Why There Is No Amazon Of Banking

According to a recent American Banker article titled Amazon Becomes Retail Bank Role Model:

“Amazon has revolutionized everything from publishing to online shopping. Can it save retail banking? At Retail Banking 2014, bank execs repeatedly invoked Amazon as an example of what they aspire to become. One said ‘Amazon was conceived around the use of data and the customer experience.’ Another called Amazon ‘the most visible example of using data to customize a customer experience.’ Another called the Amazon model a possible savior for the industry.”

My take: These views reflect a complete misunderstanding of what Amazon is.

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I don’t dispute for a moment that Amazon makes great use of the data it gathers, and that it delivers a superior customer experience. But that’s not what Amazon “is.” What Amazon is is one of the world’s largest distribution systems.

The fundamental difference between Amazon and banks is not the use of data or the customer experience. It can be summed up by this:

Amazon does not care what you buy, as long as you buy it from Amazon.

That can’t be said about banks. Banks want you to buy their products and services, and don’t care who you buy them from (although the overwhelmingly majority of time those products will be purchased directly from the bank).

There are no Amazon-branded products or services. As a result, there are no Amazon product managers with a vested interest in selling their product over some other brand.

Can you walk into a Citibank branch and open up a JPMorganChase checking account? Nope. Can you go to the Bank of America web site and apply for a Wells Fargo mortgage? Nope.

But you can go to Amazon’s web site and buy just about anything that anybody else sells.

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In 2000, I published a report while working for another analyst firm called The Atomization of Financial Services. In it, I predicted that the structure of the industry would change, and that a class of banks I called “attractors” would emerge.

I described these Attractors as banks that understood customers’ needs, created superior customer experiences, and connected customers to the best products and providers of those products. Attractors would generate revenue not from the sale of their own financial products and services, but from connecting customers and providers.

Sounds like Amazon, no?

I couldn’t have been more wrong. Of course, I describe this error as simply one of timing. That is, this just hasn’t happened yet. (I’m not holding my breath waiting for it to happen).

The closest thing to an Amazon in financial services is Bankrate.com. But Bankrate isn’t an Amazon–and will likely never be–because of its business model. Bankrate operates under an advertising business model. Amazon is much more complex business model driven by enabling commerce.

Anybody can create a website, attract a few eyeballs, and sell advertising. Nothing wrong with this if you can sustain it, and don’t dream of being a $1 trillion business. 

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The AB article quotes an interview with BBVA’s CEO who said :

“There is a concept that’s common in Internet retail, which is ‘propensity to buy’ — and the algorithms that come with that. I think we are at the infancy of understanding those business models in banks. And that’s what Amazon and all the internet retailers were founded on. They can tell you what you need to buy next.”

I’m very surprised to read this. The use of analytical models in bank marketing–particularly for credit products–is hardly in its “infancy.” And lumping Amazon in with other internet retailers really diminishes its accomplishments, and position in the retail delivery chain.

But let’s go back to the propensity-to-buy concept. Even if a bank were to improve its ability to predict what a consumer will buy next (I struggle with the notion of telling customers what they “need” to buy next), the bank would want that consumer to buy the bank’s product. Amazon may “know” you will buy a certain product next, but it doesn’t care which brand you buy as long as you buy it from Amazon.

—————

BBVA’s CEO is the same banking exec quoted back in a December 2013 Financial Times article as saying “banks need to take on Amazon and Google or die.”

Funny, I remember a Forrester Research financial services conference from about 10 years ago when a colleague of mine said something to the effect “if banks like ABC and XYZ don’t adapt to the Internet, they’ll die off like dinosaurs.” ABC and XYZ complained, and as his boss, I had to go visit those banks to “apologize” for his comment (the current CEO of one of those banks was in that meeting, complaining to me about the statement).

I guess if you talk about banks in general as dying, that’s OK, as long as you don’t mention any by name.

The exec is also quoted in the article as saying that “banks need to use data to give customers exactly what they want.”

That’s great, but what if what they want is best provided by another bank? (If you’re one of those bankers who believes your bank has the right product for everyone, I’m not going to waste my time trying to knock sense into your fat head).

—————

Amazon isn’t the future model for banks. It’s the biggest threat.

