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‘Alexa, did my rent check clear?’: Inside U.S. Bank’s voice banking strategy

U.S. Bank has quietly rolled out an Alexa skill for banking customers with Amazon Echo devices.

The fifth-largest U.S. bank by assets follows just two others that have also enabled voice as a banking channel through Amazon’s digital assistant: Capital One, which debuted its skill in March 2016, and USAA, which followed this July.

“Voice is going to be a hugely important part of how customers interact with any company, not just banks, in the near future,” said Gareth Gaston, head of omnichannel banking at U.S. Bank. “It’s already starting. Alexa gives us an opportunity to learn more about how our customers are going to interact with this channel and develop it before it becomes something really significant.”

Gaston said the bank intends to create similar offerings through similar platforms like Google Home, but wouldn’t confirm whether its begun those discussions yet.

Customers can ask Alexa for their checking, savings or credit card account balances, ask her how much they owe on a bill and when, have her read back their transaction history and prompt her to pay their credit card bills.

“It’s a great way to talk to our customers and give them another way to bank,” Gaston said. “Alexa is almost not a channel, it’s just there. We’ve piloted voice banking for authentication and saw this as a natural extension of that.”

The move is part of a bigger innovation effort U.S. Bank has been pushing this year. It was one of the initial banks in the Zelle Network to make the P2P payments offering available to customers in June. In July it launched an digital mortgage application.

It’s also a testament to the growing notion among legacy financial firms that to stay relevant, they need to meet customers wherever they are whenever they’re there, even if that means letting customers interface with potential competitors like Amazon or smaller financial companies to keep their business.

Earlier this year Wells Fargo CEO discussed the importance of keeping customers on a long leash by letting them maintain relationships with other payments providers, “as long as they come back to Wells Fargo.” Chase has also acknowledged its customers “really want to use these [third-party] financial apps and they do use them a lot.”

“Of course one should be concerned about what any competitive play would be in your industry, but to me, Alexa is like an iPhone: it’s a vehicle for an experience,” Gaston said. “At the end of the day we think it’s important to offer services through the devices our customers like using so we embrace it and learn from it.”

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Amazon is a threat to banks — just not in the way you think

For Amazon, it’s more about disrupting banks, not necessarily displacing them.

To date, the Seattle-based e-commerce giant has a foot in payments, cash, small business lending, consumer credit and an initiative to get people to shop with Amazon using their debit cards. Research also shows millennials have no love for traditional banks and would rather manage their money with a more reliable and “fun” brand like Amazon or even Facebook or WeChat, but that’s just 23 percent.

Still, observers agree that trend is a little sensationalized; that although we’re seeing an Amazonification of financial services — whereby the incumbent banks are platforms for all other non-bank providers of financial services to plug into — legacy firms aren’t actually losing accounts to Amazon. But, they are losing direct interactions with customers. For example, USAA and Capital One are both experimenting with Amazon’s digital assistant Alexa as a new consumer banking channel.

“The threat is not about [technology companies] taking market share, it’s that they become the customer interface and the banks become the ingredient brand,” said Alyson Clarke, a principal analyst at Forrester. “When you lose that connection with your end customer, you’re simply a no-name product manufacturer. And when you no longer have brand, the only things you have left to compete on are price and features.”

Further, large technology firms are becoming more and more operationally important to the financial system, particularly as companies move their data to cloud storage and increase opportunities for consumer facing artificial intelligence, according to Jesse McWaters, the World Economic Forum’s project lead on disruptive innovation in financial services.

“Three or four years ago it was common for senior banking executives to fairly declaratively say they would never move systems off premises, and now it’s becoming increasingly important for data to be processed in the cloud,” he said.

The real threat of Amazon
Banks these days look like technology companies — one impetus is companies like Amazon and Facebook raising the bar for digital customer experiences; another is that legacy financial firms are embracing an open API banking system, as they realize their customers like using third-party fintech apps.

These shifts have led them to realize the importance of data security features — encrypting, monitoring and tracking access points. As a result, financial institutions of all sizes are becoming more dependent on cloud‐based infrastructure provided by companies like Amazon, Oracle and IBM to scale and deploy processes, according to a report published by the World Economic Forum (WEF) and Deloitte. Ultimately, that could force them to relinquish some of their control over costs — and data.

“The rise of digital interfaces and data in financial institutions means that those institutions increasingly focus on developing large tech capabilities, which is accompanied by an increased reliance on large tech firms,” the WEF says, which leads to “tough choices for all firms: become dependent on large techs or risk falling behind.”

Amazon has the cloud computing advantage today. The WEF report says AWS is forming the backbone of the financial services ecosystem and Gartner ranks it as the leader in cloud infrastructure, followed by Microsoft Azure and Google Cloud. AWS sales increased 42 percent on a year-over-year basis to $4.1 billion for the second quarter, Amazon reported last month.

