Excitement is growing around Amazon’s increasing focus on financial services. The Wall Street Journal reported earlier this year that the online retail giant is in early discussions with banks, including JPMorgan Chase and Capital One, about partnering to offer its customers a checking account product or something similar. Given Amazon’s strength in the US, figures suggest that Amazon could have 70 million US banking customers within 5 years – making it one of the largest US banks.
Amazon has been quietly expanding its financial services offering over the past couple of years. They launched Amazon TopUp in the US, Canada and the UK in 2017, enabling customers to top up their Amazon accounts with cash from shops across each country. In the UK, they already offer credit cards and their global lending business for merchants has also been gaining momentum, lending well over $1.5bn to merchants in the US, UK, Europe and Japan in 2017. Both as a partner to the banks and as a competitor, Amazon’s rise in financial services is growing in momentum.
However, in the UK, we have seen countless attempts by major retailers to move into the financial services space. All the largest brands on the UK high street – from Sainsbury’s to John Lewis – offer banking services to customers. Yet they have all failed to make any real dent in the UK market. The same big-name retail banks still monopolise the landscape.
Despite the dominance of traditional players in the UK market, increasing pressure has been mounting on the major banks in recent years as the sector has been recognised as ripe for disruption. New banking startups such as Monzo have shown the power of a customer-centric digital proposition. Monzo announced in April that it has more than 870,000 customers. Yet, despite their success, they have failed to get much traction outside of the city millennials. With the majority of customers, trust remains a challenge the new digital banks have yet to overcome.
If the rumours are correct, and Amazon is looking to deepen its financial services offering, the question becomes: will it be any more successful than its retail predecessors in making its mark on the UK banking market?
I think the answer is a resounding yes.
Why? 3 main reasons…
1) Amazon’s approach to expansion
Amazon has amazed many with its rise and it now dominates the ecommerce market in some of the world’s largest economies. Outside of ecommerce, Amazon Web Services (AWS) is one of the largest providers of cloud computing, and they continue to grow into more diverse areas, including expanding into bricks and mortar following the acquisition of Whole Foods last year. Some of the principles that have been at the core of Amazon’s success so far, I believe, drive its continued success as it expands into financial services.
Over successive years, Amazon’s increasing revenue were reinvested back into the company rather than paid out to shareholders. Jeff Bezos, the founder and CEO of Amazon, had an unflinching belief in his long-term vision and has chased long-term success over short-term profit targets. As he has said:
“We are comfortable planting seeds and waiting for them to grow into trees.”
With the success of Amazon’s other businesses, they have deep pockets to invest. Financial services, more than most industries, requires a long term vision and deep pockets – having both gives Amazon a big advantage.
Jeff Bezos has always identified Amazon’s obsession with the customer as the cornerstone of the business. This obsession was described in his 2016 letter to shareholders:
“Customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf.”
Amazon delights customers with innovation before they even know they want it (think Amazon Prime and Alexa). Previously, when UK retailers launched their banking arms, for the most part, they simply tried to leverage their brand to sell their products. They generally white labelled existing products, replicated existing customer journeys and did little to change the customer experience. Amazon won’t make the same mistake.
Two tips shared by Jeff Bezos highlight the determination at the centre of Amazon’s strategy:
- “We are willing to be misunderstood for long periods of time”
- “If you want to be inventive, you have to be willing to fail”
In keeping with both of these principles, Amazon has shown that it is willing to fight through criticism and failure to deliver a great customer experience and expand. I suspect a number of Amazon’s ventures in banking may be initially misunderstood by the market and in some cases even fail, but their determination will ensure their long-term success.
Data is king at Amazon. It has a rich data pool, analysing it religiously and driving decisions based on the insight. It has thousands of data points on both the companies that sell through its platform and the customers who purchase an ever-increasing range of goods from its site.
This treasure trove of transaction data and, particularly, Amazon’s ability to understand and get rich insights from its data is the envy of any bank – old or new. The insights from the data will be key in enabling Amazon to develop new disruptive products and offer a deeply personalised service to customers.
2) It has already built the AWS platform
Amazon is already a major player in financial services behind the scenes. AWS is used by a multitude of financial services companies as the foundations for their tech stack. It has significantly reduced the cost of entry into the banking market, by providing access to servers at lower costs, and given the companies using the service access to leading machine learning tools. Many of the newest digital financial services companies, such as Starling and Thomas Cook Money, have been built on the AWS platform.
Given that any new financial services firm needs to be a technology company first and foremost, the technological capabilities Amazon has built up through the development of AWS will give it a flying head start. It will also put it in an interesting position, as it starts to compete with many of the fintechs who rely on it as their technological backbone.
3) Today’s market landscape
Today’s market also makes it an advantageous time for Amazon to expand in this space. Amazon has an advantage that other fintechs could only dream of – it is already a trusted and recognised name by many millions of people across the countries it operates in. Amazon has also been able to cross the generational gap. While many fintechs have been able to get a foothold in the younger generation, they have struggled to achieve major traction in the older generations where most of the wealth remains.
Whilst struggling to gain trust across generations, fintechs have made people more comfortable, especially millennials, with the idea that they could move banks and trust a new brand. The Credit Crisis also eroded trust in the major banks that has never quite recovered. The market looked very different from when the big retailers launched their banks in the 1990s and early 2000s in the UK. The industry is ripe for major disruption.
If Amazon is able to successfully grow its financial services business, it would not be unique in its success. Alibaba, seen by many as the Amazon of the East, successfully started and has grown AliPay, a platform offering a range of banking products to customers, out of its ecommerce business. Alipay now has 600 million users.
For the reasons I have looked at in this blog, I think Amazon will be able to repeat the success of Alibaba and disrupt banking in the UK and in the other markets it operates in. The closures this year of retailers like Toys R Us and Maplin arguably happened because they couldn’t compete with Amazon… Should this be a portent to banks? I think so.
Watch out banks… Amazon is coming.