Garnet Capital Advisors Blog

April 5, 2018

Will Amazon Crush Banks?

Amazon appears to be investigating an entry into the financial services sector with a big bank partnership to offer check account services. Banks can compete with the e-commerce giant if they concentrate on one key area.

Amazon may be on the brink of challenging the banking industry by offering consumers Amazon-branded checking accounts. The Wall Street Journal reported on March 5 that Amazon Inc. was in talks with several big banks to offer some kind of checking account product to online consumers. The company is still in the early phase of investigating this move, which may or may not come to fruition. Even the possibility, however, has some big banks nervous. One expert believes that these fears may be largely unfounded. 

Amazon is investigating creating a checking account product for online consumers.

Will Amazon Soon Enter the Banking Sector?

JPMorgan Chase appears to be one of the banks that Amazon is speaking with about entering the consumer finance market. Amazon is considered a "platform company" and a 2017 Mobile App Report by comScore determined that Amazon was the number one app that Millennials couldn't live without. Amazon appears to be on a roll with its recent purchase of Whole Foods. 

Amazon's opportunity in the banking sector lies in the area of financial services distribution since it plans to partner with existing banks. McKinsey reports that the origination and sales portion of banking accounts for 65% of global bank profits, with an ROE of 20%, which mean that this is a significant threat. One expert believes that banks can withstand this competitive pressure from Amazon if they focus on one key area.

What Banks Need to Do to Compete with Amazon

Banks may fear the worst when Amazon threatens to step into the ring, but it may not be as big of a threat as it seems. Maureen Burns, a partner at Boston-based Bain & Co. was a contributor to a report analyzing Amazon's entry into the financial services sector. According to Burns, banks have several advantages over Amazon and could come out on top if they focus on customer service.

The elements already in banks' favor include the trust that they've built with customers over decades, their massive balance sheets, and the understanding of complex financial regulations. Banks can best compete with Amazon through customer service. Specifically, existing banks will need to provide innovative ways for consumers to use their money instead of just hold their money.

A perfect example is Alipay, which is a powerful payment app that also holds a customer's money in escrow until they decide to spend it on goods or services. Alibaba's mobile payment solution now has more than 520 million users, and it processed over $3 trillion in transactions in 2017 on WeChat alone. While some banks, such as Bank of America and Ally Bank, have made significant investments in FinTech, many still have far to go to satisfy current and potential customers.

The Independent Community Bankers of America recently held their annual convention in Las Vegas, and many expressed optimism about the business climate and economy. At the same time, there are concerns about the way technology could pose a threat to its business. According to Scott Mabrey, President of Oklahoma's Mabrey Bank, " It will be important for banks like us to grow and get big, but still keep that community bank feel because people still like that personal touch and personal service combined with technology."

Banks that feel threatened by Amazon's move can respond with strategic FinTech partnerships.

A Loan Sale Advisor Can Help Banks Fight Back

It's not surprising that Amazon wants to enter the financial services sector, particularly now that the tax law changes have created a more favorable climate. The good news is that banks remain entrenched and have long-standing relationships with their clients. Banks can continue to provide the services that customers want the most by innovating, particularly with the help of FinTech partnerships. 

Garnet's loan sale advisory services can not only help your firm create the most profitable portfolios, but we can also facilitate partnerships with FinTechs who have payments and other solutions. Sign up for our newsletter to learn more about how a whole loan broker can help your company meet its short and long-term goals.