DEEP DIVE on Amazon: Tech Giant in Financial Services
For the industry’s veterans, the threat of big tech (Google, Apple, Amazon, Facebook) offering banking services has existed since the early 2010s (post Financial Crisis). With numerous emerging tech startups finding a niche and experiencing rapid growth, it only makes sense that an established heavyweight with high user volume can pose a larger threat. However, consumers wary of personal data sharing have been reluctant to bank with these companies due to privacy concerns.
This isn’t to say that the tech giants have yet to test the waters with some type of financial product. In 2019, Apple launched its Apple Card with Goldman Sachs.
In 2020, Google announced a partnership to offer a checking account with Citi and Stanford Federal Credit Union. The actual leader in this tech group is Amazon, who has explored multiple sectors and services within banking over the last decade. From payments, lending, to insurance, Amazon has pushed as far as possible without licensing or an exclusive bank partnership.
Let’s take a look at the financial services strategy, product history, and global investment focus for Amazon as it continuously increases its scope and overall ecosystem beyond retail juggernaut.
AMAZON’S STRATEGY IN PROVIDING BANKING SERVICES
When it comes to Amazon, themes of convenience, access, and availability all come to mind. The company has become a global eCommerce force in offering services, tools, and resources that enable consumers to buy more products faster and at lower prices.
This same vision has mapped over to its financial services strategy with a focus on consumers making recurring purchases AND merchants providing more products for sale.
The specific goals boil down to: consistently building the merchant base on Amazon, helping these merchants sell more, increasing consumer traffic making purchases, and enabling these shoppers to spend more. The combination of financial services (and approach) to make this happen isn’t as important as the the final outcome. As a result, Amazon has not had the need to become a full fledged bank — just layer in features and functions from partnerships or fintech investments.
The giant retailer essentially molded its own version of a bank for benefit of its merchants and shoppers. The only piece left is to hold customer deposits in its own book. In an ecosystem of recurring transactions and spending, there’s minimal gain in accruing deposit interest as funds are fluctuating in and out of accounts. Merchants quickly use revenue from sales to buy more inventory or offset costs, and consumers spend on an as-needed basis (many on credit cards) without pre-funding an account. At this time, there’s no need from Amazon to incentivize its shoppers or merchants to hold balances since this would increase user friction and detract from its core business as a buying/selling marketplace leader.
TIMELINE and ROADMAP BY PRODUCT SECTOR
Amazon is known to be ambitious and experiment with markets and services before fully committing to a product vision. Financial services has been part of its process in figuring what works and what doesn’t for consumers and businesses across the globe. From payments to digital wallets and lending, the company has pushed deep in boosting online shopping through banking.
Amazon Payments
The payments sector has the most aggressive approach by Amazon when it comes to services and infrastructure. This makes total sense as one of the global leaders in eCommerce needs to ensure its payment experience and costs are being optimized as much as possible.
In the last decade, the retailer molded what has become Amazon Pay — a consumer digital wallet for purchases with online and physical (in-store) merchants. This product evolved in its current version in the last two years with the WorldPay integration (an intermediary processor between card networks and banks) in March 2019. The partnership offered customers an additional method of checkout with Amazon’s Quick Payment button. When FIS acquired WorldPay in July 2019, Amazon now had a path to core bank processing, which is necessary for offering banking services and cross-border payments (for its customers or other companies).
Amazon’s first move into the sector dates back to 2007 with “Pay with Amazon.” Since this initial launch, the company has been able to improve and expand its payment experience on its app and website. There was also early experimenting with peer-to-peer (P2P) services (after acquiring TextPayMe) and launching Amazon Webpay. Despite these early initiatives not taking off, key learnings, talent acquisition, and improving tech capabilities would help lead to Amazon Pay.
To incentivize merchants to switch from existing merchant services providers (such as Stripe), Amazon passes on savings in fees based on its commitment of payment volume to card networks. This strategy is having success internationally (in Spain and Europe) and expanded to new business areas such as travel, donations, and government billing.
Besides providing a service layer, Amazon also experimented with hardware terminals by providing a card reader solution (similar to Square but charging about 1% less in fees) called Amazon Local Register. Despite the lower price point, the product failed to take market share away from established competitors.
Voice and biometrics initiatives also mapped over to Amazon’s payment focus. Enabling Alexa to facilitate payment requests on Amazon Pay and expanding functionality in Amazon Go stores (and the “Just Walk Out” tech layer). Both reduce user friction and make it convenient for consumers to make purchases.
Even though the eCommerce giant is an industry marketplace leader, Amazon Pay is still a small player lacking adoption in the US. Leveraging rewards and Prime Day specials is a key strategy to increase user growth and volume of Amazon Pay, and hopefully shift a shopper’s existing behavior away from competitors.
Amazon Cash
The Amazon Cash product (launched in 2017) was created for users to deposit cash, which would then be used in the Amazon app for purchases (instead of cards). A customer can go into a physical store (such as 7-Eleven) and show a barcode (linked to their Amazon account), then hand cash that would be deposited and credited right away (without a fee). It offered a bridge to customers that didn’t qualify for a bank account (unbanked) to be able to make digital purchases without a card. Through a partnership with CoinStar (in 2018), coin deposits could also be made and credited to an Amazon account.
With this same theme of expanding services, Amazon launched PayCode — a product that allows for new customers to make purchases with cash and QR codes in developing countries. Regions in Africa, Southeast Asia, and South America have been able to pilot this program in partnership with Western Union (the company providing the infrastructure for payments). By visiting their local Western Union and depositing cash, a consumer can then make a purchase. This helps expand Amazon's coverage to unbanked internationally.
