Amazon Bank: When Will Banking’s Worst Nightmare Come True?

Rumors have been swirling that an Amazon Bank may be imminent. Will banking be the next industry to feel the 'Amazon Effect'?

It seems like there’s nothing Amazon can’t do these days. They’ve moved into the cloud with web storage and computing services. They’ve launched music and video streaming services. And they’ve even taken on old-fashioned brick-and-mortar retailing.

In June 2017, Amazon announced they were buying upscale grocer Whole Foods. According to reports, they are also looking at getting into the pharmaceutical and home furnishing industries as well.

This has many wondering if Amazon’s appetite knows no bounds. Is there anything they aren’t planning on taking over, including banking?

Probably not.

Asheet Mehta with the global banking practice at McKinsey, one of the world’s most respected consulting firms, explained in an interview with Business Insider that Amazon’s stock trades on the company’s future growth potential, not it’s current market value, which is why Amazon needs to continually move into adjacent markets.

“Amazon is under pressure to keep increasing revenue, and financial services is a large pool they can go after,” Mehta says.

From that perspective, you could argue that Amazon’s intrusion into finance is an inevitability, based on nothing more than the sheer velocity of its stock price.

“Amazon’s entry into the financial sector could come sooner rather than later,” cautions Kailey Leinz with Bloomberg. “Bankers beware.”

A Significant and Credible Threat

Traditional banking providers are definitely vulnerable. In a Bain & Company survey of more than 133,000 banking customers in 22 countries, consumers said they trust Amazon and PayPal with their money nearly as much as their banking provider. Some 55% of U.S. consumers said they are open to buying financial products from established tech firms. And 73% of Millennials said they would be more excited about a new financial offering from the likes of Amazon, Google, Paypal or Square than from their bank.

If a Silicon Valley tech giant like Amazon did decide to move into banking, they would enjoy some major advantages over traditional banks and credit unions: better data, a superior user experience, a digitally-native platform, and tremendous customer loyalty.

That’s certainly why almost half of banks and credit unions consider tech companies like Amazon, Google, Facebook and Apple to be a “significant threat,” according to a study fielded by Infosys Finacle.

Another report in late 2017 from the World Economic Forum concludes that major tech companies like Amazon pose a much bigger and realistic existential threat to traditional banking providers than fintech startups.

“Banks around the world have spent the past few years preparing for competition from small, nimble technology startups,” observes Hugh Son with Bloomberg. “It turns out the real threat may actually be Jeff Bezos.”

Mehta with McKinsey agrees. He says big tech is the top threat to incumbent banking providers, not fintech.

“The greatest threat to banks from digital competitors no longer comes from fintechs, which have often struggled to scale and have entered into partnerships with banks,” Mehta says.

The consulting team at McKinsey says that if big tech firms like Amazon get serious about banking, they could steal a big chunk of profits and leave banks with the least attractive parts of the business. McKinsey’s worst-case scenario puts returns on a par with what banks saw during the financial crisis of 2008.

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Is Amazon Already a Bank?

Amazon has already staked a claim on banks’ turf, as it guns for financial consumers and the revenues and profits they represent.

They offer credit cards. They also have a quasi-debit card, Amazon Cash, that lets customers make deposits up to $500 directly into their Amazon accounts from more than 10,000 retail locations, including 7-11, CVS and GameStop.

On an invitation-only basis, Amazon Lending offers short-term business loans from $1,000 to $750,000 to businesses that sell products on the Amazon platform. Amazon does not disclose interest rates, but they tend to be lower than credit cards. Merchants can be approved for a loan within 24 hours, and tend to use the loan proceeds for inventory financing and business expansion. One interesting facet to Amazon’s business lending model is that they can choose to intercept a merchant’s sales revenues if the company falls behind on their loan payments. This type of quasi-collateral allows Amazon to make riskier loans than other lenders might.

In June 2017, Amazon said that its lending service surpassed $3 billion in loans to small businesses since it was launched in 2011. Over 20,000 small businesses in the U.S., U.K. and Japan that participate in the Amazon marketplace have received loans, and Amazon says that more around half of them end up taking a second loan.

While $3 billion in loans may sound impressive, consider that just one megabank — JPMorgan Chase — has made over $130 billion in business loans during the same timeframe. But still, there is no denying Amazon is at least starting to look more and more like a bank.

