Amazon and payment apps may hurt banks more than retailers

Originally posted on Payments Source.

Sweeping changes to the financial services industry are underway and will accelerate dramatically in the coming years. In fact, the financial services industry should get ready to experience its very own “Amazonification” in the next year or two.

The “Amazon effect” refers to the impact created by the online, e-commerce or digital marketplace on the traditional brick and mortar business model due to the change in shopping patterns, customer expectations and a new competitive landscape.

Among other factors, the Amazon effect is cited as the primary reason behind stores’ declining sales, which have often foreshadowed the stores’ eventual closure. A WWD report cited more than 9,400 store closings in 2017, up 53% from the number that shut in the wake of the Great Recession in 2008.

Amazon and other technology giants such as Apple, Facebook and Google, have long had an interest in finance. Until recently, these companies focused on payments, each in its own way. Apple Pay and Google Pay are digital wallets: they hold a digital version of cards, but do not process transactions. Facebook Pay stores card details for use on the group’s various apps such as Facebook, Messenger, Instagram, and WhatsApp, so that customers need not enter them every time. Amazon Pay does the same, and also saves card details for payments on partner websites.

The next couple of years will see Amazon and other technology companies expand their footprints into the financial services industry. Amazon introduced a credit card for the “unbanked” or those with bad credit in June 2019. Apple introduced Apple Card in August 2019, with a simple value proposition—“a new kind of credit card designed to help customers lead a healthier financial life.” Google followed on its heels in November 2019 with the announcement of project Cache offering checking accounts for consumers in 2020. Facebook has also thrown their hat in the ring, with the announcement of their much-debated Libra cryptocurrency in June 2019 and the subsequent announcement of Facebook Pay in November 2019.

Why the sudden interest in financial services?

The answer to this question lies in the data—customer data. While Big Tech already knows the purchase intent of consumers and businesses, what they don’t have is data about customers’ financial resources. They already have detailed data on what billions of customers are searching for, what they are browsing and what they are saving or marking as favorites and in some cases (for Amazon and Apple), what the customers are purchasing in the end. Now Big Tech is looking for the second half of the picture—the financial resources of consumers and businesses that fund the purchases as well as their saving and spending patterns over time. Analysis of the spending patterns of a consumer’s entire paycheck is immensely useful and could be used to assess ad performance or promote products. They may even start dispensing financial advice; in fact, Apple’s tagline for Apple card is “a new kind of credit card designed to help customers lead a healthier financial life.”

The “Amazonification” of Financial Services

Also, these Big Tech companies like to place bets and see what sticks. Selling financial services products should lead more people to use their payment systems: Apple and Google, specifically, want one more reason for consumers to keep their phone under the pillow at night and Amazon wants payments in-house so users never leave its app.

The Amazon effect in financial services will be much bigger than the one experienced by the retail industry—it will have a deeper impact due to the financial services industry being bigger and more vulnerable, and because consumers are now more comfortable with change. Unless leaders in the financial services industry embrace new data and analytics technology trends, they risk finding themselves on the wrong side of the Amazon effect and will be left behind by their competition. Jamie Dimon, CEO of JPMorgan Chase, was asked about the Big Tech competition in Sept. 2019, and he indicated he wouldn’t be surprised to see a bank fully backed by a tech company in the near future.

New advanced analytics technologies can offer a way for the incumbents of the financial services to address this challenge. Graph analytics is one of those technologies that can help the financial services companies defend their turf and build win-win relationships where it makes sense with the Big Tech.