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What the Amazon-Whole Foods deal means for banking

Amazon’s surprise announcement Friday that it is buying Whole Foods, the upscale grocer, sparked concern across the retail banking industry, as executives scrambled to assess the future implications of the blockbuster deal.

Reactions ran the gamut. Bankers with branches inside of rival grocery stores, alarmed by the steep plunge in grocers’ stock prices Friday, wondered if grocery chains would start shuttering stores in order to stay competitive. Consultants prognosticated on the importance of and brick-and-mortar locations, as banks — just like online retailers — try to find the right balance between storefronts and digital platforms.

Most prevalent, though, was the looming fear in the industry that a foray into banking could be just around the corner for the Seattle e-commerce giant, whose recent expansion into publishing, groceries and other businesses has made it an omnipresent force in consumers’ lives.

“One should always fear Amazon,” said Andrew Hovet, director of retail banking strategy at Novantas.

Amazon, of course, has not announced plans to enter the banking industry, though it has recently ramped up its lending to small merchants. Nonetheless, the deal struck a chord in the banking industry, at a time when threats from nonbank competitors, as well as questions about the future of the physical storefront, are at the top of executives’ minds.

Here are a few takeaways from Friday’s announcement.

The deal raises fresh questions about the future of in-store branches

If Amazon upends the grocery business in the coming years, as some predicted Friday, it could change the game for in-store branching — a business model that is already beginning to show cracks.

After the deal’s announcement, share prices of major retailers plunged. Costco shares fell 7%, while Kroger and Supervalu experienced double-digit declines.

Dave Martin, the founder of bankmechanics, a retail bank performance company, said he started getting calls and text from bankers immediately after the deal was announced. Bankers’ overwhelming concern is that grocers, facing even stiffer competition from Amazon, might be forced to close stores to stay competitive. At the very least, they could see a steep decline in foot traffic, which would threaten the very business model of the in-store branch.

“The knee-jerk reaction whenever you have grocers taking a hit like this is, ‘What is this going to do to the business?’ ” Martin said.

A number of large banks, including U.S. Bancorp, SunTrust Banks, PNC Financial Services Group and Huntington Bancshares, operate locations inside of major grocery outlets.

Still, even if the grocery industry is headed for a major shake-out, retailers still may find a place for banks. If Whole Foods’ grocery-store rivals feel the heat from competition and tighter margins, rent from banks could be a welcome source of revenue, Martin said.

“They are going to look at various financial institutions as being good partners,” Martin said. “If you get banks into some of your stores, you’re locking in primary customers.”

Buying Whole Foods may boost Amazon’s growing presence in small-business lending

The Whole Foods deal could open up opportunities for Amazon to expand its lending business — presenting a potentially new threat to banks.

Amazon began lending to its small-businesses clients in 2011, providing the 12-month loans of up to $750,000. The company uses transactions on the e-commerce site to underwrite the loans, and has provided $3 billion in loans to date.

It remains to be seen whether the Whole Foods deal will open up new lending opportunities, such as to some of the grocer’s smaller suppliers. Analysts said they were still digesting the implications, but noted that many Whole Foods suppliers are large, national players.

“I can’t imagine there’s anybody selling small, niche products that aren’t already national,” said Michael Pachter, an analyst with Wedbush Securities.

Still, considering the rising competition from Amazon in small-business lending, the deal should nonetheless push banks to invest in online commercial lending, according to Dan O’Malley, CEO of Numerated Growth Technologies and former chief digital officer at Eastern Bank.

“While nobody can touch banks’ pricing for real estate lending, if banks don’t invest in their C&I capabilities, other companies like Amazon can take business from them,” O’Malley said by email.

The Whole Foods deal makes Amazon’s new 2% cash-back offer more compelling

On June 13, Amazon launched a program that will allow Amazon Prime members — tens of millions of households — to receive 2% cash back on funds they spend from a gift card linked to their bank account.

Even before the Whole Foods deal was announced, it was easy to see how this enticement might chip away at banks’ swipe-fee revenue. The 2% cash-back offer is a better deal for consumers than what is available on virtually any credit card, and it does not come with the downside of spending money that you do not have.

And the Whole Foods purchase figures to drive even more spending to Amazon, said Michael Moeser, director of payments at Javelin Strategy & Research. He said that the grocery sector accounts for roughly 25% of the nation’s retail economy.

“I would be highly concerned if I was a bank,” Moeser said.

Consumers across industries want both physical locations and online options

The omnichannel business model is king.

That should be the takeaway for executives across the industry, as banks struggle to find the right blend of physical storefronts and flashy, digital offerings, according to Hovet at Novantas.

In buying Whole Foods, Amazon is making a big bet on the staying power of physical storefronts, even as consumers increasingly use online grocery-ordering services.

Similarly, in banking, recent surveys have shown that even consumers who rarely visit bank branches want the option to do so at some point, Hovet said. Customers may want advice on taking out a loan, for instance.

“It comes back to that consumer need for something physical and tangible, at least in certain moments of truth,” Hovet said.

Hovet also pointed to the recent development of cafes by Capital One 360, a digital bank, as an example of how customers want to see physical representations of online banking brands.

Yes, Amazon wants to take over the world, and it is well ositioned to disrupt the grocery business

The $13.7 billion deal for Whole Foods is a testament to Amazon CEO Jeff Bezos’ ambition, and it makes a lot of strategic sense. Amazon was already experimenting with brick-and-mortar grocery stores, and it operates a grocery delivery service. The industry it is entering is adjacent to the e-commerce realm that the Seattle-based company dominates.

Over time, Whole Foods’ customers will be more likely to sign up for Amazon Prime, which will feed even more data to the company, helping to open up additional business opportunities.

“One thing is very clear: Amazon is ingenious when it comes to possessing data, leveraging data and then figuring out new business lines with respect to the data they possess,” said Mark Hamrick, senior economic analyst at

But world domination takes time, and banking may not be at the top of the company’s list

For Amazon, the logic of competing head-on with banks may be less compelling than some other opportunities.

Of course there are big regulatory hurdles. What’s more, the company does not have a major track record in areas that are core competencies for banks, such as assessing credit risk.

So far, Amazon has mostly nibbled around the edges of the banking industry, embracing certain niches where its massive stash of customer data provides a key advantage.

“If you look at what it takes to make a lending business successful, I’m not sure where their competitive advantage lies,” said Brayden McCarthy, vice president of strategy at Fundera, a marketplace for small-business loans.

“I don’t think that at least in the short term they’re going to make a big play in financial services,” said Alex Johnson, a senior manager at FICO.

Still, if the company decides to make a big splash in banking, it certainly has the means. Amazon had $21.5 billion in cash and short-term investments at the end of the first quarter.

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