The story of Amazon getting into banking broke two week ago. We hadn’t had time to fully jot down our thoughts though a number of people have asked us for our opinion. To start we’d say this:
We told you Amazon would become a bank literally a year ago.
Let’s start at the top.
Interchange is a euphemism for a tax charged to merchants when they accept card payments (credit and debit), and it comes from three places. When a bank (Bank of America, et al) issues a credit card to a consumer, they add a fee. When a merchant acquirer (First Data, Vantiv, et al) convinces a merchant to accept a credit card, they add a fee. Then the card networks themselves (Visa, Mastercard, et al) add a fee.
Collectively these fees add up to around 3%. So when you buy something from a merchant for $100, $3 go to these three parties for doing very little, and arguably nothing that can’t be replaced in today’s market. Yes there are the semantics that credit cards are technically loaned funds but the networks make that up in their ridiculous interest rates.
Now, these parties would vehemently disagree and wax poetic about the value they provide. The issuing bank argues that there’s no way to get cards into the hands of consumers without their services. The merchant acquirer argues that there’s no way merchants will accept payments without their services. The networks argue that card payments wouldn’t even exist if it weren’t for their services. And of course they would all three talk about the “security” they provide.
All true… in the 1960’s.
What these parties are simply not considering is that distribution models have changed (hello internet!). Look at the rate of adoption of TV, personal computers, and now smartphones as an example.
And for something even more recent, look at how much faster “newer” tech companies like WhatsApp are finding adoption than “older” companies like Facebook. In a nutshell, WhatsApp has grown 4x faster than Facebook in its first four years since launch.
Why? Because distribution costs are lower than ever and people have massive communication platforms to spread the news. It means material changes can come from seemingly nowhere and be standard practice is only a few years time. This is precisely why we’ve argued that interchange will disappear, it’s just a question of when.
If consumers are self-discovering a mobile payments “app” and merchants are likewise adopting the same “app” to accept payments from their customers, distribution costs plummet to zero and the centralized “app” is effectively a bank that’s able to move money securely, for free. And to add insult to injury, if that “app” happens to be an innovator, they’re going to use all the data they’re gathering to create financial products that eat serious market share from the conventional banking system.
Let’s look to Robinhood as an example of what to anticipate.
Robinhood is a stock brokerage application. Its servers stream market data from exchanges in real-time, while notifying users of scheduled events, such as earnings, dividends, or splits. The app is meant to give traders up to date information quickly.
The company’s real selling point is that is allows investors to make stock or ETF trades without paying commissions – a big change from brokers who typically charge a $6 to $10 fee per trade. (In a commoditized industry notice how it’s all about cost, not value? Does that remind you of a certain commoditized industry?)
“Robinhood started with the idea that a technology-driven brokerage could operate with significantly less overhead,” the company says on its website. “We cut out the fat that makes other brokerages costly — hundreds of storefront locations and manual account management.”
Without those commission fees coming in, how does the company make money? It actually has three revenue streams.
First, it makes money “by collecting interest on the cash and securities in Robinhood accounts, much like a bank collects interest on cash deposits.” While the company doesn’t say what its interest rates are, it’s roughly 3.5 percent, according to Barron’s.
The company also earns revenue from rebates it gets by directing its order flow to broker dealers, though Robinhood co-founder Baiju Bhatt told TechCrunch that it doesn’t sell its users’ data.
Finally, it makes money from its relatively new premium service, Robinhood Gold, which it introduced in September. With Gold, trading is still commission free, but users pay a monthly fee to access extended trading hours, a line of credit to invest, as well as Instant Reinvesting, which lets users access proceeds from a stock sale immediately, and Instant Deposits, which eliminates the three day wait period for funds to transfer from the bank into Robinhood.
And who do we think has the best shot at successfully executing a Robinhood move in banking? Amazon, of course. But the reporters out there just don’t understand the magnitude of Amazon’s recent announcements.
Financial institutions are some of the oldest monopolies around. As such they have a firm rule: don’t rock the boat. Rocking the boat might disrupt their lucrative positions so it’s better if you didn’t even mention innovation, okay? Outside innovators who could drastically improve financial services are often reliant on data from banks to get started, so banks throw up walled gardens to keep themselves shielded from change (remind you of any POS companies?).
This is what makes Amazon particularly dangerous.
We believe Amazon will find a way to lever its consumer payments products and massive subscriber base (64% of US households are Prime Members) into brick and mortar merchants. Amazon already has several forays into this ecosystem via Whole Foods, Amazon Restaurants and Amazon Pay. Further, Amazon has shown they’re not afraid to lose money on experiments – something lacking from the DNA of the payments and banking ecosystem.
Once Amazon has a large enough uptake from brick and mortar merchants they’ll flip a switch and spend millions on advertisements to announce that accepting their payments now costs $0 for merchants. Simultaneously they’ll release financial tools for merchants and consumers built on all the data they’ll have been collecting, slowly offsetting any lost revenues from interchange.
Ironically what keeps the US payments industry on life support will be legislation that labels Amazon a monopoly and tears it apart. It’s pretty rich when you note that the payments ecosystem has long lobbied against government-sanctioned caps on the fees they charge even as other countries have curtailed the greed. To be clear, we’re not proposing for the heavy-handed intervention of the federal government on payments fees nor on Amazon’s innovation.
Let the free market determine who should win.
Payments companies and banks have had plenty of time to innovate but they just can’t help themselves; their addiction to the payments revenue stream has kept them from investing in their future. When the second largest merchant acquirer, First Data, gave up on their POS strategy it was clear they couldn’t see past the payments revenue. When the now-largest merchant acquirer, Vantiv-Worldpay, doesn’t even have a strategy outside of payments you just can’t help but face-palm. You think we were making things up when we said payments companies need a POS asset? We’re looking much further down the road than protecting ridiculous payments tariffs…
Amazon has found success in innovating on behalf of their customer. They’ve won because they’ve found ways to remove hassle and inefficiency from the customer experience. Jeff Bezos, Amazon’s founder, has said as much.
We see our customers as invited guests to a party, and we are the hosts. It’s our job every day to make every important aspect of the customer experience a little bit better
How does that contrast with payments companies who ratchet up fees and find clever ways to soak their “customers”? If payments weren’t a necessity merchants wouldn’t work with the payments industry: nobody would take the abuse.
Interchange is an unnecessary tax for merchants. As more brick and mortar merchants become Amazon’s customers Amazon will figure out how to eliminate interchange using data. If only the payments ecosystem would pay attention to data and not prioritize their payments revenue they wouldn’t be in this position. It will still take years for Amazon to execute their plan, but at least we’ll be able to say we told you how it would happen 2018.
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