It’s no secret that the digerati are taking bites out of the banking sector—offering payment services, loans and credit, cash, and savings products to the underbanked. Amazon is increasingly referred to as a “tech banking” firm. Amazon Pay has evolved to include a digital wallet for customers and a payments network for online and brick-and-mortar merchants. And Amazon Go’s “Just Walk Out” technology will grant access to the store and allows customers to grab-and-go without needing to physically check out to pay for products. Growing from just one pilot location in Seattle to 10 projected by the end of 2018, Amazon Go hopes to open 3,000 cashier-less stores by 2021, according to a recent Bloomberg story.
Amazon Cash fits neatly into the strategy of appealing to underbanked and unbanked populations. It lets users deposit to their Amazon.com balance by showing a barcode when paying cash at checkout locations, so they can shop at stores without a bank card. A partnership with Coinstar kiosks will extend Amazon Cash’s reach into rival stores. Amazon Lending offers its online sellers loans to cover working capital at rates typically lower than credit cards. It also services the consumer market with store, debit and credit cards. The Amazon Reload digital debit card has features that challenge credit cards. Amazon is offering Finance-as-a-Feature.
This rapidly growing phenomenon of “tech banking”—where ecommerce giants provide financial services—was born of three effects:
- First, the financial crisis had an adverse impact on trust in the banking system.
- Second, the spread of mobile devices reduced the advantages of physical distribution that banks previously enjoyed.
- Third, the demographic shift to millennials empowered a segment more open than older generations to financial services from non-traditional financial services firms.
Established banks make small or negative margins on serving most small businesses, so they cherry-pick customers, which creates an underbanked market. Now that sophisticated analytics is mainstream, lending and payment opportunities are moving to firms that possess the best data on customers.
That used to be banks. But now it is ecommerce companies—digerati—such as Amazon, Alibaba and PayPal, whose payment processing capabilities can underpin “tech banking.” Their customer data is more relevant, granular and timely. They can see minute-by-minute metrics, cash flows, shipping profiles, product accuracy and customer satisfaction (a phenomenon that will only grow when 5G mobile technology is introduced). Best of all, clients who have credit lines with these firms spend more than those who don’t, so even low-margin tech banking is worth it.
The great digerati clean-up
The digerati are eating into the traditional banking market at a scale any fintech organization would envy. Net interest income constitutes the majority of revenues in the banking sector—and this is where Amazon stands out compared to most of its tech counterparts. From launch in 2011 to June 2017, Amazon reported that it issued $3 billion to 20,000 businesses across the U.S., Japan, and the U.K.
The bulk of growth in the last year has been to U.S. businesses, where the company originated $1 billion loans in 2017 alone. Amazon Loans has enabled small-to-medium sized enterprises to grow sales by an estimated $4 billion. More than 20,000 small businesses have received a loan and more than half of those have taken a second loan from the company. Loans range from $1,000 to $750,000 with interest rates between six and 14 percent. Amazon Payments, with 33 million users in 170 countries, is catching up to credit cards, and PayPal is already ahead of Apple Pay, Google Wallet and the rest. Patents indicate that Amazon is thinking about the future of payments in terms of facial identity and selfies as a means of quickly paying. Payments is an efficiently served market, but not to a challenger with Amazon’s superior levels of efficiency, product integration and customer engagement.
And ahead of Amazon is…
Asian digerati are ahead of Amazon. Ant Financial, the finance arm of Alibaba (and formerly known as Alipay), is valued at around $60 billion. It offers payments, personal lending, banking products, savings products and peer-to-peer lending.
Alibaba’s four-year-old Yu’e Bao fund, a repository for leftover cash from online spending, is the world’s largest, with $165.6 billion under management. Ant Financial moved into fund management when it spotted the growing piles of cash in its customers’ accounts used to pay for everything from coffee to taxis to fridges. By sweeping the money into a money market fund, Ant Financial offers a return on surplus funds better than the banks. Customers have responded by taking their money out of bank accounts and placing it in their Alipay digital wallets.
In theory, the next step for any of these organizations would be to acquire a banking license; the quickest way to do that would be to buy a traditional bank. Not only would they get the license but they would also buy a customer base that could yield a significant credit card portfolio. Owning more of the card payment’s value chain would give them the opportunity to reduce costs and glean even more data about customer behavior: a vertical integration play in card payments. They would also gain the capability to manage the deposit base they’ve already accumulated.
But it’s less likely that Amazon is building a bank than focusing on building financial services products that increase participation in the Amazon ecosystem.
Banks can be different, without fear
All this said, banks have significant advantages over would-be competitors as they:
- are highly regulated
- hold a grip on credit issuance and risk taking
- are by far the biggest repository for deposits (which customers still mostly identify with their primary financial relationship)
- remain the gateways to the world’s largest payment systems
- still attract the bulk of credit requests
Tech bankers know how to win in a digital world. But traditional banks with their legacy loan books, branch networks and systems can win, too. It’s about how to utilize those assets alongside advanced digital capabilities to outmaneuver the tech bankers: product innovation, technology innovation, relationship change; incubate, partner, venture, acquire. These possibilities beckon, but will be realized only by taking a measured approach to understand the value that exists within those assets already.
Banks and other financial services firms stand as systemically important to society, which represents one reason they are regulated so highly. However, they fall short of meeting the financial services needs of the underbanked, which make up whole sections of business and society. Tech bankers are increasingly meeting those needs, albeit to drive up participation in their own ecosystems.
As banks look to shore up profits by diversifying they will inevitably compete with the tech bankers, but they can’t do that by copying them; they will have to out-innovate them. And that kind of innovation, once deployed, isn’t something you can buy on Amazon, Alibaba or anywhere else.
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Bill Murray is senior researcher and advisor at Leading Edge Forum. His IT career spans more than 30 years.