The WEF report cites JPMorgan Chase as an AWS customer, though the bank itself avoided naming vendors. In 2016, JPM spent 16 percent ($9.5 billion) of its budget on technology. Then-chief operating officer Matt Zames, who left JPM in June, said in the company’s annual report in April that it has been pursuing a hybrid private-public cloud strategy. Last year it launched Gaia, its private cloud platform; this spring it began running applications in the public cloud.

“Working collaboratively with public cloud providers, we have made significant progress developing a set of solutions that meets our rigorous risk and security standards,” Zames wrote. “The public cloud reduces our peak infrastructure requirements by providing compute services during temporary fluctuations in demand. The public cloud also helps reduce long-term storage costs and accelerates developer access to new cloud services.”

Capital One has employed AWS as part of its strategy to reduce its data center footprint from eight (in 2015) to three by 2018. Stripe, which powers payments for companies like Lyft, Postmates and Kickstarter, is also an AWS customer.

Reality check
There is a tiny bit of a halo effect around Amazon today in that it seems it can do anything. But it seems like Amazon has better things to do than try to legally become a bank — or even try to steal business away from banks — if only because of how much regulation it would fight both in obtaining a banking license and then in its day-to-day operations.

Longtime Amazon rival Walmart has tried becoming a bank a number of times: in 1999 it tried to buy Federal BankCentre, a one-branch thrift in Oklahoma; in 2006 it applied for a banking license to establish an industrial loan company in Utah. Eventually lawmakers and banking groups blocked future banking efforts by Walmart and tried to prohibit commercial companies from obtaining new ILC licenses.

For Amazon, providing financial services is just a means to an end: making more money by selling more things. Other retailers are still its main competition — not banks.

“They’ve already got the cards and payments going on — and they’re not making money off that, they’re doing that because it enables people to get their goods faster,” Clarke said. “Small business lending to businesses on the platform helps them get up and running faster, it’s about supporting Amazon’s existing business model.”

PayPal is arguably the more immediate “threat” to the banking industry than Amazon. It is the dominant third-party online payment platform in the U.S. and directly serves consumers, small businesses and merchants. Beyond owning the popular Zelle-rival Venmo, its growing PayPal’s mobile offerings. It’s extending its reach into brick-and-mortar through mobile wallets and through recent collaborations with Visa and Mastercard — it’s even bringing Venmo to in-store merchants. It has consumer credit and small business loan offerings. Giving financial access to people without financial access is sort of its M.O.

PayPal isn’t seen as a hazard to the banking industry, which makes Amazon’s potential threat  even less convincing. Incidentally, the top four U.S. banks as well as Apple, Google and Facebook are all PayPal’s partners.

“I don’t think Amazon is necessarily a threat to banks at all,” said Thad Peterson, a senior analyst at Aite Group. “Banks and fintechs or tech companies are in very, very different niches and a significant percentage of people understand that banks are to be trusted and that their money is safe. That’s not going to go away, it’s part of their role as a fiduciary.”

The Amazon Pay threat
While Amazon is definitely not a bank or even a payments company, it does have high-quality payments offerings (again, though, it’s just a means to an end). But since it’s in the retail business, and particularly with its recent Whole Foods acquisition, it could make some payments companies a little uncomfortable. Amazon accounted for 53 percent of U.S. e-commerce growth in 2016, according to receipt mining company Slice.

“We’re definitely going to see more from Amazon Pay,” but how that looks remains to be seen, said Thad Peterson, a senior analyst at Aite Group. “The more the brand is out there, the greater utilization and awareness it gets. I guarantee you’ll be able to use Amazon Pay at Whole Foods, and as Amazon moves into other parts of the retail space I expect Amazon Pay will follow right along with them.”

According to Liz Elder, a senior research associate at digital think tank L2, instead of trying to disrupt banks or even payments companies like PayPal, it is far more likely it will focus on what it’s already got: affluent millennials.

“Amazon’s access to customers who spend more money has been further reinforced through the acquisition of Whole Foods, which by nature serves a higher-end clientele,” she said. “PayPal is much more geared to the underbanked population and people that don’t necessarily have bank accounts or credit cards.”

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‘We’re not there yet’: USAA’s Darrius Jones on security concerns in the next big channel — voice

People could soon be doing their banking over voice-activated channels. But there are major issues around security and privacy to iron out first.

On Wednesday, USAA began piloting an Alexa skill for Amazon home assistant devices that lets customers check balances, review spending history and get other account insights based on their transactions. USAA is keen on letting Alexa read back customers’ financial data, but it’s not ready to let Alexa make payments, said Darrius Jones, assistant vp at USAA Labs, a division of USAA.

