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Should Banks Feel Threatened by Amazon's Entry?

Swayta Shah
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For Amazon AMZN, sky is the limit. Being one of the biggest companies in the United States, the sheer possibility of its entry into a particular industry can make the existing participants feel threatened.

Already this e-commerce behemoth has its presence in almost every aspect of people’s life. This includes traditional, brick-and-mortar retailing, reading or listening to books (Kindle), streaming music and videos (Prime Instant Video and Amazon Originals), web storage and computing services and shipping.  

Further, the company has Prime rewards credit card from JPMorgan JPM and Amazon.com Store card from Synchrony Financial SYF. Also, it has entered the health insurance business in January 2018 with its partnership with JPMorgan and Berkshire Hathaway BRK.B. Even there are reports that the company is looking to get into pharma and home furnishing industries.

It looks like nothing is left untouched by Amazon. So, Amazon’s entry in to the banking industry shouldn’t be a big surprise.

Amazon in Partnership with JPMorgan to Enter Banking?

Early last week, the Wall Street Journal reported that Amazon is in talks with JPMorgan to develop “checking-account-like” product for its millennial consumers. The partnership may include the ability to pay bills and/or access the bank’s ATM network. Such a deal could unite the country’s biggest e-commerce platform with the largest bank of the nation.

While the discussions are at an early stage, this represents Amazon’s further foray into traditional brick-and-mortar banks, mainly dominated by big lenders. The company already offers loans in the range of $1,000 to $750,000 to small businesses through its Marketplace platform and has originated more than $3 billion loans since the launch in 2011.

Amazon’s primary goal seems to be able to carter to young and underbanked consumers, who otherwise find it difficult to shop online. The partnership will also enable it to further grow its Prime membership via cross-selling to current JPMorgan clients. These will likely spur more online sales.

The other advantage is not facing regulatory barriers. It’s known that the banking industry is highly regulated. So, for Amazon, partnership with JPMorgan will likely do away with regulatory compliance.

Amazon Advantage: Survey Supports Amazon's Entry

A survey by Bain & Company recently revealed that U.S. and U.K. customers ranked Amazon almost as high as traditional banks in terms of trusting with their money. It disclosed that more than 50% of the U.S. respondents are ready to purchase a financial product from an established tech company, with Amazon at the top of the list, followed by Apple AAPL and Google.

With almost double the market capitalization (roughly $770 billion) of the country’s largest bank (JPMorgan has a market cap of roughly $400 billion) Amazon will likely be a success in the banking industry driven by the following advantages:

1. Established brand and excellent service provider (no big data breach till now)
2. Knows all about its customers’ income and spending habits
3. Digital relationship with customers will be helpful in avoiding client acquisition cost
4. No branch and contact center network required
5. Easy payment options
6. Global reach
7. Huge customer data base will be useful in offering other financial products eventually

Entry of tech companies in the financial services industry is already happening in Asia. China’s e-commerce giant Alibaba’s BABA financial affiliate Ant Financial has witnessed tremendous growth over the last couple of years. Similarly, Japan’s e-commerce company Rakuten operates the country’s one of the largest credit card firms by transaction value.

Therefore, Amazon can definitely amaze us with its entry into the banking industry.

This is a surprise for traditional banks that till now thought small fintech startups as a big threat to their market share. But tech companies are a bigger threat.

Amazon’s Entry Disruptive to Banks’ Market Share?

Amazon’s entry in to banking sector will not be as easy as it seems on the paper. The Bank Holding Company Act prevents commercial companies from also getting into banking activities.

While the U.S. policymakers are skeptical about the entry of a commercial company into the banking industry, this may change with time. Last year, at a conference, Keith Noreika, the temporary head of the Office of the Comptroller of the Currency, stated that it’s time to re-consider whether separation should be maintained between traditional banks and retail firms.

Bain & Company believes that over the next five years, Amazon’s banking services will likely attract more than 70 million customers, making it the third largest bank in the United States and surpassing Well Fargo’s WFC banking client base. Therefore, Amazon’s entry into traditional banking domain will definitely have an adverse impact on banks’ market share.

As customers are getting more comfortable with the use of digital technology (online and mobile banking), banks must gear up and improve their digital offerings to counter tech firms’ incursion into their turf. While banks have started making efforts on this front, those initiatives are still in a nascent stage.

Therefore, to counter Amazon and other tech companies, banks need to catch up and fill the lag at a faster pace. Instead of pushing products to the clients, banks need to put the customers first and make major changes about how to carter to requirements of millennials.

So, it’s not the time for banks to panic. They can counter tech firms’ entry as they are in the business for quite long and know the nitty and gritty of it. Only they need to catch up with the customers’ needs.

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