Amazon could be third largest bank in the US within five years

While the banking sector frets about the incursions of small fintech start-ups, the spectre of tech giants grabbing a piece of the banking pie looms large. A recent study from consulting firm Bain & Company says that online retail heavyweight Amazon could have banking services with 70 million US customers within five years - making it America’s third largest bank.

Amazon has been the bane of many brick-and-mortar retailers’ existence over the past number of years as they struggle to compete with Amazon’s low prices, low overhead, convenience, and customer service. Now, the banking sector may have to face Amazon as a competitor as well. According to a recent report by Bain & Company, Amazon could have 70 million US customers in its banking services in 5 years, making the Bank of Amazon as large as Wells Fargo.

Amazon has already been speaking to JPMorgan Chase and Capital One in order to partner up and create a checking account product aimed at young consumers - a notably unprofitable portion of the banking pie. However, as the co-authors of the Bain report - Gerard du Toit and Aaron Cheris - surmise, Amazon will be able to transform the economics of banking. As a digital channel retailer, Amazon does not have to pay for the expensive branch and contact networks that account for 40% of North American bank costs. The lack of physical locations is a financial advantage that Amazon has already used to subvert the consumer retail market.

Amazon will also be able to easily attract banking customers because it already has strong brand recognition and a long-standing digital relationship with so many US consumers. Consulting firm Bain believes that this makes them a better candidate for banking sector success than small fintech startups. Amazon can also boast that it has a high level of trust among US and UK consumers - ranked nearly as high as banks generally. Indeed, Bain relates that because of Amazon’s “obsessive customer focus”, excellent service, lack of major security breaches, and integration into computers and smartphones, it is the tech firm best positioned for success in the banking sector.

Avoiding fees, banking profits

By having customers use its checking account services, Amazon would save a quarter billion dollars in credit card interchange fees annually, in the US alone. Amazon would obviously be quite pleased to save the average 2% that it has to pay to credit card providers on transactions. Bain says this cost saving is premised on 50% of Amazon customers signing up - the same proportion that said they would buy a financial product from a tech firm in the next five years in a recent survey. The estimate is also premised on 15% of e-commerce on Amazon going through an Amazon banking account, with customers spending at average Amazon Prime levels.

Bain expects Amazon to move to more lucrative financial products once its checking service is well-established. The e-retail giant could offer loans, mortgages, insurance, and wealth management services, among other products. Crucially, Amazon could draw on an extensive amount of data to reinforce its financial services. The company could easily infer life events and stages of life from shopping patterns, enabling it to offer relevant financial services to its customers. Amazon can already look to the success of another large tech firm in the banking sector. In the last five years, Chinese e-commerce giant Alibaba has issued $96 billion dollars in loans; and last year $1.7 billion was sent through its Alipay service - five times that of PayPal. Bain expects Amazon to mirror the success of its fellow e-retailer.

Physical Banks vs Digital Banks

The banking sector has good reason to worry that Amazon will steal customers and market share. Consumers, both young and old, prefer websites and mobile apps to physical branches and call centers. Bain relates that banks lag behind Amazon and other tech firms in the performance of their digital channels. Despite their best efforts, the apps and websites of many banks simply do not match up to the quality of Amazon’s platforms. According to a Bain survey, only half of US consumers believe that their primary bank’s website does everything they need or is easy to use.

Amazon is especially poised to enlist customers in markets like Mexico and India, where banking in person is especially cumbersome and time-consuming, and mobile banking is underdeveloped. Customers looking for digital ease would be well served by the Bank of Amazon. 

The US e-retailer can also offer additional digital benefits to potential banking customers through its current technology. Amazon banking could easily be done through voice assistants, like the market dominant Alexa. According to Bain, 1⁄5 of US survey respondents said that they use voice assistants, and 1⁄4 said that they would use voice assistants for banking.

As well, few banks orient around customer needs like Amazon does. Amazon focuses on learning customer’s needs through large amounts of data, and then gaining their repeat business. If consumers see the customer-focus, better services and better customer experience at the Bank of Amazon, many are likely to switch over.

Banking is still a twinkle in the eye of Amazon, but banks should take note of the advantages and benefits the tech giant will be able to offer to potential customers. One need only look to brick-and-mortar retailers to see how Amazon can alter a sector’s landscape in a matter of years.