Amazon casts a long dark shadow over banking

Amazon casts a long dark shadow over banking

Bain is once again raising the spectre of the big banking bogeyman that is Amazon, pointing to research which suggests that 65% of Prime subscribers would be prepared to open a bank account with the e-commerce giant.

The study, conducted among 6000 US adults, finds that US banks trail Amazon in customer loyalty, earning the company a Net Promoter score of 47, significantly higher than the score of 31 for regional banks on average, or 18 for the national bank average.

The survey suggests that Amazon can count on significant demand for basic banking services. Among Amazon Prime respondents (who pay an annual fee for such perks as free shipping and streaming services), 65% say they would try a free online bank account that offered two percent cash back on their online shopping, similar to the company’s cobranded credit card.

Of Amazon customers who aren’t Prime members, 43% would try such an account. Even among people who don’t use Amazon for e-commerce purchases today, 37% would try it.

Amazon has many other advantages over incumbents, says Bain partner Gerard du Toit, citing a high and rising frequency of purchasing, viewing, listening and reviewing interactions with customers; a full commercial relationship, including credit cards on file; integration into consumers’ computers, smartphones, tablets, TVs and home audio devices; a paid membership programme with 90%-plus renewal rates and the majority of US households as members.

What's more, "Amazon has the potential for a light physical-branch footprint in the form of its Whole Foods Market network, which could feature shelf space to sell products, advanced video ATMs or service kiosks," he suggests.

Bain has been here before. In March the consultancy estimated that a banking service from Amazon could swell to more than 70 million US customer accounts within five years, equaling the size of the country's third largest bank, Wells Fargo.

The 70 million customer figure assumes that Amazon forges a financial relationship with up to half of its customer base, the same share of people who said in a recent Bain survey that they expect to buy a financial product from a major technology firm over the next five years.

Bain points to the successs of e-commerce giants like Alibaba in China and Rakuten in Japan in penetrating banking strongholds, using their vast data sets to expand their brands into new markets and build strong financial relationships with customers.

"For retail banks, the key lesson is that their main competition consists not of traditional banks, but rather the large technology firms such as Amazon that have upended entire industries.," says du Toit. "Tech firms have already reset customer expectations for what a good experience feels like, and Amazon’s expected entry into core banking heightens the urgency of accelerating work to improve the customer experience, largely by making it simpler and more digital."

Comments: (8)

David Griffiths
David Griffiths - Number19 Consulting - Hertford 12 October, 2018, 10:462 likes 2 likes

I think there are two things to consieder here.

The first is the fact that banking does not require much in the way of a physical presence in the High Street in order to operate the majority of its services - sad, maybe, but true.  This means that, for the tech giants (and the smaller newcomers), delivering banking services to banking service consumers is little more than an extension of their existing consumer-focussed services. 

The second is that suppliers into the banking industry are selling banking software to supply banking services to banking service consumers, but those consumers are evolving.  Few suppliers of banking services to the banking industry are extending their portfolio of offers over the banking service ringfence into consumer-focussed complementary services, even though there is a demand for such things from the banks.

I hear only the other day, a senior manager in a major banking services provider tell me that the banks were only interested in payments and making payments more cost effective.  Such short sighted ignorance inevitably leaves the banks playing into the hands of Amazon.       

Melvin Haskins
Melvin Haskins - Haston International Limited - 12 October, 2018, 11:251 like 1 like

I would not trust my banking to a company that is not reknowned for resolving problems. I trust my bank more than I trust Amazon (I'm sure that this depends who you bank with - mine is excellent)

David Gyori
David Gyori - BANKING REPORTS, LONDON - London 12 October, 2018, 12:101 like 1 like

I agree with David Griffiths. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 12 October, 2018, 16:272 likes 2 likes

It's not that I distrust these surveys. But I can't ignore the reality either: (1) Alibaba may have penetrated banking stronghold in China, still some of the largest banks in the world are in China (2) Apparently, everybody pays with Alipay / WeChat Pay aka no one uses plastic in China, still China Union Pay is the largest credit card network in the world (3) Fintechs have been threatening to disrupt financial services for the last 10 years, still financial services is the largest sector in the latest FORTUNE 500 by revenues, profits and number of companies (4) Amazon has attempted many forays into financial services / fintech over the last two decades but most of them have flopped (at least by Amazon's standards) e.g. Amazon WebPay, Amazon Wallet, Amazon Register. 

