Amazon a Bank for Itself

Over the years, Amazon has become one of the most valuable companies in the world. The company has been continuously building a product line to support its goal of increased participation in the Amazon ecosystem. In 2021, it was leading the e-commerce platform in the US and held a record of consistent sales growth. With an annual growth of 22% ($83 billion) from 2020 to 2021 Amazon confirms its place among the five Big giants of Tech.

Seemingly unreachable by competitors or worldwide crisis such as the COVID-19 pandemic, the company is armed with a very loyal and big customer base, virtually unlimited cash, and unending data. With this, Amazon has a good opportunity to threaten traditional banking.

Source: How do Big Tech Giants makes their billions. Visualcapitalist. 2022

In 2021, Amazon generated $470 billion in total revenues, where online stores account for 47% of the company’s revenue and slightly decline in participation compared to 2020 when it represented 50%. Differently, revenue from third-party seller services increased slightly to reach 22% of total revenue from 19% in 2020 and followed by Amazon Web Services (AWS) with 13% share of the company’s revenues.

Geographically, in terms of revenues the U.S. keeps been their main source of income as it represents 67% of total revenues, followed by Germany (8%), the UK (7%) and Japan (5%). Rest of the world becomes more relevant now than a year before as it represents the 14% share and increased from 11%.

Amazon the Banking Partner

In this article, we are going to focus first on the financial services offered by Amazon Web Services and then our attention will head onto Amazon Bank.

Amazon Web Services is growing at a robust pace. Amazon has a considerable advantage thanks to their Big Data. They know everything about their client so they would be able to offer well adapted services such as loans, insurance or wealth gestion.

Continuously differentiating themselves and adapting their innovation to the needs of tomorrow, the company has already been trusted by several financial services institutions such as Barclays, Monzo, Nubank, Starling, Allianz, Aon, Coinbase, etc.

Today, banks are partnering with technology companies of all sizes to deliver the latest innovations to their customers. These partnerships give customers access to new technologies delivered by a trusted partner. This trust is backed up by robust regulation and proactive oversight.

Indeed, institutions looking to reduce their cost and improve their resiliency look to be helped by the experience gained by Amazon and the tools they provide such as :

All graphiques above from : AWS Financial Services

  • Banks - face traditional and emerging risks in an increasingly complex regulatory environment. They benefit from AWS by loading compute-intensive work which will increase operational and cost efficiencies, backlogs are eliminated, time to market is speeded. Modernising core banking for banks represents lowering cost and the creation of more elegant customer experiences.

  • The payment industry - also benefits from AWS with its Payment Card Industry and Data Security Standards. Services and tools offer to help build deeper customer relationships by capturing customer interaction data, building innovative customer-facing channels, delivering a high level of personalisation. The industry has been transformed with real-time business decisions, processing global digital payments, increasing agility, innovating, and adapting to client expectations, scaling to meet unpredictable demands.

  • Capital Markets - firms are adopting AWS as well to discover new opportunities, rethink, and redesign operating models, and implement cost-saving measures that increase efficiency. It gives a foundation to leverage big data analytics by breaking down data silos, deepening business analytics, improving transaction surveillance and ease regulatory reporting. A new market is built thanks to data applications.

  • Insurance companies - must balance profitable growth against the burden of legacy IT. Moving data centres to services such as AWS allows to free IT budgets for transformation and growth, quickly launch new digital customer experiences, modernise/put-in more agile core systems, leverage data to take new approaches to identifying risk, deliver personalised products, and respond to regulatory changes. Insurers are moving to cloud-based grids to empower their teams with on-demand high performance computing (HPC). Cost is lowered and by using Artificial Intelligence and Machine Learning customers experience is improved, development of new innovations is sped-up.

We can conclude on Amazon Web Services by saying it looks to modernise legacy systems for both traditional banks and FinTechs for improved agility and scale, it intends to drive business growth by harnessing data and innovation and it builds confidence thanks to the most secure, compliant, and resilient cloud.

Amazon and Big Tech in Banking - Where are they today?