Many industries, not just financial services, are getting concerned about Amazon inserting itself between them and their customers. Banks and fintech startups are interested in using voice platforms to reach customers, but data and identity security and privacy concerns loom.

Tearsheet caught up with Jones about the pilot, its relationship with Amazon and staying ahead of customers’ security needs. Answers have been edited for length and clarity.

What are some of the security challenges of this pilot?
Understanding Amazon’s role in security versus our role. Privacy is another. When you have one of these devices and you plug it in, it has to listen. That’s part of the challenge and what makes them work. It’s what you’re allowed to do with the things you hear that people are now kind of going back and forth on.

How do you mean?
You don’t want your information spewed out into the ether when anyone can be in your house and ask a question.

Or move money around.
We have not put any money movement capabilities on the platform at this point. [It] is not something our skill will accommodate because we’re not comfortable with the state of security for money movement on the platform. How do you do this seamlessly and securely? We’re just not there yet.

Is Amazon a competitor or a partner?
In this conversation we’re definitely in a partnership. We’ve had to asked them to help us better understand the technology platform, we’ve had to help them better understand our regulatory requirements.

Does Amazon keep USAA customers’ data?
Amazon only has access to what the member provides during the interaction with Alexa while using the USAA skill. We use OAuth 2.0 to provide the member with the ability to see what permissions Amazon will be granted and give them the power to decide whether to grant that permission, which they can also revoke at any time. Amazon knows the question that the member asks Alexa and the response that is provided, but not the raw data used to formulate the response. All the transaction data is USAA-owned data.

Customers often care less about privacy than they think and more about speed and convenience.
We’ve enabled secure key, a six-digit key enabled with the Alexa skill that has needs to be uttered upon invoking the USAA skill. Only once you do that will you be able to get personalized spending information and balances. It was something Amazon asked for, but even the way we implement it — having it directly on the Amazon platform, where you have to set it up to determine whether to keep it on or off — is another useful usage pattern we focus on.

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Inside the creation of USAA’s Alexa skill

USAA is jumping on the voice train.

The San Antonio bank on Wednesday began a 90-day pilot of an Alexa skill for Amazon devices that lets customers check balances, review spending history and get other account insights based on their transactions. If the pilot goes well, the bank could create a new channel for customers to access their financial data and view it in ways that will help them make financial decisions.

Don’t mistake the skill for advice, though, said Darrius Jones, assistant vp at USAA Labs, a division that lets the bank’s customers participate out and provide feedback on its latest innovations.

“It’s really to paint a proper picture of what’s going on with your finances,” he said. “Having sound financial security comes out of making sound decisions, and sound decisions are based on data.”

For example: “Alexa, can I spend $100 on a new phone?”

“You typically spend an average of $200 on electronics in a month.  So far this month you’ve spent $50.  This will leave you with a balance of $2,518.51.”

This approach fits with the industry’s move toward self-service through digital channels. For years, that took the form of transactions like depositing and withdrawing paper money. But now, customers are seeking control instead of (or in addition to) advice when it comes to spending and saving.

For many customers and industry observers, the recent crop of artificial intelligence-powered digital assistants and chatbots has been anticlimactic. It’s let people see their account balances but little more than that.

“We thought there was an opportunity for us to do something different from the Q&A response mechanism that you traditionally see,” Jones said. “You’ll start to see spending advice as more of a mechanism to make a decision than to get some help. We think conversationally is the best way to deliver it.”

USAA’s skill uses technology from Clinc, which uses natural language processing, machine learning and deep neural networks to understand and respond to people. While Capital One’s own technology is keyword driven with scripted commands, Clinc’s allows USAA customers to talk in normal human language, without using keywords.

Other financial firms like TD Ameritrade, Fidelity Investments and Amex offer Alexa skills. Capital One is the only other retail bank to have launched an Alexa skill, with similar capabilities as USAA’s, as well as the ability to pay bills.

USAA, however, isn’t letting people move money via the platform for now because of security concerns.

For the Alexa skill, as with other Labs innovations, USAA customers that opt in to updates receive a direct message from the bank that prompt them to visit USAA Labs online. USAA has gotten requests for Alexa skills in its feedback, Jones said.

But it was through the PYMNTS.com/Alexa Challenge, in which it won the “Easiest to Explain to Mom” designation a year ago that really got the bank interested in the conversational channel — and led to the invitation by Amazon to develop the pilot.

“It was an interesting opportunity to see what a new channel and interface style with a conversational assistant would potentially be with USAA,” Jones said.

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‘Driving force’: Inside PayPal’s partnership strategy

PayPal seems to be going full Alipay, scooping up partners to create what looks like a comprehensive ecosystem of financial services.

