Amazon's big plunge into banking

Banks that focus on customers over products have the best shot at standing up to Amazon's juggernaut when it steams into their market.

Amazon may be taking the plunge into banking, and by any estimation, it’s a game changer for the banking industry in Asia and the rest of the world. Reports that it seeks a bank for a cobranded, mobile-friendly, checking-account-like product initially targeted to young adults in the US follows earlier moves into financial products such as a cobranded credit card and loans to small merchants selling online.

No-fee checking and debit accounts are notoriously unprofitable, but Amazon has spotted a segment of customers that it can serve better and with lower costs. It’s not burdened with an expensive branch and contact center network, which we estimate comprises roughly 40% of a retail bank’s costs on average. The company can also avoid a lot of the customer acquisition costs borne by most direct banks, thanks to its existing digital relationships with so many Americans. With these two advantages, Amazon’s incremental costs will be almost nil.

Other advantages favor Amazon as well. The bank it decides to partner with will hold deposits, whilst Amazon will design and manage the customer experience and distribution. This arrangement allows Amazon to avoid dealing with bank regulatory compliance and managing the balance sheet, and it gives its banking partner a shiny new front end designed by a digital leader. Amazon will get fees from the bank partner, though a more valuable financial benefit in the short run could be the savings realised from convincing millions of its e-commerce customers to use the cobranded debit card instead of their credit cards, which impose an average 2% interchange fee for most transactions on Amazon or third-party merchants. We estimate that Amazon would avoid more than $250 million in annual interchange fees in the US alone.

Besides its cost advantages, Amazon possesses other essential ingredients to succeed: digital prowess, a large customer base, an organisation skilled at improving the customer experience and ample leeway to extend the brand into banking without disrupting its own core business. It has earned people’s trust from the purchase, return and service interactions that together have defined what a digital customer experience can be. What’s striking—and deeply concerning for banks—is how that trust in Amazon transfers to other sectors besides online shopping. In a recent Bain & Company survey of 133,000 banking consumers in 22 countries, US consumers ranked Amazon nearly as high as banks for trustworthiness with their money. On that foundation of trust, many consumers are open to buying financial products from established tech firms. More than half of US survey respondents—and nearly three quarters of those aged 18 to 24—expect to run some of their personal finances through Amazon, Apple, Google or another major tech firm over the next five years.

Indeed, it’s not difficult to map out a scenario in which Amazon’s banking partnership gains 70 million consumer relationships for financial service products over the next five years or so—as many as Wells Fargo, the third-largest bank in the US. Once Amazon has established the basic banking service, it’s a relatively straight move into adjacent financial products, including lending (both purchase financing and debt consolidation), mortgages, property and casualty insurance, wealth management (starting with a simple money market fund to hold larger balances), and life insurance.

This dynamic is already playing out in Asia. Chinese e-commerce giant Alibaba has amassed the world’s largest money market fund, issued $96 billion of loans in five years and grown Ant Financial to a market capitalisation roughly equivalent to the ninth-largest bank in the US. Japan’s main e-commerce company, Rakuten, operates the country’s largest Internet bank and third-largest credit card company by transaction value.

For banks and other financial services firms, this is a watershed moment. As hard as they have worked to catch up, banks still lag in their digital performance relative to major tech firms. Only about half of US respondents strongly agreed that their bank’s website lets them do everything they need or is easy to use. Banks have barely touched technologies such as voice assistance that have reached a tipping point in consumer markets—and by the way, Amazon currently dominates voice-enabled speakers with its Alexa assistant on the Echo device.

Lagging performance on all things digital is a symptom of deeper vulnerabilities in banking organisations. Few banks have learned how to orient around customers’ needs when designing policies or products. Few banks make decisions fast enough to keep pace with new competitors. Amazon expects to be in market faster than it takes most banks to decide on a new product, let alone launch it.

Amazon is not invulnerable, of course, and banks that raise their competitive game can stave off incursions by Amazon and other big tech firms. But they will need to get more serious about putting customers first rather than pushing products. They will have to learn to move much faster, discarding decision making by committee. And they will need to make stark choices about how to transform their current businesses. Some might choose to become back-end utilities focused on core activities such as transaction processing. Others might become digital category specialists. And some might conserve cash by trimming costs and capital expenditures in order to become attractive acquisitions.

If banks don’t reorient their approach and radically accelerate their rate of progress soon, they will watch technology firms steadily poach their business. At first, it will be the unprofitable slice of business that no one wants. Then the rest of the pie. Meanwhile, banks’ economics will erode as too many routine transactions continue to flow through expensive branch networks, whilst too many bad events keep occurring and cause customers to flood contact centers with disputes and problems. Banks that focus on customers over products have the best shot at standing up to Amazon’s juggernaut when it steams into their market.