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09. 28. 2018

Meet Amazon’s future banking customers

While it’s yet to be seen whether Amazon will really break into mainstream banking, the tech giant can count on high demand, a new survey reveals. So who’s likely to bank with them? Here’s all you need to know about what their future customer base would look like.

Amazon has been long feared as a serious competitive threat to traditional banks. In fact, most financial executives expect Jeff Bezos’ company to enter mainstream banking sooner rather than later. Last year analysts even predicted that 2018 could be the year when Amazon buys a small or mid-size bank as a ‘broad strategic jump’ into the market, and  in March The Wall Street Journal reported that the retail giant was in talks with big industry players, including JPMorgan Chase, about creating a checking-account-like product.

The thing is, Amazon already offers payment and card services to its customers and has rolled out Amazon Cash, which allows customers to add cash to their Amazon account and top it up at selected brick-and-mortar stores. The online mega-company also offers small short-term loans to its sellers to help them fund their inventory purchases. And most recently, Amazon has started taking deposits from Indian customers who prefer to pay for deliveries in cash through the new Cashload feature of Amazon Pay. This may well be a sneak peek into what’s to come in other markets.

But as we reported earlier in this blog, some analysts argue that all this doesn’t necessarily mean that the company will actually buy a bank or that it’s eyeing entry into mainstream banking in the US or in other key markets. They believe that for Amazon, financial services is just a means to an end: making more money by selling more things, meaning that its main competition will remain other retailers, not banks. In other words, Amazon might have started to offer cards and payments simply to help customers get their goods faster and to improve customer experience in areas where banks tend to fall short.

High demand for an Amazon bank

Whatever secret plan is laid out on Amazon CEO Jeff Bezos’s drawing board, there’s one thing for sure. Customers are ready to bank with Amazon.

A recent survey by Bain & Co. shows that Amazon can expect significant demand for basic banking services in its domestic US market. About 65% of Amazon Prime respondents – who pay an annual fee for benefits like free two-day shipping – say they would be happy to try a free online bank account from the retail behemoth, with 2% cashback on Amazon orders. Amazon’s co-branded credit cards already come with a similar 1-5% incentive. When it comes to non-Prime members, roughly 43% of them would try the new account, and even 37% of those who don’t actually use Amazon yet would give it a shot.

As expected, interest for a potential Amazon account is higher than average among those who only use digital channels for payments. And Bain & Co. also found that future Amazon banking customers are likely to be younger and have a slightly above-average income. These findings seem to point to the fact that changing customer behaviour is fuelling the fears about Amazon moving into mainstream banking. Clients no longer just compare banks to other banks, but to tech giants and online retailers that boast seamless customer experiences.

Unhappy clients would give it a try

The survey results also show that the most valuable banking customers have already developed deep relationships with the online retail giant. Amazon customers control an astonishing 75% of US household wealth, with Prime subscribers controlling about 45%. What’s more, Amazon customers account for about 75% of the richest households’ assets in the US – equalling to an eye-popping $16.5 trillion.

Amazon’s potential banking customers would likely include defectors from traditional banks. A record number of consumers already buy secondary banking products from digital competitors, such as big tech companies and digital-only banks. This hidden defection today totals a whopping 25% to 51% of secondary products but what’s even more alarming to incumbent banks is that customers tend to dodge their primary institution when buying higher-profit products and services.

The level of customer loyalty will serve as a leading indicator of defection and the more dissatisfied consumers are with their current bank, the more willing they are to consider Amazon, Bain & Co. points out. It’s a bad, bad sign for many traditional banks as US and UK customers already rank Amazon nearly as high as banks for trust with their money. Among existing Amazon customers, those interested in banking with Amazon give the company a higher Net Promoter Score than those who are not interested.

Lessons Amazon can teach to banks

There’s no doubt that the threat from Amazon is real and it’s not going anywhere. According to Bain & Co., entering basic banking would not only save the tech giant a fortune on interchange costs, but also give it more direct influence and insight into customers’ finances and spending. Much better than having banks as the intermediary. “The bank account could become a platform for a whole new range of services for a company that already has enormous reach among America’s most valuable banking customers,” the report suggests.

The key lesson for retail banks? Long gone are the times when their main competition was just other banks. Big tech companies like Amazon have already transformed customer expectations and are ready to get their teeth into the financial sector.

“Amazon’s expected entry into core banking heightens the urgency of accelerating work to improve the customer experience, largely by making it simpler and more digital,” the report warns. And this might even include connecting products and customer support to Alexa, Amazon’s cloud-based voice service.

To keep up with new entrants, traditional financial institutions will urgently need to innovate and add new features to their offerings. And they will need to get rid of the high costs and complexity that stem from decades of branch-centred operations.

As Alex Johnson, director of solution marketing at Fico, pointed out recently, there’s also an often overlooked element of Amazon’s strategy that is ripe for emulation for banks. Amazon’s success relies heavily on its ability to base every decision made on the impact that decision will have on the company’s lifetime relationships with its customers.

In other words, “Amazon measures ROI in decades not quarters” and plays the long game with a focus on locking customers in for life. This type of long-term, customer-centric strategic planning has made Amazon the king in several industries and there’s little doubt that this strategy would bear fruit in financial services too.

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