Last week, the payments processing giant announced customers could use their PayPal accounts as a form of payment in the App Store, Apple Music, iTunes and iBooks. Customers can’t add PayPal to their Apple wallets, but they may be able to one day — that partnership would benefit both companies and PayPal probably doesn’t want to compete with cards because they need them to fund customer accounts. The payments processing giant did partner with Google though, in April, allowing Android Pay users to add their PayPal accounts as a payment form.

In October, PayPal also partnered with Facebook to allow users to send buy things through Facebook Messenger; and earlier this year it was reportedly in talks with Amazon about a payments partnership. And these are just the biggest companies. PayPal has forged several partnerships and acquisitions that allow it to extend its reach to small businesses and the underbanked as well as its core customer base of consumers and merchants.

“We had a lot [of partnerships] in the second half of 2016,” said Joe Gallo, a senior communications manager at PayPal. “In 2017, we’ve seen Google and Apple and I think that’ll continue. This is a driving force for us… we plan to continue to assign deals at that pace.”

PayPal has 16 million merchant accounts and 203 million consumer accounts. This year alone, PayPal has announced that customers will soon be able to buy things at physical shops with their PayPal balances through Android Pay, that it will extend a pay-with-Venmo option to PayPal accepting merchants by the end of the year and closed a huge deal with TIO that will bring 10,000 billers into the PayPal network. Its latest offering is a partnership with e-commerce platform WooCommerce and accounting software company Xero.

“PayPal’s strategy has been to partner, partner, partner promiscuously — and in this space, that’s the right thing to do,” said Brendan Miller, a senior analyst at Forrester. “They’re less concerned about their competition and are more about enabling great experiences for the entire ecosystem, and they know it’s going to bring them business when it comes to enabling PayPal at all these different touch points.”

Customer choice 
The key to customers’ hearts (and business) is choice. The industry is beginning to better understand the idea that there won’t necessarily be a winner in digital payments or that each new product doesn’t need to be a Venmo-killer to provide value and do well. Like credit and debit cards, customers will use multiple services when and where they best suit them.

“Consumers are using a lot of different methods so we want to offer them choice,” Gallo said. “We don’t want to say you have to use tap-and-pay because that becomes a barrier to entry. By offering to a series of others and partnering with credit card companies and issuers, we’re able to provide to Citi or Chase or Wells Fargo cardholders and have that breadth of portfolio that we can integrate.”

While most companies focus on either the consumer or the merchant side, PayPal’s customer spectrum includes them both. Apple Pay, for example, is very much a consumer proposition, meant to bring convenience to the Apple device owner. Until now, Apple has only supported credit or debit cards as a payment form. By implementing alternatives like PayPal would give Apple customers even more choice and freedom to pay how they like.

Until then, Apple will remain a significant merchant customer to PayPal.

“If a consumer can’t use a PayPal account in Android Pay and that’s their choice of in store payment, that’s a missed opportunity for us,” Gallo said of the Google agreement.

Building products with empathy
For a long time PayPal took a combative stance toward Visa and MasterCard, said Zilvinas Bareisis, a senior analyst at Celent. It tried to use bank accounts as funding sources as the card networks threatened to apply special charges and fees to services like PayPal.

“Six to nine months ago they buried the hatchet and said, let’s start working together,” Bareisis said.

Now PayPal is of the mindset that it needs to be ubiquitous, wherever the customer is. That’s very close to banks’ mantra these days. Also like banks, it’s also playing to the reality that money is an emotional topic for many people and when they need their financial institution, PayPal will give them the support they need.

“[Choice] is part of the strategy, but it’s also about helping consumers better manage their money over the long term and how that drive emotional loyalty,” Miller said. “If they can help consumers better spend, save and manage their money, which is emotional…Everyone is realizing now it’s not just the banks that’ll do that, try to drive that emotional connection with the consumer.”

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How Citi and Wells Fargo are creating cultures of innovation

It’s easier to change an organization’s technology stack than its culture or talent pool, and for banks, sometimes the biggest obstacle isn’t technology or regulation, it’s force of habit.

Wells Fargo and Citibank know that now. Both banks have created dedicated innovation units within their organizations in 2015 — Wells Fargo’s Innovation Group launched in July 2015 and that October, Citibank launched Citi FinTech — to help accelerate the banks’ delivery of digital products and services. Citi FinTech is specifically focused on mobile-first experiences.

Carey Kolaja, global head of product at Citi FinTech, and Sherrie Littlejohn, executive vice president of Wells Fargo’s innovation group, spoke at CB Insights’ Future of Fintech conference in New York Wednesday and talked about the challenges they’ve faced trying to rebuild company culture from inside.

Pushing the limits of ‘no’
Innovators get told ‘no’ a lot when they’re pitching new projects. Innovation can be too expensive to implement, too difficult to implement, or just plain old be out of line with regulatory requirements. A lot of that comes from bankers on autopilot that are just too used to the stodgy old bank culture Citi is trying to change.

