A Report Shows Amazon Is, Piece By Piece, Assembling a Bank


amazon-7-12-18.pngIt gets clearer every day that banks have work to do if they’re going to remain at the center of their customers’ financial lives, as more and more companies, be it upstart fintech companies or well-established technology firms, seek to disrupt the traditional banking relationship.

The examples are numerous, and attract glitzy headlines, led by Amazon, which seems intent on trying its hand at banking.

A recent report from CB Insights walks through the myriad ways the ecommerce giant is positioning itself to be, what some are calling, the Bank of Amazon. It’s not there yet, and may never be, according to some analysts, but it’s certainly making a run at it.

For bankers, this is nothing new. Amazon has long been viewed as a potential threat, but it hasn’t brought widespread disruption just yet. This could soon change, however. Amazon has purportedly been in talks with JPMorgan Chase & Co. and Capital One Financial Corp. about offering a checking account-like product, the core of any banking operation. This would be on top of Amazon Cash and Prime Reload, which allow customers to move funds from a traditional bank-managed account into a digital wallet. It’s also had co-branded credit cards with JPMorgan for years.

It was announced earlier this year, moreover, that Amazon has joined JPMorgan and Berkshire Hathaway, Warren Buffett’s company, in an effort to establish a health insurance company for their employees, collectively totaling some 1.2 million people. It’s the latest grab by the companies at creating an unbreakable relationship with American consumers.

Amazon has gotten into lending, too, backed by Bank of America. All told, Amazon has already made $3 billion in loans to more than 20,000 independent retailers on its Marketplace platform. The borrowers are invited to borrow and half of them take a second loan.

And it’s not just Amazon. SoFi now plans to offer multiple depository products as well, products which it struggled to get off the ground after former cofounder Mike Cagney was ousted in the wake of a sexual harassment scandal. With a combined checking-savings account product that pays up to 1.1 percent interest, it’s only a matter of time before the creep of non-banks like SoFi threaten the core deposit products offered by banks, regardless of FDIC insurance.

Some banks, though, have been able to spot and partner with companies that offer these alternative banking options. Ally Financial, Live Oak Bank, SunTrust Banks, NBKC Bank and, yes, Amazon all invested earlier this year in Greenlight, an alternative debit card for kids that’s backed by Community Federal Savings Bank, based in Jamaica, New York, and MasterCard.

The CB Insights report suggests there’s time for banks to adjust, but community banks with limited technology budgets will be left to watch and learn, or focus their attention on depositors they know they can keep.

In a digital age, bankers should understand that no matter the size or scope of the disruptor, they still have an advantage—the financial data they have on their customers—which will continue to grow in value as technology and analytics become more sophisticated, Jim Sinegal, a senior equity analyst at Morningstar, wrote in March.

That data may be the key that allows banks to maintain a healthy bottom line, according to Deloitte’s Banking Industry Outlook for 2018: “Banks that successfully target customers through sophisticated data analytics, make compelling product offers, and deliver strong digital experiences, could gain funding advantages and see slower increases in deposit costs.”

Why Your Bank Should Be Watching Amazon


amazon-7-7-17.pngCould Amazon be a threat to banks? The online retailer announced in June that its Amazon Lending program, a small-business loan service that the company began offering in 2011, had surpassed $3 billion in loans globally, to more than 20,000 small businesses. One-third of those loans—$1 billion—were created in the past year, making it larger than most small banks.

Competition from nonbanks in small business lending isn’t new. But while lending startups in the past have often excelled in technology, they struggled to gain customers, and funding was more expensive than for traditional banks. In contrast, banks have had the expertise and relationships, and can fund loans more cheaply.

Amazon’s loan growth may represent a new phase in loan disruption, according to Karen Mills, a senior fellow at Harvard Business School and former head of the U.S. Small Business Administration.

“Having a pipeline into a set of small business owners who are doing business with the platform, knowing a lot of data about their business, could very well be the equivalent of a customer pipeline that’s unparalleled except at some of the most important traditional banks,” Mills says.

Amazon isn’t putting banks out of business, at least not in the foreseeable future. While 20,000 small businesses and $3 billion in loans is nothing to sneeze at, the program is invitation-only and limited to Amazon sellers, with the company leveraging its data on its client businesses to make credit decisions.

“Amazon looks at everything as basically a use case,” says Steve Williams, a partner at Cornerstone Advisors, based in Scottsdale, Arizona. “Is it something that we can do that the customer would want, can we technically deliver it, and can we make a business out of it?”

Banks should prepare for a reality, led by companies such as Amazon, where customers expect rapid credit decisions and an easy loan process. An employee describes the lending process as “three fields and three clicks” in a video published by Amazon in 2014.

“You can’t waste your customer’s time, and Amazon is relentless in trying to make things easier for its partners and customers,” says Dan O’Malley, the chief executive officer at Boston-based Numerated Growth Technologies, which spun off from Eastern Bank’s lab unit in May. That unit developed an express business loan program for the bank, and banks can now license the lending platform through Numerated.

Mills recommends that banks examine whether they want to grow their small business lending portfolio and if so, examine if they can provide the platform in-house or need to use an outside company.

Banks have been increasingly partnering with fintech firms, but Amazon’s suitability as a partner is debatable: O’Malley says Amazon is notoriously difficult to work with. But Amazon seems open to relationships of convenience. JPMorgan Chase & Co. offers an Amazon Prime Rewards Visa credit card, which gives 5 percent cash back to Amazon Prime members on their Amazon.com purchases. BBVA Compass has been testing the Amazon Locker program in its Austin, Texas, branches, so Amazon customers can safely and conveniently pick up their orders. Presumably, this would drive more traffic to BBVA’s branches.

And there’s Alexa, Amazon’s voice-operated digital assistant, which is used in Internet-enabled speakers such as the Echo. So far, Capital One Financial Corp. and American Express are among the few financial institutions whose customers can use Alexa for tasks like making a credit card payment or getting details on spending.

Amazon sees promise in its voice-enabled devices. “We’re doubling down on that investment,” Chief Financial Officer Brian Olsavsky said in Amazon’s first quarter 2017 earnings call. With the Echo, Dot and Tap products, Amazon has about 70 percent of the smart speaker market cornered, according to TechCrunch.

“Voice commerce and having to deal with voice as a channel is an important thing that [banks] are going to have to figure out,” says James Wester, the research director responsible for the global payments practice at IDC Financial Insights.

Amazon likely doesn’t have its sights set on becoming a bank—at least not for now, says Wester. But the company’s customer-first approach to improving processes is setting the tone for commerce, and if Amazon thinks it can make life easier for its customers and make money doing it, it won’t shy away from competing with the banking industry.

The possibilities are endless. Amazon unveiled its Amazon Vehicles webpage as a research tool for consumers in 2016, and the retailer is gearing up to sell cars online in Europe, according to Reuters. “There’s no reason that people won’t say, ‘I’m going to buy my car through Amazon and finance it,’” says Cornerstone’s Williams. Auto loans may very well be the next financial product on Amazon’s radar, and then, what’s next?