. So far, the conventional wisdom is “no.”

I disagree. I think the fact that these lines of credit are issued by companies that directly benefit due to the growth will in fact change the landscape.

When you look at traditional risk metrics for a line of credit, you are mostly interested in the net interest margin: what you charge minus what you lose minus what it costs you to find the account. (Yes, I’m oversimplifying.)

But in the case of Amazon and Google, there’s another component of the profit equation: what you earn from the additional business. This additional profitability component could make all the difference in the world for small business owners. It could tip the scale from “too much risk” to “let’s take the risk.”

I know there’s a similarity between retail cards used at, say, Sears or JCPenney’s, and that those retailers finally opted to go with issuers instead of self-funding in most cases. These credit lines drive growth in businesses where retail cards simply fund expenses.

That’s why an “HP line of credit”, though it exists, isn’t game changing. HP doesn’t earn off of the business’ growth. Neither do card issuers. Sure, future growth help ensure future loan payments, but Google and Amazon will benefit in a way that banks, card issuers, and other manufacturers will not.

It’s clear that commercial banking needs a new profitability metric. This may be a component of it.