“We still live on a lot of historical architecture, but what has really encumbered us is people, and the perception that the limitations are the regulatory environment,” Citi’s Kolaja said. “Changing the way people look at why the ‘no’ is there has been really important.”

That’s not to say that regulatory compliance isn’t important or that regulation isn’t there to protect people. But having leadership that pushes back on why people on other parts of the business say no to innovation has been a big part of the equation for Citi FinTech.

Kolaja explained that twice a week, the product team meets with representatives of the controls team, which oversees the pace of changes in products, processes and the legal and regulatory environment.

“We walk them through the user story and walk them through the product we want to build,” Kolaja explained. “In doing so we expedite the process, but the big learning there was we have people who say ‘you can’t do that.’” Often though, they say that “because it was an old policy or it was opinion.”

Educational opportunities
Technology moves so fast that it can seem natural to hire the right talent for its increasingly digital operations and processes from the outside. But Wells Fargo’s Littlejohn, said that as important as it is to seek new talent and partner with the right startups, it’s just as important to develop existing talent.

Banks have sought to invest more in young tech talent and data scientists and some are facing competition with financial startups over college graduates. While many say it can be difficult to find the right people, Littlejohn said she sees that as an opportunity for Wells Fargo, which might not be doing enough internal training and development around new technologies.

“Thats one of the roadblocks we have: we’re so busy operationally trying to keep things running that we haven’t seen a way to make room for ourselves to learn and train and teach and be curious about how to make this new world come to fruition,” she said. “We need to educate our team members to understand what these new technologies are.”

The fact that new technologies that automate antiquated processes removes the need for some jobs is a harsh reality, she added. Historically, whenever new technology has eliminated old jobs, there has also been job creation. Wells can foster the talent for those inevitable jobs internally as well as seeking new skills externally. She didn’t say if the bank is preparing for that now, just that it’s an area of opportunity.

“Culture is difficult,” she said. “Being afraid that suddenly you won’t have a job tomorrow — that’s real for people.”

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How much of a threat to finance is a ‘Bank of Amazon’?

It seems like there’s nothing Amazon can’t do: Cloud computing services, music and video streaming, payments, credit cards, small business lending.

“They’re the everything store in the truest sense of the word,” Anand Sanwal, CEO of CB Insights said at its Future of Fintech conference in New York this week. “Amazon is on a tear. Just the rumor of them entering your space will send your stock price down,” as evidenced by the way grocer stock prices fell following the announcement that Amazon is acquiring Whole Foods.

The idea of a “Bank of Amazon” was the first of 10 trends to watch in financial services over the next year, Sanwal said at the event.

One big reason: Amazon knows how to keep people happy. CB Insights data found 86 percent customer satisfaction at Amazon, compared to Citi (82 percent), Capital One (80 percent), “all banks” (80 percent), TD Bank (79 percent), and Bank of America and Chase (each 75 percent). Studies show most millennials would rather bank with the Amazons of the world, Facebook and Google included, than their existing banks.

“Their ambition is unmatched in terms of what they can do and they play the long game,” he said. According to an Amazon patent from 2004, “they’ve been thinking of financial services either how it reduces friction in their own purchasing process or how to own some more of that value chain over time.”

But even if customers begin engaging more with Amazon through financial services, it’s not clear how much of a real threat it is to legacy financial institutions. We asked attendees at Future of Fintech: Are Amazon’s moves in financial services as threatening as they sound?

YI Lingzhi Nancy, cofounder and chief operating officer, Standard Financial Inclusion
Amazon is more like Ali Baba now in China. It has its own ecosystem and does lending to small businesses in their ecosystem as well. I will say Amazon will have their part of the market in the U.S. if they continue doing this because they have such a large base. But like Ali Baba in China, it’s not going to be taking over the other legacy institutions or non-bank startups that do financial services. At the end of the day, financial services are high-touch businesses — lending is not a business that’s just about cold data services, it requires face-to-face interaction and trust in people at the institution; it’s social science as well as data science — and you need more personal engagement with customers apart from interaction in commerce.

Jaclyn Selby, researcher and tech startup advisor, Stanford University
Banks should be terrified of Amazon because of one word: convergence. Amazon is essentially industry agnostic, which means they’re not in the business of selling you anything in particular; their entire model focuses on reducing transaction costs around the exchange of all goods and services. Platforms in finance have to be incredibly robust; they have to operate seamlessly at scale. And they have to be secure in an era of huge anxiety around cybersecurity. Given these hurdles, I think the banks will recognize Amazon is a challenger. They’ll lean on customer loyalty (and pit that against Amazon’s wealth of customer data). It’ll be interesting to see how it shakes out.

