Should Banks Fear Amazon (or just bald guys)?

Amazon has been making headlines again, as speculation continues around Amazon’s interest in “becoming a bank.” The furor reached a fever pitch as Bain & Co. estimated that Amazon could gain 70 million banking customers in the next few years! For comparison, that is roughly the same size as Wells Fargo, and nearly as big as the estimated 75-80 million Prime customers. While there is certainly hype and fear around Amazon entering yet another industry more deeply, it may be more valuable to take a step back and see how a banking strategy connects to Amazon’s core business for insight into what may come next.

For example, a lot of noise has been made about Amazon’s facilitation of over $3 billion in small business loans (despite loans outstanding roughly staying flat in 2017). When looking at the context of the entire Amazon business model, the lending arm makes much more sense as a way to capture and keep merchants who sell their products on Amazon, and giving merchants more capital to fund inventory to sell through Amazon. Amazon also holds a strategic advantage on its merchant loans since it sees all the data in regards to their sales. The vast majority of these borrowers are highly unlikely to qualify for traditional bank financing, so this is not much of a threat to banks unless Amazon decides it wants to forgo its competitive data advantage and disconnect the lending from its function of supporting the core business model.

This framework helps explain other moves that Amazon seems to be making in the financial services industry. With regard to the breathless coverage of a potential “Bank of Amazon”, a debit card/checking account alternative is more likely to follow the lending model described above than any desire to become a real bank.

For example, let’s look at the prepaid debit card (Amazon Rechargeable) that just launched in Mexico. Mexico uses more cash than any other country in the Americas – nearly 90% of consumer transactions are still in cash, which accounts for over 25% of GDP. While the reloadable card may be a good test for Amazon in launching more payments products, it more likely serves the function of increasing the addressable market for Amazon by allowing customers in Mexico to convert cash into money that can be spent online.

Of course, Wal-mart has already been working a similar angle for 5+ years in the US with the Bluebird card through a partnership with American Express. Bluebird is explicitly not a bank account, but is a prepaid/checking account alternative designed to reach the 10 million unbanked/underbanked consumers in the US. It is likely a matter of time before Amazon rolls out a prepaid/checking account alternative in the US, but don’t expect it to open the floodgates to new primary checking account relationships.

Amazon could also take the same approach Target did by building an ACH card like the Target REDcard, which could save Amazon $250MM in interchange fees, according to some estimates. This card setup would bypass the expensive card networks and use the bank ACH rails to transfer money from the consumer’s primary bank account to Amazon. This is not a checking account and doesn’t require Amazon to become a bank, so Amazon won’t be “banking” or adding primary checking account relationships. Amazon accounts for roughly 4% of all US retail sales, so even massive adoption won’t significantly affect bank interchange revenue, and there won’t be a mass defection of customers, either. This approach would benefit Amazon without really affecting the average bank (and the payment networks have plenty of revenue anyway 🙂 ).

In the end, I do expect Amazon to continue to launch a variety of financial/payments products, but there is no need for Amazon to become a real bank. Given the many workarounds and partnerships Amazon could employ, I believe the Pareto principle applies here. Amazon can get 80% of the benefit of being a bank, with only 20% of the effort, and still offer customers more financial products that support the core retail business and provide additional revenue streams. And they won’t need 70 million banking customers for that…