By Brad Berens
If Amazon decided to move into the world of commercial banking, would the company then revolutionize how people relate to their money as profoundly and irrevocably as it has already changed how people read?
Why do I pose this question? A provocative finding from our forthcoming Future of Money and Banking report inspired it: when we asked if Americans would consider doing their banking with companies that weren’t traditional banks, the top selection was Amazon at 35 percent. (Google was next at 28 percent.)
As we explored the implications of this finding, it became clear that Amazon could have as devastating an impact on banks as it has on bookstores.
Amazon has no plans (or at least no public plans) to provide financial services to consumers. However, given that customers trust Amazon with an ever-increasing amount of their purchases, why shouldn’t they trust the company to help them manage the money they spend there?
The easiest way to see this potential threat to traditional banking is to apply the three-part strategy that Amazon has used over and over again:
Part 1: Innovate around a product or business and reduce costs to customers.
Part 2: Transform the product itself.
Part 3: Turn the transformed product into a platform that others can also use. (#3 was famously the case with Amazon Web Services.)
Transforming the bookstore
With books, Amazon (Part 1) created an online store for physical books with a better selection than any offline bookstore, subsidized prices to make the books cheaper than at any offline bookstore, and offered speedy or sometimes free delivery.
Then (Part 2), Amazon launched the Kindle, which transformed physical books into digital books at a broader scale with a greater selection than any of the previous ebook companies (like the Sony Reader or the Rocket eBook); it also provided free wireless connectivity for instant downloads and an endless storefront to create awareness at the bookstore where millions already shopped: Amazon.
Finally (Part 3), Amazon opened up the Kindle platform for authors to create new, Kindle-first works that might not have any paper-book equivalents at all.
From Whole Foods to Whole Everything
Although it’s still early days, Amazon’s acquisition of Whole Foods seems to be following the same strategy.
We already know that once the deal closed, Amazon immediately (1) reduced “Whole Paycheck’s” famously high prices, added Echo (Alexa) and Kindle devices, pickup lockers, and popup stores to the larger Whole Foods stores, and began applying its legendary logistical expertise to home delivery.
Next (2), it’s widely expected that Amazon will integrate Alexa and the connected home with users’ Whole Foods kitchens and grocery lists, transforming how people think about and buy their food when Alexa reminds them that they’re low on milk, or that based on the ingredients they already have in the house they can make a bouillabaisse with just two more things that Whole Foods can deliver in an hour.
Then (3), Amazon will add other still more services to their Whole Foods retail locations, both Amazon-owned and independent, but powered by Amazon’s logistics. For example, the company has already started edging into the pharmacy business, and it will add even more services. The rest of the pharmacy business finds Amazon’s rumored entry to be so alarming that it has precipitated pre-emptive action like CVS’s bid to acquire Aetna for $69 billion.
Towards the future and Amazon’s No-Fees Prime Bank
With banks, Amazon can deploy the same three-part strategy.
1) If Amazon enters the consumer-facing financial services market, presumably as another included benefit of Amazon Prime membership, then the first thing that Amazon would do is create small branches at the larger Whole Foods locations for the slender percentage of people who prefer to do their banking face to face in real life.
The second innovation would be revolutionary: Amazon would reduce costs to customers by eliminating all overdraft, monthly service and out-of-network ATM fees.
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The biggest impact of this hypothesized Amazon Prime Bank would be on Bank of America, Wells Fargo, Chase, Citi, and others. If these banks want to avoid the grim fate of Borders Books & Music, then they will need to reexamine both their lockstep, undifferentiated product offerings as well as their predatory reliance on charging their customers incomprehensible and unpredictable fees to drive profit at the expense of loyalty and service.
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A no-fee policy would attract millions of “unbanked” Americans who cannot afford bank fees and instead use payday lenders and check cashing services. (University of Pennsylvania Professor Lisa Servon brilliantly explores this in her 2017 book, The Unbanking of America: How the New Middle Class Survives.)
In addition to the unbanked, millions of “banked” Americans would promptly switch to Amazon Prime. Our studies have found that lower fees or interest rates are the number one consideration (63 percent) when people think about switching banks. The distant second-most-popular reason for switching was better online or mobile services at 33 percent.