Sardor Umarov, partner at SRG, a hotel and hospitality group in Memphis
We would go out of our way to upgrade our terminals at our hotel to accept Amazon Pay. It would be a natural fit for Amazon to get into financial services. They’ve got the money. I would switch to the “Bank of Amazon.” I purchase a lot from Amazon, it’s convenient, personalized. It has a much higher customer satisfaction than any of the banks.

Former employee of a top four U.S. bank, now at a data company
It’s opening up new opportunities, forcing current incumbents to think a little bit more about how they can continue to offer value in products and new products to service their consumers. At the end of the day, whether it’s a bank or a fintech company, the goal is to provide end value to the consumer. If you’re not providing value, historically a lot of financial firms have been able to rely on the fact that there’s a lot of lock-in; users don’t leave financial institutions — it’s really hard to move all of that information over. As technology makes that easier, it becomes easier to create new products, offer new solutions and facilitate that value of exchange to move faster. It forces institutions to think and more be more proactive about the products they offer. There is a threat finally that there will new solutions coming to market that are providing new value added products to consumers, but it forces these large incumbents to start thinking about how to rethink their solutions and, if they can’t, how they can partner up or acquire fintech companies.

Investment banker at a top four U.S. bank
Amazon is already doing some stuff in payments, credit cards, lending… But there’s not much more that’s interesting stuff for them. If the Whole Foods deal is an entry point to brick-and-mortar for them, Amazon will be focused there for next five to 10 years. They obviously want to do distribution and end-point and that itself is an end game. They want to own commerce globally before they worry about banks, they want to be the Amazon of the world, not just of the U.S.

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Cheatsheet: What to know about Prime Reload, Amazon’s latest rewards program

Amazon introduced Prime Reload Tuesday, which rewards 2 percent of purchases back to Prime members who fund their Amazon balances with their debit cards.

The key updates:

  • To register for 2 percent rewards, users (they need to be Prime members already) provide their debit card number, U.S. bank account and routing numbers (Amazon will “sometimes route orders through your debit card instead of your bank account,” to complete the reload more quickly, it states on the website) and U.S. state driver’s license number.
  • Users top up their Gift Card Balance with their checking account or the debit card associated with the checking account. They get the 2 percent back into the Gift Card Balance at the same.
  • Purchases aren’t eligible for 2 percent rewards when shoppers reload using a credit card, even if it’s one of Amazon’s own branded credit cards.

The key numbers:

  • 66 million Amazon customers in 2016 were Prime members, compared to 46 million the year before.
  • 40 percent of Prime members spend more than $1,000 a year on Amazon (compared to just 8 percent of non-Prime shoppers).
  • Amazon offers two branded Visa Signature credit cards; one for Prime members that rewards 5 percent back and special financing options, one for non-Prime members that offers 3 percent back. Both were launched this January.
  • Prime subscription revenue was $5.7 billion in 2016, assuming 90 percent of Amazon’s “retail subscription services” revenue (which also includes audiobook, e-book, and digital video and music services). Under the same assumption, it generated $4 billion in Prime subscriptions in 2015.
  • 32 percent of shoppers that own a store branded credit card are Amazon cardholders; Amazon ranks number 1 among consumers with store cards, followed by Target (30 percent) and Macy’s (24 percent), as reported by the Vyze Retail Credit Survey.

The analysts’ view:
Cherian Abraham, senior business consultant, Experian: “Amazon primed this move — no pun intended — to take place once the Prime customer base reached sufficient scale to make this economical for Amazon to bring to its Prime base. Reloading an Amazon prepaid account via a bank debit allows Amazon to keep the cost low and one-time, whereas for the bank it disallows revenue that it would have realized for every Amazon transaction — and it loses visibility on to these transactions. And a prepaid load off of debit is a far less risky proposition compared to its own branded credit. Further this move allows it to go to a new segment of customers who are Prime customers but don’t own a an Amazon branded credit card.”

Brendan Miller, principal analyst, Forrester Research: “When you add money from an outside account into a gift card account, that is often treated very differently by the consumer than money sitting in their actual bank account. There’s an emotional difference about it. It tends to get spent more readily than when it’s sitting in your bank account and people are trying to manage budgets… It also reduces Amazon’s card processing fees. Instead of me making a bunch of transactions on my credit card, I’m making fewer transactions because it’s being reloaded, say, once or twice a month versus the seven, eight, nine separate purchases I make each month on Amazon. Then I’m only paying with my card twice to reload it so Amazon’s transaction fees will be lower. Debit is always cheaper to process than credit.”

The big picture:
Forget the rumors about Amazon potentially buying a bank. Amazon practically is a bank. To date it has a foot in payments, cash, small business lending, consumer credit and now it’s coming for debit card users.

It’s not necessarily positioning itself to replace the existing banks, Miller said, it’s just another way for people to interact with their money at a time when consumers funds are becoming more and more dispersed. Too bad for banks, that naturally means they’ll be taking fewer and fewer deposits and eventually, engage less and less with their customers, who will be engaging more with service providers like Amazon.

