Amazon’s Foray In Financial Services
From Retail Shopping to Retail Banking
As e-commerce giant Amazon grows in retail, computing, logistics, and more, Amazon has taken aim at the arena of financial services to lower transaction costs, increase customer spending, and increase profits. While still small in comparison to the >$5B shipping costs that have driven widespread product changes, this campaign has grown in the past few years, but is only poised to balloon as Amazon aims to become ubiquitous in the lives of their consumers.
Increased Transaction Volume
Independent of developments Amazon is making in financial services described further in this piece, I’d like to consider a driving force for Amazon — a rising volume of transactions that is likely bringing with it an already large and yet still rising cost for financial transactions. My underlying assumption is that the small base fees which credit card companies charge (Credit Voucher Fees, Kilobyte Access Fee [yes that’s a thing], and more) add up independently off the credit assessment fees which are usually in the form of a percentage.
Many of Amazon’s innovations actually contribute to this problem:
- Amazon Dash: Though originally released as a bar-code scanner, Dash is better known for the one-button ordering of household goods such as detergent and toilet paper. Dash encourages customers to make many more purchases overall by removing the instinct to ‘bundle’ transactions.
- Alexa: With the Amazon Echo series of smart speakers, Amazon bundles in the ability to seamlessly order anything online (off of Amazon.com of course). Again though, this convenience only serves to increase the number of transactions that customers are likely to make.
- Amazon Go: I still think ‘Gro’ would have been a great name here… Regardless, as Amazon pushes from online retail to physical retail in the form of a supermarket, there’s no doubt that transaction fees will start to fall under scrutiny — these transaction fees were enough for Costco to end their 16-year exclusivity with American Express.
Together, these incentives to review transaction costs are already high; that said, entering financial services as a player (as opposed to renegoitating as Costco did) is much more likely given the first steps Amazon has already taken in that direction.
Consumer Lending
Consumer financing has long been how many retailers — particularly those keen on selling high priced items such as electronics, home goods, and automobiles — have encouraged spending by consumers. Further it highlights a growing portion of revenue for corporations. This was particularly prominent within General Motors previously with GMAC (now Ally Financial, who is the U.S.’s largest auto lender by volume) and now with GM Financial, which earns nearly $6.5B in revenue in 2015.
To complement their monthly payment plan for select Amazon-sold and Amazon-made items, Amazon rolled out their Amazon Store Card backed by Synchrony Financial in 2014 alongside their existing partnerships with Chase for their Amazon Visa rewards card. Amazon’s own Store Card and Prime Store Card allows Amazon to exert more control over the terms of payment to further their financial services agenda.
Effectively, this allows Amazon to offer and experiment with a variety of financing options designed to increase purchasing on their site whilst also encouraging Amazon to invest in consumer lending practices to optimize their revenue.
This control allows Amazon to decrease the barrier to purchase large purchases such as laptops, TVs, and furniture online compared to retailers such as Best Buy, P.C. Richard & Son, and Ashley Furniture HomeStore who have been offering direct financing services for years. This will be important in order to push their offerings to a broader customer base: at $62,900 per annum in 2015, the average income of an Amazon shopper has nearly 13% more income than the US median; the further downmarket Amazon targets, the more flexibility they will need to allow with financing and payment types.
Business Lending
Beyond consumer lending, Amazon started targeting business loans with their Amazon Lending platform in 2012. As of 2015, Amazon has made hundreds of millions of loans to sellers on their platform. While PayNet president William Phelan claims that retailers don’t have enough data about the markets in which businesses operate, Phelan doesn’t thoroughly address Amazon’s main advantage — selection. Suppliers can’t apply to Amazon Lending loans, Amazon reaches out to them instead. All of this is tangential to Amazon’s core mission though: reinforcing their e-commerce sales. When Amazon lends to their distributors, they’re likely to have a higher stock of a greater variety of items — all which help aid increase consumer sales.
“When we sell a Golden Globe, it helps us sell more shoes.” — Jeff Bezos
Payments
In a report on Online Retail, ChannelAdvisor found that Amazon Payments was next behind PayPal in non-plastic payment methods. Pay with Amazon, the 2013 incarnation of Amazon’s payment services (which they’ve been pushing in one form or another since 2008) has been outpacing Apple Wallet and Samsung Wallet in growth and is aided by their unparalleled ecosystem — earlier this year, Amazon started a partner program allowing merchants to add Pay with Amazon as a payment option on their retail sites.
According to RBC, Amazon is poised to earn more than $500M in 2016 from Payments; though this is still pale in comparison to the $9.24B revenue for PayPal in 2015.
Conclusion
While less glamorous than drone-based shipping, Amazon’s ubiquity and the massive transaction volume it processes (which I estimate to be ~1.6B in 2016), puts it in a unique position to gain a massive competitive advantage for cost savings. Add in a $20B cash reserve that can be put towards a lean system that is built with modern technologies (blockchain, robot/AI managed portfolios, {insert buzzwords}) and a compliance focus, combined with the fact that Amazon doesn’t have a legacy banking infrastructure to maintain, and Amazon can quickly become the biggest dog in town.
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