I will get a ton of disagreement on this, but I don’t think Apple and Google will be big threats to banks. Neither company has the customer service infrastructure and delivery capabilities required to be a bank, nor do I believe either has the appetite to create it

The threat from Amazon is, in my opinion, not about displacement, however. It’s about margin erosion.

Amazon’s business model doesn’t give it the incentive to be a bank. What Amazon wants is to reduce payments friction. If Amazon can simplify the movement of money from the “source”–typically a checking account–to the businesses that sell on Amazon, then Amazon can make more money.

Amazon will do what Simple and Moven are doing–creating superior front-ends to the back-end account–to achieve its goal of simplified money movement. Amazon still wants banks in the equation. And some banks stand to gain business from partnering with Amazon to get that business.

The price, however, is reduced profit margins. Remember one of Jeff Bezos’ well-known quotes:

“Your margin is my opportunity.”

Most banks I know of are focused on how to attract more consumers to sell the products they already sell, and talking about “using data” and “improving the customer experience” in order to do so. 

That’s not Amazon.

If you know of a bank that’s trying to shift the fundamental economics of the financial services industry by attacking profit margins, and creating a new distribution system (i.e. being the central nervous system of the industry), let me know.

Bottom line: Please, bankers, stop telling us about your wet Amazon dreams. I know Amazon, and you sir (and madam), are no Amazon. No existing bank will ever become an Amazon.

—————

20130324 10:31 update: Shoot. Hate being wrong. As my buddy @shukla points out, I was wrong in saying “there are no Amazon-branded products or services.” Kindle, hello? But even here, Amazon’s approach to its own branded product is likely to be different than a bank’s. Jeff Bezos, quoted in Wall Street Journal, said “we want to make money when people use our devices, not when they buy our devices.” In other words, the Kindle is simply a platform to make it easier for consumers to buy all those non-Amazon-brands products and services. [sigh of relief]

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14 thoughts on “Why There Is No Amazon Of Banking

  1. Amazon is the pinnacle of CX and banks, of profitability. As a consumer, I’d love my banks to become like Amazon. However, as a believer in old-fashioned metrics like profits, I wouldn’t want my banks to become Amazon. But I think all this is moot. Without the regulatory backstop enjoyed by banks, I wonder if Amazon would even want to enter financial services.

  2. So we have this belief that Communities United Grow together… hence CU Grow. It is along the lines that a credit union or community bank could in essence become a commerce conduit within their local community connecting consumers with local business.

    There may be even some profit baked into this model for the bank as well for the commerce that is created for the local business.

    But for the point of your post I digress a bit. A couple of weeks ago I came across this Wired article: http://www.wired.com/business/2014/03/next-big-thing-missed-starbucks-next-bank/

    A key takeaway for me was this:

    “González says banks can take a lesson from the way Amazon’s embraces third-party sellers, who piggyback on Amazon warehouses and web infrastructure in exchange for a cut of their sales. He says banks can take a similar approach by seeing themselves as platforms on which lots of small companies can build products and services. In this model, banks could still profit handsomely even if they mainly took on a backend role.”

    This has been another extreme thought of mine and an area to explore with the right credit union or bank. In short, you have all of these micro niche banks that serve specific market segments. For example, a bank could be formed for dog lovers, cat lovers, craft beer lovers, football lovers, coffee lovers, fashion lovers, etc.

    Perhaps these banks could even form relationships with national brands. Commoditized banking products would be customized for each niche market segment. For example, instead of generic crappy reward points for debit and credit purchases, the coffee lovers bank would tie rewards directly into their Starbucks account. The same could be done for any referrals they make to the bank sense birds of a feather do flock together and their would be some commonality and archetypes found within each market segment.

    But the only way to make this happen was if a bank was willing to support the back end of these smaller niche banks which is very similar to Amazon’s operating model as they support the back end operations of multiple brands.

    The key to this model I believe would be the targeted content and digital community created for each one of these niche markets. Perhaps a bank could get a jump start on a model like this by simply buying a niche market media/content company with a large enough platform to jump start things.

    • JR: The concept is solid. Where I (think I) disagree with you regards the “key to this model.” I believe the key to the model is scale. If Amazon was a small, regional retailer with a few stores in the Seattle area, it could never become the “platform.”

      This is, fundamentally, facing any single credit union. Inability to scale. There are may one or two credit unions who could even think of pulling this off at their current size, but Navy FCU’s membership charter would limit even its ability to become this platform.

