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Advancing into extended financial services – where banks fail, Amazon delivers

  • Do you have a bank account? A what?
  • Amazon’s partnership with the major players in the financial sector is a well-thought-out business move
  • Extended financial services: where banks fail, Amazon delivers
  • First steps into the real world: shop in-store with your Amazon Pay account

Amazon is the king of online retail. Always a step ahead, with both feet on the ground, this e-commerce giant seems to know all the right moves, ensuring it keeps that crown firmly on its head. Amazon has won that throne through continuous efforts to enhance customer experience by delivering new tools and services. Attentive response to current trends was and continues to be critical to its success, especially when it seizes opportunities that its competitors dismiss.

Amazon understands what traditional vendors don’t – the habits and preferences of digital natives. And this new generation of consumers is demanding change. Their affinity for money transfer services like PayPal is encouraging Amazon to expand its financial services and products beyond the bare-boned offerings it now provides. And when a player the size of Amazon decides to make waves in the finance sector – given that its value is more than the Bank of America and JP Morgan combined – you can bet the industry is watching carefully.

Could this spell the end of traditional banks? Will there come a day when you’ll complete your transactions through the Bank of Amazon? We don’t think so, and it doesn’t look like Amazon intends to compete with traditional institutions. It’s not scared off by the risk; business is risky, too, after all. But banking is accompanied by regulatory limitations that are staggeringly complicated, and if it can monopolise the sweet spot before those regulations kick in, partnering with traditional banks where necessary, these extended financial services might mean a huge pay-day.

Do you have a bank account? A what?

Amazon is well-aware that younger generations, essentially digital natives, are rethinking traditional habits and services. ATM cards were novelties for their grandparents, and credit cards are more their parents’ kind of thing. They’re looking for mobile payment options, and have as much trust in Amazon or PayPal as Visa or Wells Fargo.

Amazon’s been paying close attention, and it’s aware that a lot of young consumers don’t even have a bank account, which makes it difficult for them to shop online. By enabling them to access Amazon’s online marketplace, the king of e-commerce is shopping for a new generation of customer, enabling their emergence rather than waiting for it. That’s why it’s partnering with JP Morgan Chase & Co. and Capital One to explore “a checking-account-like” service. Not a bank account, and thus not subject to the regulations that govern them, Amazon’s looking instead at something like the Sears cards of yore, basically a one-store debit card.

Amazon’s partnership with the major players in the financial sector is a well-thought-out business move

Should this worry commercial banks? Not really – at least not for now. Justin Post, an analyst from Merrill Lynch, reiterated that Amazon’s intention isn’t to shake up the firm ground of the financial sector, but to expand its own e-commerce business on top of it.

“We think Amazon’s aim with expanding its financial offering is less about disrupting the financials sector and more about increasing engagement on its own marketplace,” says Post. “While there may be some ability for Amazon to reduce the fees it pays to banks and payment processors by creating a closed-loop prepaid debit card type of product, we think that Amazon’s primary motivation would be to attract younger and underbanked customers that otherwise would find it difficult to shop online.”

And teaming up with big players in the financial field can help avoid regulatory issues. For instance, partnering with Bank of America was a shrewd move since it buffers risk and allows them to “access capital specifically to provide credit to more merchants so they can acquire inventory”. That’s how you work both ends of e-commerce, increasing revenue by pumping money into your best business partners and capturing that sales boom on your platform at the same time.

In short, Amazon knows that millennials aren’t the only untapped market, and it’s looking to innovative financial services as another way to earn money.

Extended financial services: where banks fail, Amazon delivers

Starting a business is painfully difficult, and as many people with good ideas soon discover, an entrepreneurial spirit isn’t enough. The need for significant initial investments drives people toward banks and business loans, but these often deliver nothing more than bitter disappointment. In fact, a whopping 80 per cent of those who apply for a bank loan get rejected, stifling small business development. That’s where Amazon sees an opportunity to provide much needed financing. For millions of sellers operating through Amazon, many of whom are small companies, Amazon Lending could be an answer.

But this service is invitation-only, which means that a loan is given only when Amazon finds a registered Amazon seller to be ‘a good fit’. In other words, the seller needs to meet certain eligibility requirements, a status that depends on a solid sales history and excellent customer service ratings, among other things. Amazon knows that investing in business conducted through its e-commerce network means increased sales and interest fees, creating profit at both ends of the e-commerce process.

And don’t think Amazon is thinking small business means small-scale. In 2016 alone, Amazon Lending provided $1 billion in financing. These are short-term loans with a repayment period of 12 months, and interest rates ranging from 6 to 16 per cent. And while this might seem an offer that’s too good to be true, let’s not forget that these businesses can operate only through the Amazon marketplace. So while this is a great option for starters, those with bigger appetites or different visions still need to look to traditional banks.

First steps into the real world: shop in-store with your Amazon Pay account

And Amazon knows that brick-and-mortar still matters, even as its being reshaped by online shopping. Millennials love the fast and frictionless payment of e-commerce, and while no one likes to wait line at the bank or stand at the check-outs, these digital natives simply won’t do it. And as e-vendors like PayPal demonstrate, alternatives have already gained their trust by enabling seamless shopping.

Girl with laptop and credit card
Millennials love the fast and frictionless payment of e-commerce, and while no one likes to wait line at the bank or stand at the check-outs, these digital natives simply won’t do it.

That’s something that Amazon recognises, which is why it launched Amazon Pay in 2007. Essentially an alternative to PayPal, Amazon Pay allows online businesses “to add a button on their websites’ checkout pages that let shoppers pay via their Amazon account info”. Charging the same fee as PayPal, it offers the same seamless convenience. And recently, Amazon upgraded the service with a new feature called Amazon Pay Places, looking to gobble up the competition in the real world, too.

Now, Amazon’s threatening its rivals with brick-and-mortar mobile payment options, partnering with the restaurant chain TGI Fridays to enable POS service through the app. That’s the first step into the real world, and if it goes as planned, expect Amazon to roll out more physical options, probably first at Whole Foods, the supermarket chain it bought last August. If these initial experiments pay off, they’ll be the first of many, and we can expect a new payment ecosystem to emerge, potentially challenging Visa, MasterCard, and American Express.

It’s safe to say that by offering bank-like financial services, Amazon is demonstrating its clear-eyed vision. Responding to current (and future) trends by enabling new customers to shop its platform means more revenue, short- and long-term. The financial sector can take a breath and relax for now, because Amazon isn’t planning to join the club. But if that changes, and the e-commerce king decides to accept the regulatory burdens of banking, it’ll likely upset the industry, disrupting the status quo there just as it has in retail.

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