It might not sound believable that Amazon would eliminate the fees that other banks find addictive, but remember that Amazon has a long history of operating parts of its business unprofitably in order to drive higher transaction activity elsewhere. For two examples, Amazon sold the Kindles at a loss for years (and may still), and it loses money on Amazon Prime two-day shipping but makes up for that loss because Prime members buy nearly twice as much annually as non-Prime customers.
A no-fees Amazon Prime Bank would attract more members to Amazon Prime itself, dramatically increasing transactions across Amazon and Whole Foods. Amazon Prime Bank would also make money the way conventional banks did in the past, by investing the money and making it grow. Amazon would also use the increased exposure to its customers to drive their attention back to Amazon and the purchasing opportunities that await them there.
2) Amazon would then transform how its bank works compared to conventional banks. One early change would be to link Alexa to every Prime Bank customer’s bank account, making conversational bank queries and transfers easy. For the few sorts of transactions that require a face-to-face meeting — for example, getting something notarized — Amazon could deliver a notary to wherever the customer is, rather than insisting that customers come to a small physical branch at their local Whole Foods. Amazon could also create drone-powered moving ATMs that would fly to wherever the customer is, dropping from the sky to provide the requested cash and then zooming away.
Amazon could also transition a great deal of banking into virtual reality, creating an always-open virtual bank where customers could manage their different accounts, send and receive money, consult “face to face” with virtual bankers to get financial advice or apply for loans and mortgages without leaving their homes or offices.
3) Finally, Amazon would turn its new bank into a platform for helping its customers with other financial tasks.
Amazon would either launch its own credit service — not VISA, MasterCard or American Express but a new AmazonCard — or (less likely) it might acquire Discover. At the time of this writing, Discover has a market cap (per Google) of $27 billion, or roughly twice what Amazon paid to acquire Whole Foods.
If Amazon launched or acquired a credit service, then doing so would save the 1.43 percent to 3.5 percent commission it currently pays on every transaction. According to Statista, Amazon’s ecommerce revenue was just under $136 billion in 2016, and two percent of that is around $2.7 billion. Even if Amazon spent a billion dollars marketing its new AmazonCard, the credit service would pay for itself in just a few years.
In addition, Amazon would then have insight into all the data surrounding AmazonCard members’ purchases outside of Amazon.
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Amazon could have as devastating an impact on banks as it has on bookstores. Given that customers trust Amazon with an ever-increasing amount of their purchases, why shouldn’t they trust the company to help them manage the money they spend there?
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If Amazon provides its customers with the usual banking services and credit cards, then it’s likely to launch additional, complementary services, perhaps under an umbrella “Amazon Money” brand.
These services would include Amazon versions of money management software like Quicken or Quickbooks, as well as mortgage services and 401Ks or IRAs for people who currently don’t think they can have them.
If Amazon is managing so much of its customers’ finances — purchases, savings, credit cards, online bill pay — then it might also provide free tax preparation to its customers. As Alexa’s artificial intelligence matures, it could automatically recognize business expenses, medical expenses, tax deductions and more as customers made them over the course of the year, eliminating the tedious paper chase the disorganized multitude face a few weeks before every April 15th.
CPAs might find their businesses shrinking rapidly if Amazon can automatically organize and file its customers’ taxes in the background, depositing any returns directly into the right Amazon Prime Bank account. In just a few short years we could find ourselves saying, “Alexa, please file my taxes.”
The biggest impact of this hypothesized Amazon Prime Bank would be on Bank of America, Wells Fargo, Chase, Citi and others. If these banks want to avoid the grim fate of Borders Books & Music, then they will need to reexamine both their lockstep, undifferentiated product offerings as well as their predatory reliance on charging their customers incomprehensible and unpredictable fees to drive profit at the expense of loyalty and service.
Today, Americans have limited options when it comes to banks. They can go to one of the global banks, to a local independent or credit union, to one of the small, innovative mobile-first banks like Chime or Simple, or they can be unbanked and rely on payday lenders and other expensive but predictable services. If Amazon launches its own bank, then people will have a truly viable alternative with scale and benefits that other banks simply cannot match.
The best outcome for the big banks is if I’m completely wrong in these predictions.
But I don’t think I am.
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Brad Berens is the Center’s Chief Strategy Officer.
See all columns from the Center.
December 14, 2017