Financial services in the age of Amazon
TLDR: It seems that Amazon is testing out new revenue + cost savings models in a low-risk manner by partnering with existing financial institutions, to potentially build the bank of the digital future. And other random thoughts.
In 1997, Amazon’s vision was: “to be the leading online retailer of information-based products and services, with an initial focus on books.” This soon expanded to “be earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.” Today, Amazon’s vision is simply: “We seek to be Earth’s most customer-centric company”. In a day and age where financial products are increasingly moving away from physical branches to new digital experiences, it’s not a stretch to believe Amazon could quickly make moves into financial services. For many years, banks have been trumpeting the horn that large tech companies are starting to encroach into the financial space and it looks like we’re starting to see the first few big steps.
Amazon is reportedly looking for a banking partner to launch some sort of checking account product, with the key word being “banking partner”, rather than say a banking charter or license. Over the past years, Amazon has entered the banking market through a series of partnerships, primarily focused around supporting Amazon’s core business. For example, in just the last few years, Amazon has launched or announced:
- A co-branded credit card with Chase in early 2017 after testing demand with a co-branded card by Synchrony starting in 2015
- A cash deposit service that enabled customers to deposit cash directly into their Amazon balance in thousands of retail locations in the US
- An SMB lending business in partnership with Bank of America, lending over $1B in the past year to SMB’s selling products online
- A monthly installment payment plan for Amazon products
- New health care initiative in partnership with JPMorgan and Berkshire Hathaway
Offering a customer retail checking product through a bank partnership allows Amazon to outsource all the balance sheet, compliance, and regulatory requirements to a bank, while testing out the business model in a relatively risk free environment.
In the short run, if Amazon is able to get a significant number of users to use an Amazon checking account to buy from Amazon, they’ll be able to shift from paying for interchange (% of every transaction) to flat fee bank payments (cents per transaction) savings hundreds of millions of dollars. Amazon would also potentially be able to open the account to markets under-penetrated by credit, such as low income or younger generations, thus expanding the customer base for Amazon prime. Additionally if Amazon is able to offer unique discounts for their products, there’s an interesting opportunity to create a cash-back reward program but in an debit/ACH cost structure environment.
Amazon has also several products in market that immediately deliver differentiated features through unique distribution channels for a consumer financial product. Although I’m still a bit undecided if voice is really a killer app for financial services, Alexa is by far the market leading platform to build on. Amazon also has existing digital relationships with millions of Americans (Tens of millions of Amazon Prime subscribers), so distribution and acquisition is already solved from the get go. Amazon could also move increasingly into the processor space by expanding the user base for people that would use Amazon Pay online and brick and mortar, thus competing with the likes of Square, Stripe, Braintree, etc.
Where things get interesting though is what happens in the long term. I think the big question is whether Amazon wants to offer up its balance sheet and go down the arduous road to obtain a banking license, or continue down the partnership path. I think there’s even the possibility that Amazon takes partnerships to the extreme to develop some sort of marketplace for financial services. Is it possible for Amazon to be the AWS of financial services, offering balance sheet and financial infrastructure for any financial product that’s relevant to its consumers + businesses?
Ben from Stratechery has a great framework on Amazon that’s been distilled down from analyzing a variety of Amazon’s business: “Amazon’s key to profitability is having a first-and-best customer able to utilize the massive investment necessary to build the service out in the first place.” For example, for Amazon’s fulfillment centers, the first and best customer is Amazon’s e-commerce business where:
- “E-commerce distribution has massive fixed costs but benefits tremendously from economies of scale
- The cost to build-out Amazon’s fulfillment centers was justified because the first and best customer is Amazon’s e-commerce business
- That last bullet point may seem odd, but in fact 40% of Amazon’s sales (on a unit basis) are sold by 3rd-party merchants; most of these merchants leverage Fulfilled-by-Amazon, which means their goods are stored in Amazon’s fulfillment centers and covered by Prime. This increases the return to scale for Amazon’s fulfillment centers, increases the value of Prime, and deepens Amazon’s moat”
If Amazon went direct to the end user (whether that be consumers or businesses) and obtained a banking license, could building up a balance sheet be a potential large source of revenue or cost savings? Amazon’s “first and best customer” could be dependent on its ability to drastically reduce its own cost of capital if everything is funded from balance sheet, rather than having to go to a bank and draw down from a credit facility or raising debt in the market. This does seems to be a very big “if” though, especially since historically the market has extended Amazon very favorable rates for debt.
Is the future of Amazon financial services potentially a marketplace then? Going back to Amazon’s vision to build a place where people can find anything to purchase online, I could imagine a world where users are able to select from a wide variety of financial products offered by banks + fintech companies, using their Amazon bank account as the central hub. Amazon could then take a platform fee for access to consumer distribution + their funds, similar to Apple’s App Store revenue model.
I believe the bank of the future is one that fully embraces a platform model, enabling products to be easily built on top of existing services (huzzah for APIs) and shifting to a platform revenue model for access to balance sheet + users. It seems only Bezos and his execs know exactly where they want to take financial services at Amazon, but no matter what, banks and fintech have been officially put on notice.
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