There is no doubt that big tech has changed how many of us live our lives. The way we work, shop, socialise, find and share information has been transformed by these technological powerhouses. They are steadily fortifying their market share in payments as a gateway into broader financial services. In a new world in which data, digital, and customer- centric capabilities are key to winning, it is reasonable to posit that big techs can transform the economics and power relationships within traditional financial value chains permanently.

In recent years, technology has fundamentally reshaped our economy and the way all companies interact with their customers. This wave of digitization, boosted by the pandemie, has touched nearly every industry, and banking is no exception.

Amazon and Big Tech players have penetrated the market in diverse ways by region. US Players for example extend propositions from payments, credit and current accounts and focus on serving banking institutions. Differently, Chinese players have higher penetration and wider offering across all services, even a further penetration supporting services for banks.

We also know that diverse regulation is impacting Big Techs across geographics. For example in Europe there is further impact on Big Technologic players as it is limiting the use they can make of customer data.

Bain & Company estimates that a banking service from Amazon could swell to more than 70 million US customer accounts within five years, equaling the size of Wells Fargo, the country's third largest bank. The 70 million figure assumes that Amazon forges a financial relationship with half of its customer base. Also, a recent global survey from Bain indicated roughly 50% of people expect to buy a financial product from a major technology company over the next five years.

A different survey from Cornerstone Advisors confirms that the idea of an Amazon bank account appeals to millennials. In all, 83% said that they would be open to banking with Amazon - even if it meant having to pay a monthly fee of between $5 and $10.

The Amazon Approach

Amazon remains very focused on building financial services products that support its core strategic goal which is increasing participation in the Amazon ecosystem and solving inefficiencies for its approximately 300 million active customers, 200 million Prime customers, 65 million Amazon Echo speakers were sold in 2021 and 9 million sellers worldwide (according to company data).

Amazon a bank for itself

However, the company isn’t looking to build a traditional deposit-holding bank. Instead, it is focusing on taking the core components of banking and using them to best support its merchants and customers. As a CB Insights study summarised, “In a sense, Amazon is building a bank for itself — and that may be an even more compelling development than the company launching a deposit-holding bank”

Payments were the first financial service Big Techs offered, mainly to help overcome the lack of trust between buyers and sellers on e-commerce platforms. Buyers want delivery of goods, but sellers are only willing to deliver after being assured of payment. Big Techs’ payment platforms currently are of two distinct types. In the first type, the “overlay” system, users rely on existing third-party infrastructures, such as credit card or retail payment systems, to process and settle payments. In the second, users can make payments which are processed and settled on a system proprietary to the big tech.

Big techs such as Amazon use their wide customer network and brand name recognition to offer money market funds and insurance products on their platforms. This business line capitalises on Big Techs’ payment services. Big Techs’ one-stop shops aim to be more accessible, faster and more user-friendly than those offered by banks and other financial institutions.

Co-branding strategies are helping Amazon and other Big players to leverage the capabilities of traditional banks and incumbents. They are steadily expanding their presence and fortifying their market share in payments as a gateway into broader financial services. Early this year Amazon decided to renew its contract with JPMorgan Chase, which means it will continue to issue the e-commerce company’s rewards credit card.

Amazon’s Prime Rewards credit card is one of the most preferred co-brand deals in the industry because its loyalty program offers unmatched perks and benefits. In fact, the program was estimated to have 150 million members in the United States.

For financial institutions, co branding strategies with companies as Amazon gives an instant audience from millions of loyal customers who often spend many billions every year for their purchases or availed services. With all that they can gain from the tie-ups, credit card deals are really valuable to all banks.

For now Amazon offers a range of credit and payment cards. The rewards cards offer a cash back for purchases made on amazon and on Whole foods market. The Amazon Store card has no annual fee, zero fraud liability, and 0% APR financing. Businesses can acquire an Amazon Business American Express card with a cash back on purchases made at Amazon businesses, and Whole Foods. They have access to business tools, travelling insurances and no foreign transaction fees.

