Amazon is growing at 15-20% per year and capturing increasing shares of the retail market. With US$ 17 bn or 14% of total turn-over Germany has been Amazon`s second biggest market after the US. Therefore any activity, Amazon is developing in financial services could affect the Germany retail banking market.
In the following, we will summarize our findings in five key hypothesis to outline Amazon`s current and potential future development in financial services.
Amazon extends the offering of banking and insurance products to support its overall ecosystem. The core ambition is to facilitate purchasing processes as well as as to profit from additional data. At the same time there is no ambition to build up a larger retail banking franchise.
Amazon has pushed on core banking products over the last 30 months along a whole range of product categories (see Figure 1).
Among the tech giants, Amazon is the most likely to seriously push forward in financial services. As a major executive stated “If Amazon can get you lower debt payments or give you a bank account, you will buy more staff on Amazon.”. Key objectives for Amazon are (1) increase the number of (independent) merchants on Amazon and enable each merchant to sell more, (2) increase the number of customers on Amazon and enable each customer to spend more as well as (3) continue to reduce any buying/selling frictions.
Amazon has a clear priority on to aspects – (1) „Retail“ payments and cash as well as (2) SME lending. Other banking products such as B2C lending as well as insurance are still experiemental.
So far, Amazon has developed five financial services beachheads, out of which three are core (see Figure 2):
- Payments: Key priority is to make payments frictionless for customers as well as more cash efficient for Amazon itself. Heavy investments in the payment infrastructure have led to its core product, Amazon Pay. It includes a digital wallet for customers as well as payments network for online and for brick-and-mortar merchants.
- Cash: Amazon Cash bridges the gap between online commerce using debit or credit card for payments and offline commerce that relies on cash on delivery. It allows customers to deposit spare cash to a digital account by showing a bare code at a brick&mortar retailer or via the Coinstar network in the USA. Based on a barcode only, you can pay lateron. This product particularly addresses the underbanked or even unbanked population. Amazon allowance gives kids a certain wallet provided by their parents. Therefore its cash product looks like an entrance product into the payment market.
- SME lending: Amazon provides lending via partner banks. For SMEs, this allows them to purchase and sell larger volumes on the Amazon platform. Until end 2017, Amazon had issued more than US$ 3 bn to SMEs in the US, Japan and UK. For private customers, it is card based and connects up to 5% cash back options with a credit card functionality. While SME lending has become a strong business case, retail lending remains infant for the time being.
Technologically, Amazon follows latest innovations to set up a frictionless payment process. Following their recent patent statistics, it is facial recognition, automatic payment within the AmazonGo stores as well as voice recognition via Alexa. Therefore innovation is used to streamline and facilitate core processes again.
Amazon is strong on developing products. Its in-house biometrics payment technology has been piloted in the Amazon Go grocery stores. Using computer vision, sensor fusion and advanced machine learning enables Amazon to provide a fricitonless payment process. The client enter the store, is identified, collects the goods and leaves the store again. Payment will be automatically processed including the required identification.
The evolution of the current banking product offering has been a trial and error process with failure at the beginning, but an increasing speed over the last two years. Apart from its core market in the USA, recent financial services activity has focused on grow economies such as India and Mexico.
Amazon`s financial services offerings have emerged since 2007 with increasing speed over the last 30 months. It is a whole journey of in-house developments, equity investments as well as shut-downs of unsuccessful approaches. The criteria always has been and still is, if the new financial services product can achieve one of the above mentioned three targets within the next three years.
Amazon prefers own innovations and patents. Start-up investments are concentrated around Alexa. In Financial services Fintech investments and M&A are focused on the US and large emerging markets such as India.
Compared to an overall innovation spend of more than US$ 12 bn a year, financial services related investments are still overseeable. This applies even more for Fintech investments and related M&A activity (see Figure 5).
In the US, Amazon acquired Greenlight to strengthen its cash business. Greenlight is an alternative debit card which is aimed at young consumers. Therefore it supports Amazon`s allowance product.
In India, the acquisitions were threefold: ToneTag is a contactless payments hardware and software provider that can be integrated into any merchant and consumer interaction point. Capital float is a lending platform, that offers competitive financing to Amazon merchants. The banks behind the platform are Capital first, Bank of Baroda, Aditya Birla Finance and Yes Bank. In addition bank:bazaar offers comparion tools.
Compared to financial innovation in the financial services industry and the new fintech models coming up, Amazon takes a modest, less advanced approach in its acquisitions.
Amazon becomes an increasing threat to established retail banks, particular with respect to payments and lending. Nevertheless, it is clear that they still play not to their full potential, which – for the time being – leaves room for established payment players to provide the service respectively push forward on innovation. Only taking the potential on retail lending in combination with advanced risk analytics shows the lever, Amazons with its millions of customers has. In the end it is likely to become a collaborative approach of Amazon and certain financial service providers in dedicated markets. Therefore the game is on!!!