5 of Amazon's innovations in card payments

Amazon is working aggressively to change the way people shop — especially in the grocery space — but not all of its activities focus on products and store design. The e-commerce giant has also influenced a lot about how people use their payment cards.

In a move that will certainly cause friction across the card payments industry, Amazon recently announced a service called Amazon Prime Reload, which incentivizes newcomers to the program to load funds using a debit card or bank account with a 2% cash back on purchases.

It’s designed to increase enrollment in Amazon Prime, the $99 per year membership program that provides discounts and access to a range of goods and services, including video streaming and two-day shipping. Prime Reload focuses on treating an Amazon account as a stored value account to decrease purchase friction and to reduce transaction costs.

After enrolling a debit card and bank account (Amazon chooses which to use when processing reloads), the next step in the process is to load value to the shopper's Amazon Balance with a $100 load set as the default and emphasised in bold. The 2% cash back is not provided at the time of purchase, but at the time of reload.

Amazon is subtly guiding the end user to load at least $100 to the account for and to burn through this to earn rewards. Psychologically, it is also abstracting the funds from traditional payment media, presumably to make the value stored by Amazon “fun money”, rather than a value that is coming directly from the weekly budget. Its use of the phrase “Gift Card Balance” is somewhat telling - this money is a gift, it just happens to come from yourself.

The launch of Amazon Prime Reload will not be welcome news to card networks, issuers and traditional retailers.

The banks and card networks fought relentlessly with PayPal over the years against its use of a similar practice of using linked bank accounts to cut its own payment costs. Visa and its peers finally convinced PayPal to change its ways, but it seems now that this battle was fought on the wrong front.

If Amazon succeeds in convincing shoppers to use their Amazon Balance instead of a payment card, issuer revenues from Amazon will dip dramatically as the retailer shifts more reload volume to ACH.

In January, Amazon revamped its cobranded rewards card, adding a higher tier of rewards for people who pay a $99 annual fee — as 65 million people already do — for Amazon Prime membership.

The strategy is at odds with that of most credit card issuers, which market the perks of using their credit cards and use the lavishness to justify an annual fee. In Amazon's example, the company has sold its customers on paying the fee for a growing range of services including expedited shipping, video streaming and early access to deals; the credit card would just be one more benefit for a cost consumers already pay.

The Amazon-branded Visa card, issued by JPMorgan Chase, has no annual fee but its rewards are less generous for non-Prime subscribers, who get a mere 3% back for money spent on Amazon compared to Prime members' 5% reward.

The reward structure allows Amazon to offer a premium reward card while bundling the premium fee as part of a service that the majority of its customers already purchase. It also makes Amazon's credit card more enticing at a time when the e-commerce giant is experimenting with new services that could ramp up its customers' spending.