Is Amazon About to Burst Banks?

Could we soon be opening an Amazon bank account and getting loans and mortgages from the e-commerce giant? ParcelHero’s Head of Consumer Research, David Jinks, says established banks can bank on competition from the industry disruptor.

Local bank branches will soon be harder to find on your High Street than dodos, thanks to their current rate of closures. As the UK moves to online banking well over 9,000 bank and building society branches have closed since 1990 – and many more closures are planned. Names you’ll no longer see at all on the High Street frontages include the Midland, Abbey National, Bradford & Bingley, The Woolwich, and Alliance & Leicester (some brands survive as bank in-house mortgages).

Online however, the banking industry is booming. Until very recently, the transformation has largely been led by traditional banks in the UK, with solely online banks such as Egg, launched during the 1990s’s dotcom bubble, leaving bankers with egg on their face. But the banking restrictions in the UK were relaxed significantly in 2013, and now traditional banks face competition from a sizeable number of so called ‘challenger banks’. But could their stiffest battle come not from a direct banking industry competitor, but from that ultimate in industry disruptors, Amazon?

American bankers are also bracing themselves for a potential onslaught from Amazon. In February the US banking industry bible, American Banker, reported rumours that Amazon might buy Capital One. Capital One is a fully-fledged US bank, so with one fell swoop Amazon would not only be responsible for the products that consumers buy; but also the means by which they buy them!

Mark Tluszcz, chief executive of Mangrove Capital Partners, a venture capital firm based in Luxembourg says: “In the next three to five years, it wouldn’t surprise me to see large banks being bought up by tech companies.”

Amazon is already a surprisingly big player when it comes to finance and lending here in the UK. For example, it has its own credit card. The Amazon Platinum Mastercard gives reward points whenever you shop on it. However, behind the scenes, its UK card is actually run by card provider NewDay, with Amazon simply acting as a credit broker. Were Amazon to create its own bank, or buy an existing provider, access to full credit card information would give it even more data analytics about its customers’ shopping behaviour, and enable it to further extend the banking services it already offers to many merchants.

Amazon’s payment service is already advancing steadily: today, it allows online vendors on its Marketplace site to take payments across the US and Europe. And that’s by no means all. In 2016, the e-commerce firm rolled out ‘Pay with Amazon’ across France, Italy and Spain — a PayPal-like service that allows users to pay for non-Amazon purchases including government services, insurance and travel, using their Amazon login on thousands of third-party websites. So in many respects Amazon is already fulfilling some of the functions of a bank.

And, Amazon has also become a fully-fledged money lender too already. It makes small loans to merchants in the US, UK, Europe and Japan through Amazon Lending. The division has made loans totalling over $1.5bn, with a total outstanding loan balance of $400m.

Using its internal data to assess suitability, Amazon provides loans for three to six months of between $1000 and $750,000, which merchants can use to buy inventory for sale on the site. Amazon makes money from interest and, of course, the cut of the increased sales it takes.

Amazon supplies funds to traders from its own balance sheet within 24 hours, then deducts loan payments every two weeks automatically from the seller’s account. If the account runs dry, or if sales suddenly dip, Amazon can put a freeze on any merchandise held in its warehouses until the seller pays up.

Anthony Duffy, director of retail banking in UK & Ireland at Fujitsu, commented when the Amazon Lending service was announced to be rolling out to the UK in 2015: “Amazon‘s extension of its – by invitation only – business loan service is to be welcomed. It introduces new competition into a market that regulators have long-viewed as being short of innovation and alternative market options…Given Amazon’s name, size and existing lending experience, its approach may well set a benchmark to which other providers – both established and new – might aspire.”

And it’s not just its traders that benefit from Amazon’s lending and credit services. In some markets the online e giant is now offering a deferred payment facility to consumers too. Amazon Prime customers ordering clothing can place their orders knowing that they won’t be charged until they have tried them on and agreed to keep the garments. Additionally, discounts are being offered to those who decide to keep more than three of the items ordered.

So, could Amazon really create a successful bank here in the UK? When Metro Bank opened for business in spring 2010, it was Britain’s first new high street bank in over 150 years, so at first sight the odds look rather stacked against a new Amazon bank! However, as a result of a UK independent commission on banking in 2012, the rules for new entrants in the banking sector were loosened by regulators in 2013, and as a result there has been an explosion in the number of challenger banks applying for and securing banking licences.

Well over 50 new banking sector companies have been launched or planned since the changes were introduced. The burgeoning sector, with an A-Z of new companies from Atom Bank to Zopa opening up, presents a great opportunity.

And in case you doubt that large e-commerce companies are interested in the market, earlier this year, Ant Financial (the Chinese e-commerce giant Alibaba’s digital payments arm) applied for an e-money licence in the UK. If granted, its UK licence — allowing it to provide financial services that include issuing electronic money or granting loans under certain conditions — will apply to consumers across Europe.

But would we really want to have an Amazon bank account, or do we trust the established big banks more? According to Accenture, 40% of global millennial respondents reported that they would consider switching over to an Amazon (or Google) bank account. Millennials in the US were even more enthusiastic, with 50% saying they would consider banking services from the e-commerce giants.

So, is Amazon really considering launching its own UK bank; or purchasing one of the many new entries into the field? It has already invested hugely in its Prime Services in the UK, establishing its own logistics network to give free and same day deliveries; together with other perks such as video streaming, one-hour grocery deliveries, etc.

Think of the perks an Amazon bank could use to lure more people to join the Prime Membership scheme. From more attractive rates of APR to added points when you buy on its cards, Amazon could attract a new group of Prime members. And its members spend around twice as much as non-members with Amazon.

Amazon’s undoubted interest in Capital One points the way to the future. And a number of those newby UK challenger banks are already consolidating. A few might welcome an approach from Amazon.

Our recent report, Amazon’s Prime Ambition, reveals how the company intends to become the pipe through which all goods and services can be provided. Opening its own bank would be a key step towards its long-term goals.

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