How Amazon Could Put Merchant Acquirers out of Business


Why do we still pay to move money?

PayPal, Venmo (who is technically PayPal) and several others have showed us that moving money can be free. So why do merchants shell out 3% of revenues to accept payments?

We don’t pay to deposit money into our bank account. We don’t pay to withdraw it either. Our banks, if they have two brain cells, will engage in lending and other forms of market arbitrage to make money on our deposits.

But merchants are still paying lots of money to the credit card value chain.

Will Amazon change that?

In case you’ve been under a rock, Amazon has shown us glimpses of their future grocery store concept: Amazon Go.

While light on specifics, Amazon Go is a techie’s utopia. Straight from Amazon’s website,

Amazon Go is a new kind of store with no checkout required. We created the world’s most advanced shopping technology so you never have to wait in line. With our Just Walk Out Shopping experience, simply use the Amazon Go app to enter the store, take the products you want, and go! No lines, no checkout.

Our checkout-free shopping experience is made possible by the same types of technologies used in self-driving cars: computer vision, sensor fusion, and deep learning. Our Just Walk Out Technology automatically detects when products are taken from or returned to the shelves and keeps track of them in a virtual cart. When you’re done shopping, you can just leave the store. Shortly after, we’ll charge your Amazon account and send you a receipt.

Amazon is using technology to remove the first-world hassles of grocery shopping: waiting. Though don’t laugh too much… in aggregate, saving time becomes a serious value to the busy Westerner. The entire underpinnings of the last-mile delivery craze are fueled by the value (relatively) rich people will place on their time.

It would seem that Amazon has finally found a use case for mobile payments. We’ve argued that mobile payments is mostly a solution in search of a problem; the time savings of using Apple Pay, for instance, are negligible. Some people have even argued that mobile payments take longer than conventional card payments (the swipe, not the joke of EMV).

Amazon, however, has found a way around this. You don’t need to scan items with your phone; you don’t need to wait at a counter; and you don’t need to worry about verifying your receipt with a doorman before you leave.

These inconveniences have fundamentally plagued the adoption of mobile payments in most retail environments, and Amazon seems to have fixed them.

Will shoppers flock to Amazon’s stores? Probably at first for the novelty, but few people will be willing to drive 20 minutes to an Amazon Go store if the antiquated Safeway is only 3 minutes down the road. Yes, you’ll have to wait in line at Safeway, but it’s probably less than the 17 minute delta.

Though I doubt the leadership at Safeway understands this. They’re likely panicking because a company that is 1000x more sophisticated is entering their market; a company with a true data and technology culture just demonstrated how to use such tools to be more competitive. Safeway will want to clone Amazon’s technology, no doubt.

And they will fail for the same reason incumbents *mostly* fail at doing anything innovative.

That’s not to say Safeway won’t eventually get what it thinks it wants… but only through a licensing deal with Amazon.

Think about it: Amazon is already in the licensing game. Their AWS division has grown into the world’s largest cloud computing licensor. And Amazon is constantly adding new features so customers don’t need to look elsewhere for tools like microservices or deep learning algorithms.

Amazon feeds off data. It wasn’t long ago that Amazon got in trouble for using sales data to position its own offerings ahead of sellers on its platform. And you think Amazon wouldn’t love to know what to stock on its grocery shelves?

Coupling their retail technology and their real use case for mobile payments could be a game changer. Amazon already has over 240 million active customers. Finding a way to work with those customers’ banks to develop a low-cost mobile payment solution is not a quantum leap, and merchants would jump at the opportunity to reduce their processing rates by cutting out the card networks and acquirers.

Amazon, being the crafty data company they are, will find ways to capture all the SKU and PII data from their mobile payments (and licensed retail technology) and use it to sell more goods. It’s even not unrealistic to think that Amazon could become the omnichannel technology layer for many retailers in this licensing play. Amazon continues to lose billions on shipping, and if it could leverage local availability it might justify those efforts by becoming the ubiquitous ecommerce front for every main street merchant. You might be wondering why the hell any merchant would sign up for this, but think of it this way…

As we mentioned earlier, the ability to use SKU and PII data to drive supplier budgets is worth more than the whole of US acquirers earn annually. Amazon will simply find a way to shift revenues from acquiring merchants to selling more products, and merchants will gladly jump on board for decreased processing costs and the additional value Amazon can drive with its payments platform and ecommerce business: reduced supplier rates, just-in-time inventory fulfillment, and customer analytics/discovery.

It won’t happen over night… these shorts of shifts take many years, especially in brick and mortar. But don’t discount Amazon’s ability to solve this problem – especially when the acquirers have a vested interest in not solving it with today’s business model.