Kids and teens were also being offered services via Amazon Cash with a feature called Amazon Allowance. Minors now had the capability to have their own Amazon account (after verifying parental consent) to make purchases. Parents would fund these accounts and supervise spending. Unfortunately, Amazon pulled the plug in July 2020 on this capability. Still seeing potential in this younger user segment for Amazon Cash, the company invested in Greenlight (teen banking app) in December 2017.
There’s tremendous opportunity for the giant to continue its expansion of services to unbanked and underbanked globally with Amazon Cash and Paycode, and increasing partner locations to accept cash and coin deposits.
Amazon Lending
This sector is the most compelling for Amazon to expand its scope. CEO Jeff Bezos clearly disclosed its focus to work with banks willing to provide business credit, while Amazon bears the underwriting and credit risk. FOr consumer lending, thec company partners with banks (such as JPMorgan Chase) with credit cards.
The initial launch of Amazon Lending (in 2011) was focused on financing small businesses to sell more inventory in its marketplace. About 3 years, a loan program in partnership with Bank of America offered loans from $1K - $750K to certain business clients. Other lending relationships would follow with Goldman Sachs (in the US) and ING (in Germany). For credit lines through Goldman, fixed rates would range between 6.99% - 20.99% and can be disburses as needed (and paid back on a monthly basis). With ING, loans are issued between €10K -€750K to SMBs (CB Insights).
In October 2018, Amazon started to provide corporate cards (backed by American Express) to boost user growth of its marketplace. The card helps new companies struggling to gain credit from banks by evaluating revenue history. It includes discounts (for AWS and Prime) and useful tools to manage employee spending, monitor inventory, and provide expense insights and analysis. Other products in the Amazon Business Suite include an Amazon Prime Business Account, Pay by Invoice (a version of Buy Now Pay Later) and a revolving line of credit. As its base of businesses increased, out-of-netowrk payment costs will be minimized due to its closed-loop marketplace.
On the consumer side, Amazon has focused on exclusive card offers and partnerships with higher perks for its Prime members. Incentives for spending more on Amazon increased customer loyalty and retention. Examples of card products include:
Amazon Prime Store Card (via Synchrony Bank) offered 5% cash back on Amazon purchases; launched in 2015; a similar card with less rewards is available for non-Prime members;
Amazon Prime Rewards Visa Signature Card (from Visa) awards Prime members 5% cash back at Amazon & Whole Foods, 2% cash back at gas stations / restaurants / drugstores, and 1% cash back on other categories; a similar card with less rewards is available for non-Prime members;
Amazon Reload is debit card for Prime members that can be topped up with funds from external bank accounts; it includes 2% cash on Amazon purchases;
Amazon Credit Builder (via Synchrony Bank) helps customers in the unbanked / underbanked clients with poor (or no) credit boost their credit profile through a secured credit card. Users put up a one-time security deposit (between $100 - $1K) which represents the card’s limit. Payment history is reported to the credit bureau and the deposit goes back to the user at time of account closure (and balances owed being cleared).
Overall, the business focus for lending is in facilitating a merchant’s ability to sell more products and continue to deepen their overall financial relationship (with tools and services). For consumers, it’s centered on improving their ability to shop through card reward programs and improving their credit standing.
International Market Strategy
Similarly, Amazon is aggressively expanding internationally in emerging markets. With similar efforts in payments, transacting in cash, and lending, the company is increasing adoption across Mexico, South America, and India. The lack of banking and heightened mobile adoption create an opening for digital-first financial services that serve non-banked users. An easy to use payment experience AND non-car purchase options are key growth strategies abroad.
In India, Amazon and other retailers are experiencing stunted growth due to regulations prohibiting foreign ecommerce companies from holding inventory OR working with local firms (through a joint venture), which was decided in December 2018. Companies had to remove items being listed and alter seller arrangements to fit with new guidelines. Earlier this year, the government mentioned new guidance further prohibiting foreign retailers from owning a percentage of parent companies — Amazon has existing equity agreements with some of its existing sellers in India, which would need to be changed.
Cash is still predominantly used in Mexico for purchases, which provides Amazon an opportunity to turn offline transactions into digital buying. QR codes started to be used (starting in March 2019) in conjunction with the country’s central bank. By October, more than 33 banks were part of the program.
New partnerships in South America are building a foundational structure for cards and other services in countries like Chile, Colombia, Argentina, and Peru. Pilot programs to pay in pesos, via cards with interest-free installments, and local payment methods are up and running. Consumers are now able to make purchases at Amazon with other options besides PayCode.
What comes next for Amazon in banking
Without obtaining a charter or a full bank partnership, Amazon has played the field when it comes to financial services in the last decade. The rumor of Amazon becoming a licensed deposit institution still persists. The company has shown an interest in bank account information and proprietary cards since the early 2000s with the patents its registered. The trigger will likely be bank rates earned on customer deposit — most banks today offer customers near 0% (due to current Fed Funds Rate). Deposit interest would be a new revenue stream and provide merchants and shoppers more benefits to bank with Amazon in the future.
Amazon also has its AWS (cloud infrastructure platform) that enables modern-day core banking and file processing. Once the company partners with a bank (or becomes a bank) that can hold funds in user accounts, it can deliver a Banking-as-a-Service (BaaS) program. The speed and security would be an improvement over legacy structures of traditional banks. Amazon would become a threat in the BaaS sector to both banks and service providers.
Regardless of their roadmap in the next year, Amazon has no signs of slowing down when it comes to leveraging financial services to expand its core business. The company has a willingness (and capability) to experiment both in the US and abroad when it sees an opening, and compete with existing leaders in payments, lending, cards, and banking. Once Amazon does decide to formally enter the bank arena, fintech startups and established institutions will need to react quickly to protect their customer base and deposit share.
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