Banking Law, Finance, Wall Street

Is Amazon Coming To Crush Lawyers?

Amazon lends billions to small businesses -- and surely plans to expand.

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In the wake of Amazon’s announcement last week that it is buying Whole Foods, analysts and commentators have rushed to analyze what the deal means for the future of the grocery segment. Yet legal and financial professionals might instead want to ask what Amazon has planned next. In fact, there are some indications that Amazon is planning a foray into a new arena that could have a dramatic impact on a large swath of the professional-services market.

Amazon began a program called Amazon Lending a few years ago to supply capital to small businesses, in particular merchants selling through the Amazon platform. That effort has ramped up considerably in the last 12 months. Since the program started in 2011, Amazon has loaned $3 billion to third party-businesses; $1 billion of that total came in the last 12 months alone.

Why does any of this matter to lawyers and bankers?

The answer is that Amazon is unlikely to be content with this in-house program. Amazon’s lending so far has been focused on small business loans from $1,000 to $750,000. This lucrative niche is helping Amazon learn the ropes in the space, and the firm will probably move to offering loans to a broader audience in the future. Amazon has a very low cost of capital compared to most other firms, and it has embraced data analytics in a way that is almost unparalleled across most industries. For all of the data analytics focus of Wall Street, most business lending is still distinctly 20th Century, at least based on my experience with the industry.

This matters for a lot of attorneys. Amazon is all about cutting costs to enable lower prices for customers, and they would likely bring that same focus to a broad lending platform. This would almost certainly mean lower fees for attorneys, or possibly borrowers forgoing an attorney altogether in favor of boilerplate documents that Amazon could use. That has significant implications for any attorney involved in finance. Moreover, imagine what would happen if Amazon moved into lending to consumers for housing; the traditional attorney-led closing process for buying a house could disappear.

Some of this might seem far-fetched. After all, Amazon would have only incremental share in any lending market it chose to enter. Yet, despite small market share, Amazon has tremendous stature in any industry it enters. Grocery stores and their shareholders are not panicking about Amazon’s current sales; they are panicking about what Amazon’s share might be in the future, and the broader industry effects Amazon might engender. The same situation could play out in lending. For those who remain skeptical, ask yourself – a decade ago, did you foresee Google becoming a real player in the car market?

Whether Amazon ultimately enters the financial markets or not is one issue, but even if they don’t, attorneys should still pay attention to the company. Amazon is demonstrating an ability to upend a very traditional and staid business that hasn’t changed much in decades. While the business in question is the grocery store, the same description could be said to apply to the law firm as well.

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The legal markets are ripe for disruption from litigation finance, the application of Big Data to the law, and from changes to legal marketing practices – all topics that I have written about previously. Come what may from Amazon or others, the lawyers who succeed tomorrow,will be the ones who think about how to incorporate these new practices and ideas into their businesses today.

Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively through Morning Investments Consulting and writes for Litigation Finance Journal. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at [email protected].

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