“There was already a trend of bank card spend being consolidated inside apps and services, and we are seeing the downstream risk to banks who are aware of this trend but aren’t do anything to act on it,” Abraham said.

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What banks can learn from Amazon

No one knows if Amazon will be buying a bank anytime soon, but more and more, it’s becoming a shining example of how banks themselves should be running their businesses.

Banks have embraced the idea that their own customers want new products delivered by new financial startups — the savings and management apps, authentication and security tools and money movement capabilities — but to truly put the customer experience first (as so many say they do) they should show the customers they’re here to give them what they want. That means instead of collaborating with young startups on building technology, they should make themselves a distribution channel with different financial products — just like Amazon does.

“Amazon opens its platform to hundreds if not thousands of providers of goods and services and makes it available to millions of consumers — they don’t care what you buy or from who as long as you buy it from the Amazon platform,” said Ron Shevlin, director of research at Cornerstone Advisors. “Amazon does have products to sell,” like the Fire TV or the Kindle. “They don’t care if you buy them because they still sell the iPad and everything else.”

It’s probably a little out there for banks. But more and more, changing customer expectations and an increasingly digital world are forcing banks to accept the idea of open banking platforms. But they should also bring that thinking to their actual business model.

Why a platform?
Banks today don’t care where customers buy their products, as long as they buy their products. But considering how many millions of customers they have, they don’t have that many products and services to sell to them — loans, credit cards, accounts.

In a banking context, a successful platform would be one that attracts and matches both producers and consumers. It would give people choice without friction — duplicate data entry, integration, having to paying multiple providers — create new revenue streams for banks and offer opportunities for fintech startups to scale, by reducing acquisition costs through platform participation, according to Shevlin’s report, The Platformification of Banking.

“The platform as a business model is designed to address that problem of enabling a bank to provide products and services without having to go into different partnerships and one-to-one integrations,” Shevlin said. “If you want to sell your stuff on Amazon, you sign up and you’re in. It’s easy to plug into Amazon, and that’s the concept missing in banking.”

Banks that exist today are one sided, they attract consumers and they’re the only provider of services to their customer. When it offers customers a choice of products and services, they’re bank-selected products and services. Fintech companies have trouble reaching consumers and banks have the challenge that they have this base of consumers but aren’t able to provide them with a large base of products and services.

Banks as platforms
If banks are becoming platforms, these are the earliest days of that shift. APIs are nothing new — they’ve been around for decades — but in the last year alone, Citibank, BBVA, Capital One and probably others have made their APIs open to developers in an effort to innovative better and faster.

They should also open additional revenue stream by monetizing offerings that run on those platforms. For example, a payments API that makes it easier for a retailer to do payments with a bank should inevitably bring in more payments. The bank takes a cut, everyone wins. But to be truly customer-first, the platform model shouldn’t stop at technology; banks should move their consumer-facing business to a platform model too, Shevlin said.

“All these API stores are pretty much technology-driven efforts without a lot of thought to how the business model changes,” Shevlin said. “How do we provide an interface to the consumer that shows there’s a choice? The banks aren’t necessarily adopting this or embracing the concept.”

There are some moves. In November, Citi launched its API Developer Hub. Mastercard, Virgin Money and others are already using Citi APIs to create customer solutions.

If banks today are going to stay relevant in an increasingly digital world, their only choice is to become more open. Until now, banks traditionally have been closed off, not wanting to share their secrets of the trade. It’s been an enormous cultural shift for them. Now they’re becoming more open, but it’s important to recognize there’s a fine line between providing open banking as a service and merely outsourcing innovation, said Carey Kolaja, global head of product at Citi FinTech.

“Our move to a developer hub and an open banking strategy is by no means a reflection that we’re outsourcing innovation or that banks will become the dumb pipes on which a transaction sits and not add value to our customers,” Kolaja said. “That being the case, we have to be realistic around why banks, including Citi, need to embrace new strategies with some of the fintech disruptors out there.”

It might seem we’re entering a world where banks become the platforms that fintech startups plug into so customers can use those services more easily, more securely and with more trust — Digit and Qapital for savings, Acorns and Robinhood for investments, maybe a credit monitoring app like Credit Karma or NerdWallet, and of course, the Venmo, Square Cash and other payments services.

Each of these apps uses APIs to plug into banks, that’s what allows users to interface with their bank account and register those details in order to open accounts with these various apps. It’s fun for now, the experimentation phase, but it’s not sustainable, Kolaja said.

“I don’t necessarily believe that in the next five to 10 years we’ll end up in a place where consumers want fragmented financial lives across multiple apps, nor do I believe some of these fintech disruptors will be able to sustain their existence from a financial and capital perspective without broadening their reach into other categories,” she said. “There’s a convergence that’s already starting to happen.”