One way or another, Amazon is likely going to use its vast data, distribution and enablement to change the way its customers experience banking.

Amazon already uses Just Walk Out technology, using computer vision, sensor fusion, and deep learning to enable shoppers to enter an enabled store, grab what they want and leave. Just Walk Out technology detects what products shoppers take from or return to the shelves and keeps track of them in a virtual cart.

Source: Amazon's Payment Adventures. Whitesight. 2022

While Amazon has had numerous product pivots and failures along its way, it still isn’t afraid to iterate as it moves from e-commerce to omnichannel enablement.

The US retail turned its sights to India by partnering up with Capital Float. The company has designed a collateral free credit facility for online sellers called Pay Later that helps them make supplier payments within 24 hours. It allows shoppers to get instant credit on the platform, and in just over a year’s time, the service boasted over 2 million customers and 10 million transactions with an almost 100 percent success rate.

Capital Float offers its buy now, pay later service on many popular online platforms in India, including that of the e-commerce firm. It has raised $50 million in a new investment following a strong growth in recent quarters.

In Germany, it partnered with Barclaycard to offer financing for purchases made through above EUR 100; teamed up with Nubank in Mexico to offer monthly payments without interest with the Nu credit card on sales at the website; and collaborated with Ebanx to allow Peruvian customers to pay for Prime Video services in Peruvian Sol.

Through a partnership with Affirm, Amazon introduced a pay-over-time option at checkout, and its agreement with PayPal meant that customers were able to pay with Venmo for purchases on the website as well as on the mobile shopping app.

Its constant strive for innovation was further reflected in the e-commerce platform’s decision to field bids to replace JPMorgan Chase as the issuer on its popular co-brand credit card that reportedly garnered interest from American Express and Synchrony Financial.

Amazon’s feud with Visa has been quietly brewing since September last year. Although a formal resolution is yet to be achieved, the reversal of this decision as posted on the company’s UK website on Jan 17th, seems to be a more suitable option, as the online retailer was poised to lose out nearly £1.4 billion from UK shoppers because of the ban.

Regulation is a key aspect holding back big techs into finance.

In the table we analysed Banks VS Big Tech and their competitive advantages and disadvantages across data, network and also the core business. In general, traditional banks have a competitive advantage to Big Techs as they have more reliable and long history of personal data, with high privacy importance. Large number of financial activities and services already provided, with a high understanding of navigating regulation.

Big techs’ low-cost structure business can easily be scaled up to provide basic financial services, especially in places where a large part of the population remains unbanked. Using big data and analysis of the network structure in their established platforms, big techs can assess the riskiness of borrowers, reducing the need for collateral to assure repayment.

As such, big techs stand to enhance the efficiency of financial services provision, promote financial inclusion and allow associated gains in economic activity. In the new digital world Big Techs have the potential to drive structural changes in the delivery of financial and non-financial services.

Enabling the Amazon Ecosystem to transact more efficiently.

It is clear that technology disruption, including the entry of Big Techs, can bring consumer benefits. These include better customer experiences with new products and services such as faster payment processing and loan approval, financial inclusion, and cheaper services both in lower prices and better customer returns, such as higher yields in e-wallet balances than in bank deposits. Their entry into finance reflects strong complementarities between financial services and their core non-financial activities, and the associated economies of scope and scale.

In practice, Amazon has relied more heavily on internal product development than partnerships, M&A, or investments to broaden its financial services offerings. As we can see, Amazon is first building core product pillars for itself, with a variety of key financial services products that support Amazon participants first, and enable them to buy, sell, and transact more easily than any other platform.

It is certain that established and already-trusted tech firms as Amazon pose a bigger threat for financial institutions than the threats from FinTech firms. Amazon has all the tools it needs to succeed in banking - a huge customer base, digital network, and an organisation that's skilled in and committed to improving customer experience and service; however does it want to be regulated accordingly?

If you are interested in how the banking industry is changing and what everyone should know about digital banking, take a look at our latest research Monzo: The Evolution of a Marketplace Model

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