Amazon may be taking the plunge into banking, and by any
estimation, it’s a game changer for the industry. News reports that it
seeks a bank for a cobranded, mobile-friendly checking-account-like
product initially targeted to young adults in the US follow earlier
moves into financial products. The company has a cobranded credit card
offered by Chase, and Amazon Cash allows customers to deposit cash
directly to their Amazon accounts from more than 10,000 retail locations
throughout the US. In addition, Amazon has loaned more than $1 billion
in the past year to small merchants selling online.
Amazon is now talking with big banks, including JPMorgan Chase &
Co. This latest move raises urgent questions for retail bank and other
financial services executives—and not only in the US:
- Why is Amazon doing this, and what is likely to come next?
- Will Amazon succeed, and how concerned should banks and other financial services firms be?
- What should they do about it?
Why Amazon would bother
The checking and debit account components of a banking relationship
are notoriously unprofitable, especially for a fee-free model aimed at
younger customers who have little money to keep in the account. Most
banks don’t relish serving this part of the market, but Amazon has
several good reasons to do so.
Amazon has spotted a segment of customers that it can serve better,
and the company can worry about making money later. Start with Amazon’s
mission statement: “Our vision is 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.” It can afford to go after this
previously unprofitable segment in part because it will be able to
transform the economics of banking; Amazon does not have the burden of
an expensive branch and contact center network, which we estimate
comprises roughly 40% of a North American retail bank’s costs on
average. Instead, Amazon could steer new customers to “just ask Alexa,”
its voice assistant on the Echo device. The company can also avoid a lot
of the customer acquisition costs borne by most direct banks because it
already has digital relationships with so many Americans. Given these
two advantages, Amazon’s incremental costs will be almost nil.
Amazon will not legally become a bank. Rather, the bank it partners
with would probably hold deposits, while Amazon would design and manage
the customer experience and distribution. The arrangement allows Amazon
to avoid dealing with bank regulatory compliance and managing the
balance sheet. Amazon might generate revenue through fees and royalties
from the bank partner, though the more valuable financial benefit will
likely be the savings Amazon realizes from direct access to customers’
checking accounts. Amazon could make it easy for customers to pay right
from that account instead of with their credit cards, which impose an
average 2% interchange fee for most transactions on Amazon or its
third-party merchants. Bain & Company estimates that Amazon could
avoid more than a quarter of a billion dollars in annual interchange
fees in the US alone. This estimate is based on three assumptions:
Amazon achieves the bank account penetration our consumer research
suggests; 15% of its e-commerce customers pay directly from their Amazon
bank account instead of through a credit card; and those customers
spend at the same level as Amazon Prime customers.
Beyond that direct cost saving, we could imagine Amazon’s banking
services growing to more than 70 million US consumer relationships over
the next five years or so—the same as Wells Fargo, the third-largest
bank in the US. The estimate assumes that slightly more than half of
Amazon’s estimated US customer base chooses a financial relationship
with the firm—the same share of people who said in our new global survey
that they expect to buy a financial product from a major technology
firm over the next five years. Of course, the pace of customer sign-up
will hinge on competitive pricing and a distinctive experience so that
positive reviews spread quickly.
Once Amazon has established a cobranded basic banking service, we
expect the company to move steadily but surely into other financial
products, including lending (both purchase financing and debt
consolidation), mortgages, property and casualty insurance, wealth
management (starting with a simple money market fund to hold larger
balances), and term life insurance. Amazon would follow the typical
order of needs for its target customers as they age and move through
different life and family stages. Underpinning this all, Amazon has a
massive data platform and continually refines its ability to personalize
offers and communications. Online shopping patterns already tell Amazon
what it needs to know about customers’ life events, from getting
married to having children to buying a house, which will allow the
company to offer relevant financial services products—and information
from those products will further increase the depth of the data.