Amazon and JPM: It's not about banking, it's about payments

If Amazon goes ahead with its reported plans to offer a checking account, it's not because the e-commerce giant wants to become a digital bank. As with most of the company's inventions, an Amazon checking account would more deeply embed customers into an Amazon ecosystem that provides an endless flow of data and efficiencies.

Amazon is seeking to partner for the account, with JPMorgan Chase and Capital One being among the early possibilities. But Amazon would control enrollment in the account, give it more surety over acceptance costs, control data and use it as a platform for marketing and cross-selling.

Chris Ratcliffe/Bloomberg

It wouldn't be Amazon's first move into this realm. Amazon already offers debit perks for Prime members, a program designed to provide incentives to use debit or bank accounts to load Amazon Prime accounts. These perks are structured in a subtle way that focuses more on loading and routing consumers to the Amazon Prime account than on encouraging transactions—having the effect of de-emphasizing card brands and issuers.

It's a model similar to PayPal's old strategy of linking to bank accounts to cut its own processing costs—a practice PayPal eventually abandoned after pressure from the card brands.

"PayPal is the closest parallel to this idea. Being able to at least give the appearance of stored balances in a self-contained ecosystem could be a first step towards disruption and disintermediation," said Wei Ke, head of the financial services practice at Simon-Kucher.

Amazon is following a pattern of big retail brands establishing financial services arms such as Walmart with Green Dot in the U.S. with a prepaid card, and President’s Choice Group with CIBC in Canada, Ke said. "Those partnerships tended to focus more on the underbanked population or the lower-middle-income crowds. Amazon’s target crowd is different and this makes it stand out, strategically speaking."

Amazon is not planning to become a bank, The Wall Street Journal reports. This would free it from a lot of new regulatory compliance issues while offering a major financial service. Amazon and JPMorgan Chase did not return a request for comment and Capital One would not comment on The Wall Street Journal's report.

The most immediate impact of having a checking account and companion debit card would be to cut costs from payment processing by leaning on Amazon Prime's membership of nearly 100 million for scale, said Thad Peterson, a senior analyst at Aite Group. But Amazon must be focused on more than reducing costs, he said.

"Offering its own [checking account] certainly has potential to lower costs, but given the size of their customer base it’s unlikely that they will pick up sufficient volume in the short term to significantly offset costs from other tender types," Peterson said. "The primary value is that it further deepens the customer’s relationship with Amazon, and adds value for the customer in that there is no intermediary between the consumer’s purchase behavior and the transaction."

A digital company like Amazon can do a lot with the sort of data a bank collects. One possibility is that it could mimic Square Capital, a business lending system operated by the mobile point of sale provider Square. That service, launched in 2014, examines a Square merchant's cash flow to determine whether to offer credit — and takes loan payments as a cut of future sales. If Amazon has insight into the consumer's cash flow, it could similarly use its data to extend credit and encourage more sales.

Amazon's marketing programs will become more important as the e-commerce company tries to lure more consumers into its cashierless Amazon Go stores and its Whole Foods groceries, both of which would benefit from the promotions and user experiences provided by Amazon Prime membership.

"It also provides Amazon with another platform to deliver incremental value through discounts and promotions … and it would tie nicely with their credit card offering," Peterson said.

Amazon already offers a cobranded credit card with Chase, and allows customers to spend reward points directly on Amazon's site rather than go through a redemption process. Amazon and Chase are also partners in a health care venture with Berkshire Hathaway.

As part of a banking partnership, Amazon could incorporate ChaseNet into Amazon Pay to reduce costs and also provide greater access to data. "Data is the new oil and payments are the well," said Richard Crone, a payments consultant.

Chase built ChaseNet as a closed-loop processing network in 2013, and it built Chase Pay on top of that. When the consumer and merchant are both Chase customers, ChaseNet reduces the traditional five-party acquiring system to three parties, cutting costs in the process.

A checking account adds to Amazon's goal to remove overhead from its model—either in-store through its Go cashierless environment, starting its own shipping network, or in this case partnering with financial institutions that are equal or controlling partners in payment relationships. A checking account could also enhance consumer and merchant programs that Amazon already offers, simply by removing an intermediary whose brand and processing fees would diminish from Amazon's own.