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It is not just banks and new financial technology companies that strive for product innovation, non-traditional actors such as Amazon are determined to enter the fray — but without assuming the same regulatory risks.
Amazon’s inroads into banking is not new, albeit not going as smoothly as it might have hoped. The US tech giant was forced to deny reports that it would accept payments in cryptocurrency for goods ordered by the end of last year, but market rumors indicate that it might reassess this decision shortly.
However, the US firm has kept the market guessing about its payment plans when it declared it would no longer accept Visa credit cards in the UK from January, citing high transaction fees charged by the network. For some, this left open the possibility of Amazon offering its own payment systems to bypass card networks and issuing banks. The two sides eventually reached an undisclosed settlement in February, and Visa continues to be accepted on Amazon. However, given the sheer size of the platform’s global customer transactions, its moves in this area have implications for the bottom line of card issuers.
Is this possible? A digital system that allows customers and firms to carry out account-to-account payments, enabled by open banking, lets Amazon ignore credit cards. But this can only happen if shoppers share their financial data, something that many are not willing to do, given the danger of identity theft. However, Amazon is already involved in other financial services such as Amazon Cash and buy-now-pay-later schemes, offered in the US through third-party provider Affirms, integrated into its Amazon Pay platform.
Mining its customer’s data for their transaction histories is important to Amazon, as well as to other online sellers. This allows the company to understand the spending habits of customers and assess client credit scores.
Besides digital wallets for cryptocurrencies, should Amazon decide to go that route, blockchain is another option for the company’s supply chain that would integrate with Amazon Web Services, its cloud operations. But even the best intentions sometimes do not go as planned. In December, AWS suffered a major outage, something that is likely to encourage regulators to keep a close eye on cloud providers.
All this provides Amazon with a wide array of potential products that will allow it to extract maximum value from financial services, without taking on much of the responsibilities that regulated financial institutions have to shoulder. This is basically Amazon having its cake and eating it.
However, once something takes off and becomes a substantial competitor, then voices are raised from those most affected, which often sees regulators step in to oversee the so-called disruptors of the existing system. Amazon relishes being a global disruptor and making inroads into traditional financial territory as a firm that promotes instant payments and borderless commerce.
Going it alone might be good for some, but having friends to support you on the way is better, and Amazon has signed some interesting new partnerships. Last November it agreed a deal with US payments giant PayPal that will see the company accept payments through its Venmo mobile payment apps, which has more than 80 million users in the US. A month later it signed a partnership with Barclays Bank in the UK to allow customers to set up accounts at the lender allowing them to pay for goods bought on Amazon in monthly installments. Amazon might be an avowed disrupter, but it also understands the limits of being completely outside a more formal regulated environment.
• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics, King Fahd University of Petroleum and Minerals, Dhahran.