IMO these surveys miss out something big. I don't know what it is but it could be one or more of the following: (1) Banking is a fundamentally different business compared to ecommerce and other industries; people who keep deposits with banks and people who borrow money from banks both want to be treated as customers whereas the former are actually suppliers going by how other industries would view their role; while Amazon (mostly) treats its customers very well, it is known for shoddy treatment of its suppliers / sellers, not to mention employees; the Amazon business model might break down if it needs to treat both depositors and borrowers equally well (2) Banking makes money by lending out money on its balance sheet and not market cap; while the Amazons of the world have a high market cap, the actual surplus cash in their balance sheet is too small to give them the lending prowess of even a single Tier 2 bank.

Maybe Amazon et al know what these surveys are missing, which is probably why they haven't entered financial services in a significant manner despite years after the ludicrous punditry have been predicting such a move.

David Griffiths
David Griffiths - Number19 Consulting - Hertford 12 October, 2018, 16:41Be the first to give this comment the thumbs up 0 likes

Why would anyone expect the likes of Amazon to use the same business model in banking as they do in retail?  To the best of my knowledge, Virgin Money isn't run like a train operator - or is it? The reality is that Richard Branson is selling the Virgin name, not re-applying business models.

The fact that it hasn't happened yet is not proof that it isn't going to happen in the future, and the problem with pundits is they have a tendency to get a bit too excited a bit too soon.  It's going to happen, but the tech giants are going to cherry pick; the banks are going to be left with what's left.   


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 12 October, 2018, 17:30Be the first to give this comment the thumbs up 0 likes

Absolutely. Amazon et al CAN'T use the same retail business model in banking. You can sell the Amazon name all you want but, to paraphrase the old saying, if you only have peanuts on your balance sheet, you can only attract monkeys. My point is market cap can't be used for lending. And without lending, Amazon can't become a sizeable bank.

The fact that it hasn't happened suggests that it won't happen more strongly than that it will happen. Otherwise, there'll be no difference between predictions and delusional daydreaming. In the long term, we're all dead anyway.   

One of those ludicrous punditry predicted that online P2P lenders will cherry pick the best and leave banks with what's left. Hasn't happened. Not by a mile. Five years later, some of those P2P fintechs, not to mention the startups founded by some of those ludicrous punditry themselves, have faded away into oblivion whereas US banks recently posted record-high quarterly profits.

A Finextra member
A Finextra member 15 October, 2018, 08:071 like 1 like

I think you may be overly focussed on market cap / different business models. There are plenty of precedents for non-banking companies developing significant financial services offerings (Ford, GM, Walmart etc). No-one is suggesting Amazon would use "market cap" to start lending. They would, most likely, start offering deposit accounts first. They don't need to make a profit at first - in fact Amazon's new ventures tend not to be profitable for a long time after launching - so they don't need to offer credit early on. The deposits from those accounts will build up the cash for them to offer credit at a later date. And if they need access to more capital, they are paying just over 3% on their debt which is low enough for them to turn a profit on a low interest loan.

Finally - a quick note on China Union Pay. It is the largest card scheme *when measured by the number of cards issued (5.4 billion)*. That is mainly a vanity metric. If you look at transaction value, CUP comes in third worldwide, a good way behind Visa and Mastercard. Mobile payments in China is where its at with total 16trillion USD spend volume in 2017 which is split pretty much 50-50 between Alipay and WeChat Pay.   

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 15 October, 2018, 11:59Be the first to give this comment the thumbs up 0 likes

I think you may be overly focussed on what Amazon will do in the future when there are several precedents of what Amazon has done in financial services in the past - and flopped.

In the day and age when companies raise hundreds of millions on the basis of a white paper and achieve billions in valuation before their product is ready, it's facetious to claim that volume of cards issued is a vanity metric.