(continued from yesterday’s post here)
Banks are likely to be concentrated in ever-larger clients, where program management has less weight and where they can load up margins and other value-added services that support the cost of their structures. Wholesale banking and investment banking are activities that require more man-hours, with a profile closer to consulting and, for now, less likely to apply algorithms.
The problem may be that the advance of technology will leave less and less products to offer to banks, narrowing the margins resulting from increased competition between entities and the conversion into a commodity or undifferentiated product.
As far as Amazon is concerned, it is expected that its supply of financial services will increase little by little, as it grows its knowledge of this business, it will generate trust between companies and they will use more Amazon solutions (commercial, logistic, systems, Artificial intelligence, etc.) and share more information with the company. In this sense, it is possible to imagine how Amazon would improve its information if, for example, it offered its services at a reduced price in exchange for access to data.
Amazon Lending is not the company’s only foray into financial territory. In 2007, it launched Amazon Pay, a service that allows its users to pay Â using their Amazon account or accept payments under those conditions. We could see it as a step in the construction of an alternative to the companies of means of payment or a way to snatch part of the margin.
A world of possibilities
There are other financial services that Amazon could offer in the future, such as consumer loans and installment payments for the purchase of durable goods on its platform. Unlike companies, Amazon does not have such exhaustive information from end-users that it will lead them to estimate their credit risk, but it could approach them by focusing on their most loyal customers, almost all users of Amazon Prime (an incredible 60% of US households are subscribed to).
In addition, as Amazon adds new product categories, it continues to refine its customer knowledge, and can make more accurate inferences about their preferences, socio-economic status, future plans, etc. All this information can then be used by the company to cross-sell, launch new services and offer new products such as financial services.
Where it does not appear that Amazon will enter will be in long-term financing, which requires the review of business plans and strategies, with increasing uncertainty. It is an activity that involves investing more man hours and immobilizing funds for extended periods, with the opportunity cost involved.
The same can be said of other long-term loans for the purchase of assets such as cars or mortgages, where it is necessary to perform valuations of the underlying assets. Although the valuations could be automated to a greater or lesser degree, the problem of the term still exists.
For Amazon, it would probably be more meaningful to launch a service of comparison of this type of products, with a view to taking a commission from the financial operators present, comparators that could expand to other types of services: energy, telecommunications, insurance, etc.
In fact, for the case of cars, Amazon.com already includes a large section of information on all models for sale in the US. Amazon Users, where users can consult specifications, read reviews, make comparisons, integrate into Your Garage (a owners’ forum), etc.
So far, the sale is limited to accessories and spare parts, but Amazon has a window here to observe its users and get information on their preferences in this market. Analyzing this data may lead Amazon to infer whether a customer is interested in buying a vehicle and, in the future, make offers directly or through a brand or dealer on its platform.
While it is true that long-term financing does not seem a likely business for Amazon to enter, the company could capture some margin by becoming an information provider to banks and other financial intermediaries. As we have seen, the company has quality information that could be useful to funders.
However Bezos should make sure that banks do not use that information to offer short-term loans that compete with theirs. One way to avoid this would be to provide the bank with brief information about potential borrowers in the form of indicators on their relative position, the scoring that Amazon assigns them, etc. Enough to bring value without revealing more than necessary.
Additional Financial Service Offerings
Other activities, such as the provision of savings products and demand deposits, should not initially seduce Amazon:
Savings products, depending on repayment terms and other issues, may have a low risk and be highly automated. However, it is a very competitive market and in which deposit providers would benefit.
Apart from the scarce attractiveness of the business, this is an activity with important regulatory requirements. Most likely, neither Bezos nor its shareholders have any interest in being subject to the permanent supervision of central banks and other state agencies.
Although, as we have just said, the provision of demand deposits would not fit the strategy of Amazon, it would add value to the company to have information on the home economics of the users of its pages. To do this, the ideal would be to have access to your current accounts, and here would be an opportunity.
Imagine the following scenario: Amazon offers its customers, free, a personal finance app similar to Mint or Personalcapital. It would be a round-up for Amazon that, in exchange for the management tool, it would gain access to countless useful data, hitherto held by the bank, and would allow it to:
- Accompany your commercial campaigns at the right time financially for each client and optimize your offer of products and services.
- Improve your inferences about future purchases.
- Segment the detail to customers and test.
- Sharpen the credit rating of its millions of users, which would give rise to expand its offering of financial services with less risk.
Of course, there would be reluctance from many users to share such sensitive information with Bezos, but probably enough if the user experience was good enough, and Amazon was able to sell the benefits of the tool.
Concluding, in the last two decades we have found that digitization blurred the boundaries between sectors. We saw it, for example, in the cases of photography and consumer electronics, merged with the computer sector. Banking is a data and systems business, competencies that Amazon dominates.
But it is also a business of trust. Amazon enjoys a great brand image, is recognized for its excellent customer service and attracts new talent. If, apart from the advantages listed so far, trust is a factor to consider, Amazon will have much to say in the future of the financial sector.