Will Amazon Spell the Death of Traditional Finance?

As the digital revolution continues to disrupt the status quo of numerous industries, the demise of traditional finance is impending. The recent surge in popularity and accessibility of cryptocurrencies, for example, has many large financial institutions worrying about the future of the financial sector. But the origin of major disruption may come from another source: Amazon.

The e-commerce giant has disrupted traditional sectors at an unprecedentedly rapid pace. What started as an online bookstore just two decades ago has transformed into the largest retailer in North America, having surpassed Wal-Mart in 2015. Amazon is the fourth most valuable public company in the world and the largest Internet company by revenue in the world. In addition to disrupting traditional brick-and-mortar retail, Amazon has entered into markets including music streaming, television shows, sports goods, jewelry, beauty products, and even healthcare – continuously applying its extensive infrastructure and services to new industries. Since 1998 Amazon has made upwards of 85 acquisitions across various sectors, with its $13.7 billion acquisition of Whole Foods in June 2017 being the largest. In addition to throwing the grocery industry into disarray, the Whole Foods acquisition represents another step in Amazon’s quest to impact every aspect of consumers’ lives. Part of what has made Amazon so successful is its loss leader pricing strategy – an aggressive pricing strategy in which a firm sells selected goods below cost to attract customers who will make up for the losses on highlighted products with additional purchases of profitable goods. It is a risky approach, but has paid off immensely. Following their acquisition of Whole Foods, Amazon slashed prices considerably, causing large chains including Costco to lose a combined $12 billion.

While it may seem that no industry is free from Amazon’s threat, investment bank Morgan Stanley believes companies that sell unique or less profitable goods, industries with heavy regulation and large contract negotiation requirements, and products that require copious amounts of customer interaction, are generally Amazon-proof. Examples include dollar stores, restaurant chains, railroad companies, telecom, and the financial sector. Traditional finance is pegged as Amazon-proof due to the strict regulations surrounding the industry. However, Amazon may have found a way around that, as it is discussing a potential partnership with JP Morgan to offer its customers bank accounts. This partnership would unite America’s biggest bank and biggest ecommerce platform. While the partnership seems unforeseen, JP Morgan and Amazon are in fact already partners in other areas. Last month the pair joined forces with Berkshire Hathaway to create a not-for-profit healthcare company (a joint effort to reduce health care costs), while Chase, JPMorgan’s retail banking arm, issues the Amazon Prime Rewards Signature Card. Although a final product could include an Amazon-branded account, it would not involve Amazon becoming a bank. Since Amazon is unable to make loans by law, it will have to turn to big banks to offer such a service. Capital One has also been mentioned as a potential partner.

Amazon is looking to offer a checking account for lower income consumers and younger consumers who currently lack banking accounts. This would mean accepting clients with lower FICO scores (credit score system), making the Amazon-branded accounts easier to set up than with a traditional bank. The details are still pending (unclear whether customers would have the ability to write cheques, directly pay bills, or access the bank’s network of ATMs), but the intention is there. The strategy could help Amazon lower fees it pays to financial firms and give it a bigger window into customers’ income and spending habits.

The potential for demand is large: 60% of bank customers in the US are willing to try a financial product from tech groups they already use. Interestingly, Amazon (along with Paypal) is the brand consumers would trust the most with their money, notably ahead of Apple, Google and Facebook. Additionally, Amazon has prior experience in the financial arena. Amazon Pay allows consumers to pay for products on third party sites without reloading their credit-card information. More than 33 million people use the payment system, and Amazon has lent more than $3 billion to small businesses that sell on its platform since 2011. The ecommerce giant also offers a pseudo-debit card, Amazon Cash, that lets consumers add cash to an Amazon wallet and purchase items online without a credit card. Last year, Amazon waded into the deposit business with Prime Reload, which gives customers a 2% bonus when they use their debit card to move funds from a bank account to an Amazon balance that they use for transactions on the website. The move means Amazon paid less in fees to card networks like Visa and Mastercard. Amazon can collect deposits so long as it's not issuing loans (comparable to Apple pay).

Such a venture would add yet another entity to Amazon's ever-expanding portfolio, and if the company can turn financial products into mere features of its all-encompassing ecosystem, it would have a commoditising effect on the banking industry. An Amazon branded bank account would be another link in the retail juggernaut’s extensive web of ways to impact and influence every aspect of people’s lives. Amazon would also be able to further grow by cross-selling into existing J.P. Morgan customers. If successful, this could lead to more similar initiatives down the road. Focusing on the consumer and the finance vertical, especially through partnerships, appears to be the next step of adding to the Amazon empire. The e-commerce behemoth is open to teamwork, especially since the company faces regulatory barriers should it wish to lend beyond its pool of Amazon sellers. Recently, Amazon has been expanding more into partnerships, such as with Nike as of June 2017, as opposed to a purely acquisitions-based approach. 

While U.S. policy makers have for years been skeptical of letting big companies like Amazon move into banking services, that may be changing. Keith Noreika, the former acting Comptroller of the Currency, said last year that it is time to reconsider whether the traditional separation between lending and retailing should be maintained. This change would take time, however, and despite the possibility of tech giants like Amazon venturing into finance on their own, partnerships are the more likely path – at least for now. 

All values are in USD unless otherwise noted