Amazon is eating the world

When winning e-commerce isn’t enough: How Amazon is poised to disrupt financial services

Amazon is a lot of things to a lot of people: An everything store, a 2-day delivery guarantor, the future of grocery shopping, and unparalleled cloud computing services, to name a few. And over the past several years, the behemoth has been wading into financial services territory, culminating in the recent launch of Amazon Cash and the disclosure that its lending arm has issued billions in loans — all part of an attempt to drive not just what you buy and how you receive it, but also how you fund that purchase.

Of course, we’ve seen this before. General Electric, for example, practically wrote the playbook for how modern conglomerates come to be, and its grasp on multiple industries eventually evolved to include its massive GE Capital unit and the credit card company Synchrony Financial, both of which have now been spun off.

But while GE and other conglomerates have essentially entered financial services as a straightforward play to generate value, Amazon’s strategy is about something bigger. Delving into financial services seems to be a critical prong in becoming the central platform for consumers’ everyday lives. No mere everything store — just everything, to everyone.

With the recent launch of Amazon Cash as well as a peek behind the curtain of Amazon Lending, it’s clear that the company could redefine the financial services game. So it’s not just e-commerce retailers that should keep a close eye on Amazon’s every move—the company’s approach could also have powerful implications for financial ecosystem players.

Take Amazon Cash, which launched in April. Billed as a fast, no-fee way to shop on Amazon, these gift cards essentially obviate the need for consumer bank accounts; really, all someone needs is funds, a smartphone, and an Amazon account. Cash allows consumers to add, well, cash — any amount between $15 and $500 — to their Amazon balance by showing a barcode (from a smartphone or printed out) at a participating retailer. With cash on file, the consumer can shop Amazon.com just as they would with a credit or debit card. Amazon Cash is similar to efforts by PayPal (My Cash Card) as well as Walmart (Pay with Cash) and, taking a broad view, even Starbucks.

But, in Amazon’s case, we’re looking at a unique fusion of its own online marketplace with independent brick and mortar stores. For a retailer with millions of consumers — some 65 million on Prime alone — it’s also an important form of outreach to the underbanked, who aren’t necessarily under-smartphoned. In some ways, the move also capitalizes on the ways millennials want to pay: with debit or gift cards and on a mobile phone, because they know how much money is available and because, after all, we now live in a mobile-first world.

Perhaps most critical is that Amazon Cash doesn’t come with any fees for the consumer, nor does have to Amazon have to pay the traditional payment process players. The implications for the broader financial services industry would be bigger — and more obvious — if Amazon were facilitating fee-free credit or debit transactions, because that could subvert how the entire ecosystem interacts and gets paid. But that’s not out of the question.

In guaranteeing 2-day shipping, and in making it free, Amazon massively altered consumer expectations. It took a hit to profitability to create a competitive advantage, and now the rest of the world has to work on those terms, too. And with financial services, Amazon has the scale to afford eating extra cost, potentially causing massive ripple effects and changes in consumer expectations — simply because it can. With Amazon, all bets are off.

As it stands, Amazon is bypassing the banks with Amazon Cash, meaning purchases made with the service cost them less money. The use case is admittedly narrow, but the approach means Amazon doesn’t have to pay processing fees, and consumers can transact online in a way that’s more like using cash in a store. It’s not totally unlike the grand vision of cryptocurrency, wherein there are no third parties involved — except, of course, Amazon itself.

And on the other side of the physical spectrum, Amazon Go, a physical shopping experience with no checkout, still requires you to have a credit card linked to your Amazon account, but it certainly does away with the POS part of transacting. While conventional wisdom holds that most of the innovation must happen on top of existing infrastructure and processes, Amazon is inserting itself right in the middle of it.

And Amazon may be making even more compelling moves on the merchant side.

Amazon Lending launched in 2012 as an invite-only inventory financing service for Amazon sellers. And why not? From a strategic point of view, lending to sellers already on their platform creates compounding benefits for both parties. Competitively, Amazon has clear advantages over other financing solutions already in market — namely its relationship with merchants, vaguer regulatory regime, and access to real-time data on loan applicants. While most small business lenders must require and evaluate data from the applicant, Amazon has automatic transparency into how its sellers are doing, putting them in a much better place to evaluate risk and therefore to offer new loans. The company already issued $1 billion in loans in the past year, making this pillar of its business similar in size and scale to programs from payment companies PayPal and Square Capital. So far, Amazon’s strategy seems to be paying off: Its most recent financial filings indicate that loan losses are not material (i.e. default rates are extremely low), and the company has already earned more than half a billion dollars on loan payments.

It’s not hard to imagine that Amazon is pulling pages from — and innovating on — the playbook of its rival and physical analog, Wal-Mart. Only a decade ago, Wal-Mart dipped its toe into the lending industry by applying for an industrial loan corporation charter, which banks ultimately helped shut down. While the banking industry hasn’t piped up yet, that may be simply because Amazon is playing a subtler game.

Regardless, the behemoth is building the clearest example yet of the power of closed loop systems, and of how conglomerates today have the power — and the will — to go beyond being hubs of their customers’ lives. They’re the spokes, too, and may hope to become the entire wheel.

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