Online tech giant Amazon is threatening traditional banking through its unconventional business model.

Imagine having a bank account where you don’t have to pay any bank charges – the only catch being that the “bank” has full access to all your data and it being able to use this data against you to generate sales. Scary isn’t it?

Yet, a few years from now our children will most probably think it strange that we were so paranoid about how “personal information” gets treated by digital companies. Traditional banks have been guarding this type of information for decades and have used it vigorously to regulate and decide who qualifies for which services.

With the vast improvements we have seen in machine learning, the traditional way of evaluating customers and banking is becoming dated. Banks are taking desperate measures to up their game through improved online services and customer loyalty programmes with linkages to awards partners. Where they have been trying to hold the fort against fin-tech companies, the real threat is coming from online giants, like Amazon.

Amazon

A lot of speculation has been going on about when Amazon would launch a bank, with the company reportedly being in talks with J.P. Morgan last year to offer checking accounts. The truth, however, is that Amazon is already offering many of the smaller tasks associated with banking, with consumers for long now already being able to make deposits and “save” money through unlicensed transactions.

Banks have been systematically primed over the years as the are waiting for the big move, but chances are that they, like a frog that is boiled slowly in water, will only realise the danger once it is too late.

The company has issued more than 3 billion USD to 20 000 business in the United States, Japan and the United Kingdom. It last year, reportedly partnered with the Bank of America to issue loans on an invitation-only basis and is currently exploring similar opportunities in India and Mexico.

This is great news for entrepreneurs and start-ups, who because of “high perceived risks” struggled to secure loans in the traditional banking system and when they did, were subjected to significantly higher interest rates than permanent employees.

On the consumer side, Amazon has been allowing merchants to offer flexible financing programmes through its Bill Me Later payment platform and consumers also have access to various payment Cards, with the Amazon Prime Rewards Visa Signature Card offering 5% cash back at Amazon & Whole Foods, 2% cash back at gas stations, restaurants and drugstores and 1% cash back on everything else.

The way in which money can be deposited is also becoming more convenient. It can be done via gift cards, electronic transfers and in India people are even now being employed to collect cash from homes. Sales in India have, nevertheless, suffered a blow this year, due to new regulations aimed at to protecting local retailers against online sales companies.

Amazon’s biggest appeal as non traditional financial institution is that it is able to offer its services at significantly lower prices than traditional banks. Why? Because unlike banks, the tech giant’s aim is not to make money from banking but from its other sales platforms.

According to the CB Insights Report, Everything You Need to Know About What Amazon Is Doing in Financial Services, Amazon’s main goal is to increase participation in the amazon ecosystem, by increasing the number of merchants on Amazon and enabling each merchant to sell more; increasing the number of costumers and enabling each customer to spend more; and by reducing any buying or selling friction. In other words, the company is taking core components of modern banking and tweaking it to suit its customers.

The biggest problem that the traditional banking system or regulators have with this, is that Amazon also offers other services. From a legal point of view, the company, which at the moment enjoys a lot of free-reign in unchartered regulatory territory, might in future therefore have to sharpen the way in which it uses data and banking services to comply with the laws and regulations in operating counties.

On the consumer and merchant side, improved information should translate into better shopping experiences, with the company being able to push products according to consumer preferences and budget, and even offer discounts or credit to render products more affordable. Ikea is already starting to rent out some of its produce to raise affordability and address consumers’ need to keep up with fast changing fashion trends, something that Amazon is also looking into.

This greater access to information may, however, backfire for consumers, if only “top end” products within their budget range or products of companies with whom Amazon has a special arrangements are pushed when they want to buy something. For online shoppers who only make use of Amazon, the world created by Amazon may become their only point of reference, rendering them blind and unaware of other options.

Markets

According to Bain & Company’s article Can Amazon Take Customers Loyalty to the Bank, Amazon is crushing traditional banks on loyalty scores, with 6 000 American consumers admitting they trust Amazon more than their own banks.

Sixty-five percent of Amazon Prime customers also said they would sign up for a bank account with Amazon, specifically a free account that offered 2% cash back, while 43% of the non Prime customers and 37% of non Amazon customers said they would.

More about the writer

Paul Stemmet is the co-founder and CEO of YAP, a company aimed at optimising advertising returns for publishing companies, as well as Shinka, which uses human-machine assisted technologies to advise media and advertising agencies on ways to improve marketing strategies. Besides this, he is the Chief Data Officer at Ole! Media Group, with previous experiences including time spent at World of Avatar, Mxit and Sybase SA.