Amazon and Banks: Friends or Foes?

An American Banker article from a while back, titled Amazon Becomes Retail Bank Role Model, posited:

“Amazon has revolutionized everything from publishing to online shopping. Can it save retail banking? Bank execs repeatedly invoke Amazon as an example of what they aspire to become. One said ‘Amazon was conceived around the use of data and the customer experience.’ Another called Amazon ‘the most visible example of using data to customize a customer experience.’ Another called the Amazon model a possible savior for the industry.”

With this week's news of a potential Amazon/JPMorgan Chase partnership, the focus among the banking industry has turned from "Amazon as a model for banks" to "Amazon as a threat to banks," although a number of observers have pointed out the partnership opportunities. All of this begs the question: Are banks and Amazon friends or foes?

The answer is "neither."

What is Amazon?

I don’t dispute for a moment that Amazon makes great use of the data it gathers, and that it delivers a superior customer experience. But that’s not what Amazon “is.” What Amazon is is one of the world’s largest distribution systems.

The fundamental difference between Amazon and banks is not the use of data or the customer experience. Banks could improve their use of data and the customer experience, and they still wouldn't be Amazon. The difference is that Amazon is a platform which means:

Amazon does not care what you buy, as long as you buy it from Amazon.

That can’t be said about banks. Banks wants consumers (or businesses) to buy their products and services, and don’t care who you buy them from (although the overwhelmingly majority of time those products are purchased directly from the bank).

Can you walk into a Citibank branch and open up a JPMorganChase checking account? Nope. Can you go to the Bank of America web site and apply for a Wells Fargo mortgage? Nope.

But you can go to Amazon’s web site and buy just about anything that anybody else sells. In fact, Amazon's success--and the success of any platform-based business--is predicated on aggregating as many providers as it can, because the more providers it attracts, the more consumers it attracts. And vice versa.

The result is that not only can it sell more products and services to consumers, but it creates opportunities to offer services to the providers on the platform. That's the beauty of a successful platform business model.

Why Does Amazon Want to Offer Checking Accounts?

I can't imagine for one minute that Amazon would limit itself to just one bank provider like a Chase. While that's certainly in Chase's best interest, it's not in Amazon's. But why is Amazon even interested in providing checking accounts?

A popular answer is that it wants the data, and that makes Amazon a threat to banks.

That's misguided thinking. Amazon has zero interest in displacing banks, or cutting banks out of the consumer equation.

Banks represent a huge opportunity to Amazon as customers--not competitors or partners.

By offering checking accounts on its platform, Amazon is establishing opportunities to provide marketing and technology services to banks that could earn it billions of dollars in revenue.

Understanding the Platform Business Model

There are three elements to a successful platform:

  1. Magnet. Without the ability to attract a meaningful number of the “right” participants, a platform cannot succeed. Simply having a lot of producers and consumers is no guarantee of success. The platform must attract the right producers (those with the most desirable products and services) and the right consumers (those who the producers in the platform want to do business with).
  2. Matchmaker. A platform requires a mechanism for matching consumers to the right producers, and for enabling producers to reach the right consumers who come to the platform. At its most basic level, a search engine can be matchmaking mechanism.
  3. Toolkit. The toolkit is what enables producers (and consumers) to easily plug-and-play. This is why APIs are so critical to firms pursuing platform strategies.

Amazon started off as an online bookstore, becoming a magnet for book buyers, and developing matchmaker capabilities ("people who bought this, bought that").

But it didn't really take off as a platform until it launched Amazon Web Services, which has become a multi-billion dollar business in and of itself. And who are the primary customers of that service? Providers on the Amazon platform.

Banks as Amazon Customers

For the past few years, Amazon has been offering merchant cash advances to merchants on its platform. Recent reports put the amount at $1 billion in the past year or so.

Is this an example of Amazon "competing" with banks? Sure, but the key question to ask is this: Why only $1 billion?

Two possible answers:

  1. That's all the money Amazon had to lend, and/or
  2. That's all the money Amazon was comfortable lending.

In other words, the potential demand for merchant cash advances among Amazon merchants could have been $5 billion last year. It's in Amazon's best interests as a platform to meet that demand by matching merchants will banks willing to lend the $4 billion that Amazon couldn't or wouldn't lend.

And Amazon will make money, not just by "matching" merchants with banks willing to lend that money, but by providing the "toolkit" -- the technology to underwrite and process the loans -- which the banks will pay for, because it offsets their existing loan acquisition and processing costs.

The same thinking applies to checking accounts.

By offering consumers checking accounts from as many banks as Amazon can attract to its platform, it creates opportunities for Amazon to provide technology and marketing services to banks to open and manage those accounts.

The Real Amazon Threat

Amazon isn’t the future model for banks, nor is it banks' biggest threat. The players who are most threatened by Amazon's entrance into checking accounts (and lending) are the legacy fintech providers--the Fiservs, FISes, and Jack Henrys of the world. Amazon is positioning itself to cut these players out of the loop.

I know that sounds really far-fetched. It's not so much about core replacement (in the short-term at least), as it is about digital account opening and ancillary apps.

But if Amazon can go out and acquire a Whole Foods, why can't it build or acquire core processing capabilities and establish itself as a platform services provider for banks' technology and marketing needs?

Ron Shevlin
Director of Research
Cornerstone Advisors