Will 2018 See The Bank of Amazon?

Given that Amazon already provides payment services, credit cards and loans, Gerard du Toit from Bain & Company says it’s plausible that they could offer a bona fide suite of retail banking services in the very near future.

“It’s just a matter of time before big tech players enter retail banking in the U.S.,” du Toit said in an interview with Bloomberg. “You’re going to see a Darwinian battle between banks and tech firms, and some surprising combinations on how they get to market.”

CFRA bank analyst Ken Leon predicts that an online giant like Amazon may acquire a small or mid-size bank in 2018 to test the regulatory waters and gain a footing in the industry.

“This may either be a tactical move or a broad strategic jump into banking, as Amazon seeks more stickiness with consumers and small businesses in consumer lending such as auto loans, credit cards and home mortgages,” Leon wrote in his forward-looking analysis.

Other industry observers are more restrained in their assessment. Will Amazon actually get a banking license and start offering checking accounts, home mortgages and auto loans directly to the public? Alyson Clarke, a principal analyst at Forrester, is skeptical.

“The threat is not about Amazon taking market share, it’s that they become the customer interface, and the banks become the ‘ingredient brand’,” Clarke said in an interview. “When you lose that connection with your end customer, you’re simply a no-name product manufacturer. And when you no longer have brand, the only things you have left to compete on are price and features.”

No matter what happens, most pundits agree that Amazon will have a presence in the banking space and the impacts felt by every traditional financial institution — both large and small — will be major.

Emma Hinchliffe with Mashable sums it up neatly. “Even if these tech giants aren’t directly competing with banks most of the time,” she wrote, “their sheer presence in consumers’ everyday lives, the amount of data they collect about customers, and the reliance banks are forced to have on their business-side products will impact the future of the financial sector.”

But Won’t Regulators Step In to Save Traditional Banks Again?

Retailers like Walmart have lusted after the banking sector for decades. And many financial watchdogs like to point out what happened to Walmart when they chiseling in on the financial industry. They failed to buy one-branch thrift in Oklahoma, and their application for a banking license was rebuffed by lawmakers who felt heavy pressure from lobbyists.

As Bloomberg reports, U.S. policy makers for years have rejected attempts by big companies to muscle in on banking. The crutch everyone in the traditional banking industry leans on is the Bank Holding Company Act, that prohibits companies in commerce from also engaging in banking activities. The concern was that they might, for instance, siphon deposits, or make risky loans to their own customers in order to stimulate/inflate sales.

“There has been concern, historically, that for banks owned by corporate enterprises there would be excessive lending into the corporate enterprise and its subsidiaries,” said Guy Moszkowski, a banking analyst at Autonomous Research, in an interview with Bloomberg. “The fear has generally been that if you allow corporates to control banks, they’ll find ways around those prohibitions.”

But that was then.

Times have changed, and perhaps the regulatory environment isn’t that far behind.

Keith Noreika, the temporary head of the Office of the Comptroller of the Currency (OCC), the agency that oversees U.S. national banks, points out that this notion of separation underpinning the Bank Holding Company Act has roots in the 18th century. He argues that the law reflects outmoded beliefs, and that its motivations were never all that righteous in the first place. Noreika contends that the modern version of the law was influenced by “the Rockefellers who wanted to stick it to the Morgans” by advocating more aggressive bank regulations back in the 1930s.

Noreika says it’s time to take another look at these laws. At a conference in 2017, he actually called for ending the centuries-old separation between banking and commerce.

“Such dogma props up bureaucracies… and serves the interest of the status quo without regard to why the separation exists in the first place or whether the separation has any usefulness for today’s economy,” Noreika told the audience. “If a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so.”


So does that mean it’s time for traditional banking providers to panic? No, says Eric Byunn, a partner at Centana. Byunn says banks should not be fatalistic about the threats posed by tech companies like Amazon.

“Incumbents still hold the upper hand,” he said in an article published by American Banker. “The risk of an Amazon or Google or Apple dominating the traditional banking sector is nowhere near a slam dunk.

“By no means will the Bank of Amazon or Bank of Google be taking direct deposits to finance the apartment complex next door anytime soon,” Byunn says. “While Amazon [brings] capital to an underserved market, their business strategies are still a far cry from an existing industry being ‘crushed’ by a tech giant.”

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