Rumors of competition from the technology sector has been going on for a while in the financial industry, and of the four horsemen of tech (Google, Apple, Facebook and Amazon) most attention have been devoted to Apple and Google ever since the announcement of Google Wallet back in 2011. Since then, Google has also launched Android Pay, pivoted Wallet towards a pure peer-to-peer service, Apple has launched Apple Pay, and numerous surveys are telling us every other year that consumers are ready to do their banking with Amazon, Facebook or Google.
While these players are vastly different in many ways, they all share the traits of a successful digital ecosystem. While Facebook may be best suited to disintermediate retail banks for transaction banking and everyday banking services, Amazon is the most likely candidate to fully enter financial services. This debate heated up last week when it was rumored that Amazon was considering an acquisition of Capital One. There may be some obstacles regarding this specific scenario, but it does not change the fact that Amazon already is well positioned to take a strong position in financial services regardless of regulatory barriers for structural growth.
While a lot of attention has been focused around the payment space and payment revenues at risk, the fierce competition in this space will most likely render payment process a commodity. The two biggest hurdles for tech companies when it comes to entering finance however are extensive regulations and potential low margins. The regulatory burden may still be an obstacle for Amazon, but Amazon has been following a low margin strategy as a competitive advantage for years.
Amazon is already experiencing significant growth in the payments space, with 33 million active users and 200% year-over-year growth in merchants adding the “Pay with Amazon” buy button to their online stores. As a comparison, Alipay has more than 450 million monthly active users and has more than 50% of the online payments market in China. Despite high growth rates, Amazons biggest weakness is that they are perceived as a direct competitor by other online retailers.
Amazon has also been providing credit card services for a while and now it is stepping up its efforts thought Amazon Prime Rewards credit card which gives 5% back on all Amazon.com purchases, 2% back at restaurants, gas stations, and drugstores, and 1% back on everything else in order to increase usage. To further boost growth, Amazon announced at last year’s Money 2020 Europe that they are contemplating acquisitions in the payment space.
Last year, Pay with Amazon was rolled out across Europe, allowing users to pay for non-Amazon purchases including government services, insurance and travel, using their Amazon login on thousands of third-party websites resulting in nearly doubled volumes. This is undoubtedly a valuable strategic position while we wait for the introduction of PSD2.
However, payments are just gravy for the banks. The majority of revenues in the banking sector are generated through net interest income, and this is where Amazon stands out compared to its tech counterparts. Just like Ant Financial , Amazon has expanded their supplier finance program in order to better server SMEs. According to an Amazon press release, the Amazon Lending division has provided loans to enable SMEs to grow sales by an estimated $4 billion. The Amazon Lending division has issued loans totaling over $1.5billion, with a total outstanding loan balance of $400 million.
Amazon also has a proven track record when it comes to transitioning to new business areas by successfully pivoting from the traditional marketplace as core to Amazon Web Services, which is now Amazon’s most profitable segment.
Just like Wechat is one step ahead of Facebook, Amazon is playing catch-up to Alipay in the fintech space. Amazon may be the first western tech giant to fully enter finance, but they will still be doing this years after Alibaba and Ant Financial.
Even though Google, Apple and Facebook are more visible in the payments space, Amazon differs from these players by relying on a low-margin business model with the ability to deliver payment services at a zero-marginal cost, affordable loans for SMEs and no-frills current accounts for both businesses and consumers. Technology may be the driving force behind the disruption of financial services, but it is business models that disrupts incumbents.