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

10 March 2018 Consulting.us

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.

Consumers are most likely to trust PayPal and Amazon with their money

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.

Many consumers find their banks digital tools disappointing

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.

Voice assistants are coming on strong

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.

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Payments market projected to see 6.6% annual growth to 2027

17 April 2019 Consulting.us

Bank payment systems are big revenue generators for incumbent banks, and growth in the segment is projected to continue at a rapid 6.6% annual increase, from $1.3 trillion in 2018 to $2.4 trillion in 2027. Developing markets are set to see the fastest growth, increasing their total share from 52% to 61% in the same period.

The payments segment is set to see strong growth in the coming decades, particularly in developing countries. The long-time control of banking incumbents over the segment, however, faces various threats from the rise of fintechs leveraging a range of technological innovations.

To understand the changing market conditions, as well as the possible impact of new entrants, Boston Consulting Group (BCG) has released its “Global Payments 2018” report.Payments revenue is expected to grow by 1.1 trillion to 2027Payment revenue has seen a number of years of solid growth, particularly in line with developing global economies. Compound annual growth rate (CAGR) globally stood at 6.8% between 2010 and 2017, increasing from $805 billion to $1.27 trillion. Mature markets have been relatively stable, with growth of around $100 billion noted during the period, resulting in around $616 billion in revenue in 2017. Developing economies, meanwhile, saw total revenue more than double, from $268 billion to $657 billion.

While the disparity in growth between developing and mature economies is currently stark, the firm’s projections for the future will see developing markets up their growth while mature market growth slows, at 8.3% and 4.4% CAGR, respectively, between 2018 and 2027. Developing market revenue shares are overall set to continue to eat into mature market shares. The shift will see the 2027 mature market represent 39% of total revenues, compared to a 48% share 2018.Primary income set to close gap on secondary income in mature marketsThe study also examined the difference between primary and secondary revenue sources, and their respective growth rates. Primary sources represent transaction fees that come with making payments, while secondary sources represent account fee costs and related non-transaction costs. The study revealed a shift toward increased income from primary sources in mature markets, with the share between primary and secondary sources shifting from 43% and 57% in 2017, to 57% and 43% by 2027. In developing markets, however, secondary sources are and will continue to be the main source of revenue growth, at 27% (primary) and 73% (secondary) by 2027, with only a 4% increase in income from primary sources over the same period.Retail payments revenue is expected to growRetail growth is projected to represent the more lucrative growth market for payment revenues, with 7% growth between 2017 and 2027. Credit card revenue will see the strongest relative growth, up almost $462 billion, followed by account revenue and debit card revenue. The retail market, meanwhile, is set to top $1.85 trillion by 2027, with the wholesale market set to see growth of around 6%. Account revenue will see the strongest absolute growth, while credit card and debit card revenue growth is set to outpace the market as a whole, with around 7% growth during the period.

The firm notes, however, that customer sentiment is changing. Fintechs are sometimes able to provide more efficient and better tailored services – with uncertain outcomes for some incumbents. “In both the retail and wholesale payments business, customers are becoming impatient with clumsy interactions and inefficiencies,” Mohammed Badi, leader of the firm’s global payments and transaction banking segment, and the report's coauthor, said. “Consumers, treasurers, and merchants are looking for automated, integrated buying journeys and tailored service. They are being conditioned by their buying experiences in other industries. Banks, in order to stay relevant, must respond faster and more strategically to the altered payments environment by focusing on the pain points that matter most across the overall customer journey.”