OBSERVATIONS FROM THE FINTECH SNARK TANK
There's a lot of talk these days about the possibility and probability of Amazon getting into banking:
“Amazon is under pressure to keep increasing revenue, and financial services is a large pool they can go after.”
— Asheet Mehta, McKinsey“Amazon may acquire a small or mid-size bank 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.”
— Ken Leon, CFRA“By no means will the Bank of Amazon be taking direct deposits to finance the apartment complex next door anytime soon. 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.”
— Eric Byunn, Centana
What Do Consumers Think?
Cornerstone Advisors conducted a survey of 2,393 US consumers between the ages of 21 and 72 who own a smartphone and have a bank account, and asked respondents what they would do if Amazon offered a checking account bundled with other services like cell phone damage protection, ID theft protection, and roadside assistance, for a fee of $5 to $10 a month.
Roughly three of 10 consumers say they would open the fee-based bundled account, of which 60% said they'd keep their existing bank account. Overall, another 30% said they'd consider opening the fee-based account.
Cornerstone also asked what consumers would do if Amazon offered a free checking account. Interestingly, a slightly lower percentage of consumers would opt for the free checking account--an indication that consumers' interest in an Amazon checking account is less about the bank account and more about access to other services they find more valuable.
As you might guess, there are generational differences in stated intention to open an Amazon checking account. What might surprise you, however, is that Millennials in their 20s are not the group most interested in doing their banking with Amazon.
Roughly four in 10 Older Millennials (30 to 38 years old) and Gen Xers would open a fee-based Amazon checking account, in contrast to just 28% of Young Millennials (21 to 29). Across each generational segment, a slightly higher percentage would keep their existing account and would prefer the fee-based account to the free account.
What Would Happen To Bank Deposits If Amazon Launched a Checking Account?
Based on consumers' self-reported levels of checking account deposits, banks could lose about $100 billion in the wake of an Amazon checking account launch.
This estimate assumes: 1) The people who said they would "consider" opening the Amazon account actually did, and 2) The people who said they'd keep their existing bank accounts moved half their money.
Just looking at the people who said they would definitely open the Amazon account yields a not-too-shabby $72 billion in potentially displaced deposits.
The bad news for banks in an Amazon checking account scenario is that the consumers who said they would open the Amazon account and close out their existing bank account have balances 2.5 times greater than the average.
Should Banks Be Worried?
Yes, but not about the whole $100 billion. There are a number of reasons why this level of deposit displacement won't be realized:
- Consumers never do what they say they're going to do. You know how many surveys show that a double-digit percentage of consumers plan on switching accounts? A lot. Does it ever happen? No.
- Amazon doesn't want (or need) that level of deposits. It's not in Amazon's best interest to be a checking account provider when it can partner with banks to find lending opportunities and take a cut of the action (on both products).
Banks as Amazon Customers
Amazon reportedly provided $1 billion in merchant cash advances to merchants on its platform in 2017. Is this an example of Amazon displacing banks? Maybe, but the key question to ask is this: Why was it only $1 billion?
Two possible answers:
- That's all the money Amazon had to lend, and/or
- That's all the money Amazon wanted to lend.
The potential demand for merchant cash advances among Amazon merchants could have been $5 billion. It's in Amazon's best interests as a platform to meet that demand by matching merchants with banks willing to lend the $4 billion that Amazon couldn't or wouldn't lend.
And Amazon will make money, not just by "matching" merchants with banks willing to lend that money, but by providing technology to underwrite and process the loans -- which the banks will pay for, because it offsets their existing loan acquisition and processing costs.
The same thinking applies to checking accounts.
By offering consumers checking accounts from as many banks as Amazon can attract to its platform, it creates opportunities for Amazon to provide technology and marketing services to banks to open and manage those accounts.
In essence, Amazon isn’t a threat to banks--it's a potential distribution channel and technology provider. The players most threatened by Amazon's entrance into checking accounts (and lending) are the legacy fintech providers--the Fiservs, FISes, and Jack Henrys of the world. Amazon is positioning itself to cut these players out of the loop.
The Fiserv merger with First Data helps protect against this threat.
This may sound far-fetched, but it's less about core replacement (in the short-term at least), and more about digital account opening and loan underwriting/processing. But an Amazon as a service provider for banks' technology and marketing needs is a real possibility.