      Could credit unions collaborate to create the scale required? Maybe.

      • Agree with you Ron about scale 100%. That did not come through too clear on my previous comment and was my reason for suggesting buying an established digital niche media company as they already have a built in community which typically revolves around solid content.

        Scale is a must. And I see even the opportunity for credit unions and community banks to come together and collaborate for something like this.

        Let’s take the SoHo market which is primed for credit unions and community banks. In addition to providing small biz financial products, why not offer insight on how to run a business: blogs, videos, webinars, remote consulting, etc.

        This is basically what AMEX Open Forum is.

        Perhaps even bring in providers to help with other areas small biz have challenges with: accounting, payroll, marketing, HR. These additional services could provide additional referral fee income. Maybe even charge a “membership” fee for access to these experts along with providing a “network discount”.

        Regardless… the point is to provide more value than just offering business lending and checking products.

        But for one credit union to pull this off on a local level would be a challenge because of the inability to scale. However, bring multiple credit unions and community banks to pool resources together then an opportunity for a SoHo market platform may present itself with the local credit union or community bank providing the back office operations.

  3. Two quick thoughts, Ron: 1) Amazon has been able to move at Amazon speed selling books, CDs and other merchandise because it is less regulated than banking. Regulation slows the ability of firms to sell each others’ products and freely combine the “product” and “distribution” layers Forrester talked about 15 years ago.
    2) Margins are being attacked, but not by banks. Peer to peer lending is a great example of this, but it’s happening outside banks.

    • Jeff: Point #1 is spot-on. I disagree re: point 2, though. P2P lending is a funny business. From the lender perspective, it’s more about finding higher returns than available elsewhere. From the borrower perspective, it’s finding funding from alternative (i.e., non-bank) sources. Since banks are passing on this business, their margins aren’t being affected at all.

      • P2P is in its infancy (though taking longer to develop than I expected). Long term, it’s a threat to the credit card side of the business. You have a lot of people getting under 1% on their savings, a lot of people paying 18%+ on their credit cards. Long term, P2P will rise at the expense of credit cards. Classic disintermediation. I don’t think borrowers care if the money’s from a bank or not, just the rate.

  4. Ron,

    I do agree with your overall point about Amazon.

    Here are some corrections to your article.

    You said: “There are no Amazon-branded products or services. As a result, there are no Amazon product managers with a vested interest in selling their product over some other brand.”

    What about the Amazon Kindle? It is both a product and a service. I also think Amazon Prime would qualify. I apy Amazon for Prime service not FedEx, UPS, or the USPS.

    Did you forget about Amazon Basics?

    http://www.engadget.com/2009/09/20/amazonbasics-bezos-and-co-starts-private-label-consumer-electr/

    See Amazon Basics here: http://www.amazon.com/AmazonBasics/

    I am sure Amazon has other products and services that I left out.

    Despite these omissions I still agree with your main point.

    @dmgerbino

  5. Ron…the most likely near term play is a continuation of Amazon as a marketplace for existing products. Filene piloted this marketplace (http://www.amazon.com/compare-credit-card-offers/b?ie=UTF8&node=3561432011) with credit unions to see how effective CU’s are with online sales. The report is coming out in a few weeks…SPOILER ALERT: they get a “Needs Improvement” score.

    Regulatory barriers are staunching the digital world from overtaking financial services. It will take an act of congress to change these barriers. Also, it is probably more fun (and profitable) to sell these kinds of things than offer banking services: http://www.amazon.com/Accoutrements-FFP-12283-Magical-Unicorn/dp/B00E1AEEPC

    -GH

  6. Pingback: Why There Is No Amazon Of Banking | Disruptive ...

  7. I’ll be posting something on my blog this week about how I think banks could re-architect their business process and technical services to become a platform. “Bank as a Service” if you will (to quote Dusty Rhodes).

    I actually think something British Telecom did in the early 2000s is an interesting model. They were facing a forced break up by the regulator and avoided that break by spliting their business with chinese walls. The “Wholesale” arm became “Openreach” part of the same group, but offering equal SLA’s to both BT Retail, and to any other Telco.

    There were plenty of flaws with both the implementation, and the business model… but I’ve been saying since 2009 – banks should protect and seal the core with military grade security and scalability… but build plumbing and APIs ONCE and focus investment on re-useability… not on building one time use integrations for the latest me-too offering.

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