Banks can only innovate so much
Customers don’t care about that distinction between open banking and outsourcing innovation. They just want what they need and for that service to come as easily and affordably as possible. That banks are becoming more open with each other on a technology level doesn’t mean they’ll apply the same thinking to their business model. Considering the size of their business, the existing organizational structure and the fact that they are making money, it is highly unlikely a bank will adopt this business model.

“When you look at what has prohibited big institutions from being successful — besides process and not being willing to take risks versus being able to take risks – solving for a simple customer experience with minimal friction has been problematic,” Kolaja said.

The more likely scenario is that a tech giant, like Amazon or Alipay, will enter the arena to sell consumers financial services, and existing banks will compete with those platforms, Shevlin said.

“The large bank is simply not going to become a platform,” he said. “They’ll go through all their technology exercises by opening APIs, but they’re not opening up, they’re not selling additional products or services or creating an environment.”

A bank could theoretically offer its own services and be its own banking platform, said Tom Eck, IBM’s chief technology officer for industry platforms. For example, if it were a Chase banking platform, it would expose Chase services and could open all up as APIs, making it easy for developers to consume those APIs on a Chase-specific platform.

IBM has a similar vision for an Amazon-like marketplace. It’s not consumer facing, but it’s a cloud based platform for financial services on which app developers and data scientist can come and build apps. Eck described it as a one stop shop ecosystem that includes fintechs startups, banks and insurance companies.

“A bank could both be a seller of services while it’s also consuming services from some third-party fintech. In addition to IBMs own assets, we’re focused on attracting fintechs, banks credit card processors… You come to ours because you know you can come and access all these insititutions. You see the catalog, can subscribe to these services in one place and then we make it easy for you to build on our platform consuming those APIs.”

It’ll be a significant additional revenue stream when it starts to monetize offerings that run on that platform — effectively a marketplace fee. It will also bring value to the platform itself.

“There’s an economic incentive for the platform operator because it typically extracts the seed for the use of services. IBM is a great new marketing and distribution channel for them, and it takes very little work to get them into the marketplace.”

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Tradestreaming Deep Dive: Amazon and Capital One?

Today’s episode is part of a new series we’re running. It’s called Deep Dive and as part of the show, we get an inside look from the reporters writing some of our top stories. From our New York office, reporter Tanaya Macheel joins me on the podcast to discuss the rumors that Amazon was in talks to acquire Capital One. Most of the articles that covered the story focused on why the deal didn’t make sense. Tanaya took the opposite tack with a contrarian piece on why the deal isn’t as crazy as it first sounds.

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Below are highlights, edited for clarity, from the episode.

Why would a tech firm want a bank?
Let’s start by saying that this deal is unlikely to happen. Banks were formed to manage dollars and cents. But as they’re undergoing this digital overhaul, like every industry is, they’re now managing data. All customer digital transactions and history are data which tech companies are really good at managing.

Are customers open to banking with Amazon?
I’m one of those people who is a little more wary of sharing my data with tech companies. There’s research that shows that 20 percent of people polled would buy financial and insurance products from large tech firms. Those findings aren’t that surprising given what I said before about banks moving into managing data.

Customers expect banks to keep up with the pace of innovation that technology firms set. 37 percent of people polled said they would be willing to leave their bank if it wasn’t keeping up.

Why is Amazon interested in Capital One?
We’ve seen payment plays from the other big tech firms, but Amazon is the only big tech firm that needs payments as part of its core business. Most of Capital One’s business is in credit and lending. While traditional banks focus on borrowers with high FICO scores, Capital One has opened up lending to almost anyone with an unsecured loan.

Amazon also offers a branded credit card that is issued by Chase. Capital One is also a card issuer and if Amazon could bring that under its own umbrella, it would earn more money.

Lastly, Capital One knows how to get new customers by marketing the right product to the right person at the right time. Customer acquisition is one of the biggest challenges for credit cards. It’s so expensive and can cost credit card issuers up to $800 to land a new account. With the data each company has, they can provide potential borrowers with better targeted offers and reduce acquisition costs.

What does a potential Amazon-Capital One acquisition look like for customers?
When you enter the checkout process now, you get all these payment offers. You can use credit cards and PayPal. You can also use PayPal Credit, which used to be called BillMeLater. There’s also this great company called Affirm, founded by PayPal’s Max Levchin. It’s a digital installment startup that directs you to apply for a no-interest or low-interest credit option. Because this is kind of core to Capital One’s business, that’s how I can see it manifesting.

What could get in the way of the deal?
Capital One has 800 branches and may need to sell off some of the consumer business to make the deal more attractive. Vantiv does Capital One’s merchant acquisition and Capital One would need to deal with that before doing a deal with Amazon. There’s also some lingering regulatory things that need to get cleaned up.