The risks and rewards of partnering with Amazon
News that eight financial institutions have partnered with Google on its forthcoming checking account product shows how urgently banks are responding to tech giants’ push into financial services.
Community bankers surveyed last year said tech giants are a bigger threat to their business models than larger banks. Amazon in particular is stirring up more discussion as mentions of the e-commerce behemoth on industry conference calls has spiked in the past few years.
Amazon’s activity certainly warrants such attention. It has made a multitude of financial services plays in online payments (Amazon Pay), in-store payments (Amazon Go), lending for merchants, credit cards for consumers and virtual cash wallets (Amazon Cash).
This activity aims at facilitating more business on Amazon’s core e-commerce platform, not developing a full-fledged banking offering. In fact, Amazon previously backed away from launching a checking account product that would make it a full bank.
However, the tech giant will continue growing its financial services offerings in multiple areas to make its core business more attractive to consumers and merchants alike.
Banks can take advantage of Amazon’s ambitions by partnering to launch financial products and services. Some — like Goldman Sachs’s online bank Marcus and Synchrony Financial — are already doing so. Amazon is also reportedly partnering with Bank of America and JPMorgan Chase. Such partnerships carry risk if Amazon’s ambitions grow larger.
However, partnering can complement a broader digital strategy, allowing banks to tap into Amazon’s growth and customer loyalty to improve their own prospects. Amazon’s outlook has only brightened with consumer spending shifting online during the coronavirus pandemic.
Banks can leverage Amazon to develop relationships in key customer segments — including mass-affluent consumers, an important demographic with an extraordinary affinity for Amazon — and with underbanked consumers. Also, through Amazon partnerships, banks can tap into the small businesses that sell on Amazon’s marketplace and are enjoying record sales during the pandemic.
Though Amazon’s relationship with its marketplace sellers remains a controversial topic that could earn greater regulatory scrutiny, sellers are unlikely to ditch its marketplace as long as it remains the first place most consumers shop online.
Banks looking to strengthen their business with these segments should consider how their strategic aspirations might align with Amazon’s financial services goals. Amazon has shown more and more interest in several financial services segments, including in the payments space beyond its own marketplace. Its integration with Worldpay last year, was a significant milestone. Emerging technologies like Amazon Go’s cashierless checkout system that is available to other retailers, or the biometric-based payments terminals reportedly being tested with Visa, may help enlarge its foothold.
Also, the Alexa voice-assistant platform already facilitates billions of dollars of transactions annually, according to Amazon. Enabling voice payments through Alexa can both boost e-commerce purchases on Amazon’s marketplace and enhance its payments presence in other settings, such as gas-station purchases.
A move into home real estate listings, insurance and financing would complement other Amazon priorities. It could offer a deep discount on Echo smart speakers to customers search for, financing or insuring homes, or target them to improve sales of furniture and appliances, categories where Amazon has been searching hard.
Amazon has also been moving into health insurance, most notably through the Haven Healthcare joint venture with Chase and Berkshire Hathaway, which provides insurance to some of Amazon’s employees.
Further, Amazon could play a role in meeting demand among wealth management clients for greater transparency and improved digital interactions. Alexa, for instance, could deliver daily account and market updates, paired with seamless voice payments capabilities. Combining Amazon’s aptitude for customer insights and recommendations with banks’ customer data could also enable more valuable financial advice.
However, partnering with Amazon also entails potential risks.
It was rumored Amazon might acquire a bank, but there are significant legal and regulatory hurdles to any such move. As it builds out its financial services portfolio, Amazon could create a general banking offering to meet the everyday financial needs of for consumers or small businesses.
This could mirror the path of its gigantic Amazon Web Services cloud computing arm, which started out as an effort to support its core e-commerce business with streamlined access to infrastructure services.
A similar platform play in banking could force Amazon’s banking partners to compete within Amazon’s financial services ecosystem, much like merchants selling on its e-commerce platform, or tech providers selling services through AWS’s marketplace.
To mitigate that risk, any partnership with Amazon must be ancillary to fortifying the bank’s own ecosystem of vendors, partners and customers. That means developing other partnerships, including fintechs and potentially other big-tech companies, to avoid overreliance on Amazon.
Customer relationships originated through any joint products or services launched with Amazon must be strengthened by cross-selling other relevant offerings. Cultivating the ability to harvest customer insights from those joint products and services along with the bank’s own data vaults will be foundational to that effort. And it will help ensure that the customer views the bank, not Amazon, as their crucial financial services provider.