Why Amazon buying Capital One isn’t such a crazy idea

Last week a rumor circulated that Amazon might be looking to buy Capital One.

It’s only a rumor, and it’s probably very unlikely such a deal would go through, if only because the regulatory scrutiny that banks endure would put off any retailer in minutes. But who knows. The Trump administration is just decorated with Wall Street execs that can’t wait to deregulate banks.

The idea that a Silicon Valley giant could buy a bank is not new. Twenty percent of people would happily bank with them, according to a Fujitsu survey of 7,000 people. About 37 percent of respondents indicated they would leave their bank if it wasn’t up-to-date with technology and innovation that could improve customer experience. After all, banks exist to manage dollars and cents, but in a digital world, people would rather trust tech companies with the exchange of data that comes with financial transactions.

Among the obvious tech contenders — Google, Facebook and Amazon — Amazon is the only one who needs payments as part of its core business. If Amazon wants a bank badly enough and the price is right, Capital One would be a great fit. Amazon has a large marketplace that includes many retailers. Most of Capital One’s business is in credit and lending. It lends to a wide spectrum of people with different needs when most major banks only want to look at potential borrowers with FICO scores above 700. The prospect of a deal like this really happening might not be so crazy. (Amazon and Capital One declined to comment for this story.)

That’s one of three aspects that would be of greatest interest to Amazon, according to Mike Moeser, director of payments at Javelin Strategy & Research.

“When you get down to people with spotty or thin credit, a lot of banks will back off from that, whereas Capital One has been doing it for years,” he said. “They’re able to look at someone and determine if you have a thin file but you’re a young person or new to the country. Sometimes they have awesome credit, which is easy. But that full spectrum credit lending capability is something they bring to the table.”

Secondly, Capital One’s knows how to get new customers and how to market the right product in order to do it. One of the biggest problems with credit cards is the high cost of customer acquisitions, said David True, a partner at Paygility Advisors. Each company would benefit from the other’s customer data to create smarter marketing and selling strategies.

“If you had some of the information Amazon has — what motivates people, what do people buy — you could provide target offers at a lower cost that would help the card business a lot,” True said. “That would be very attractive because that’s the core of Capital One’s business.”

Finally, Amazon currently has a branded credit card issued by Chase. Since Capital One also issues branded cards, Amazon could earn more money on fees and interest by bringing the bank into the company.

If the two came together, Capital One’s credit and lending expertise would probably manifest as an installment lending option at checkout, Moeser suggested.

“There’s a whole host of little guys in that digital installment lending business,” he said. “But no one with real clout, real money. I think that’s where Amazon’s purchase of Capital One could really come to force.”

For example, when online shoppers get to the checkout point, they might see a popup or button from PayPal Credit, formerly named Bill Me Later, or Affirm, that advertises some sort of no-interest or low-interest credit option instead of entering card details or using stored card information.

That’s a situation that should scare rival retailer Walmart, Moeser said, which has been purchasing companies it probably won’t capitalize on as much as Amazon would on Capital One. Walmart has been on a buying spree to keep up with Amazon. In August, it bought Jet.com for $3.3 billion; in December it closed its $70 million acquisition of online retailer ShoeBuy; and last week it completed a $51 million deal to purchase outdoors retailer Moosejaw.

“If Amazon were to underwrite that using Capital One’s acquisition analytics, their full spectrum lending and issuer economics it would be a killer app that would really have Walmart quaking in its boots,” he said.

Amazon and Capital One already have a relationship. Last year, they teamed up to put the Capital One skill on the Amazon Echo, making the bank the first to integrate with a voice-controlled virtual assistant. By November, Capital One had migrated its core business and customer applications to Amazon’s cloud infrastructure provider, Amazon Web Services, signaling the bank’s commitment to delivering improved and more innovative customer digital experiences.

But other factors need to come together, too. Capital One has some 800 branches and may be a more attractive target if it sold off that consumer business, Moeser said. It has a long-term agreement with payments processor Vantiv, which does the bank’s merchant acquiring, so it would have to take care of that agreement before a deal with Amazon closes. And Capital One is in murky water with regulators over compliance deficiencies they found in the bank’s program that prevents money laundering, which halted their bid for outdoor-gear retailer Cabela’s when seeking regulatory approval.

Why Capital One, or any bank, would allow a deal of this kind to take place is impossible to parse right now, said Simon Taylor, a cofounder of fintech consultancy 11FS who previously worked at Barclays and TSYS.

“Do the bank staff and sharesholders get a good deal? How much does Capital One get to benefit from Amazon’s global muscle and footprint? If 20 percent of Amazon’s global customer base had a Capital One card, would that be wildly profitable? There are simply too many unknowns,” he said.

And where is Richard Fairbank on all this? The credit card giant’s 67-year-old founder and CEO keeps a low profile, as much as he can anyway considering how high-profile he really is in his position. He’s a famously nontraditional, contrarian and innovative leader who said on an earnings call a couple years ago that the bank should “think more like technology companies and maybe a little less like banks.”

It’s unlikely we’ll hear from him anytime soon, but he seems like the type of leader that will mesh well with the likes of Amazon.

How Amazon is becoming a major player in finance

amazon becoming a financial giant

It was never about the books.

Jeff Bezos may have launched Amazon as an Internet book seller, but he quickly turned the company into an overall ecommerce powerhouse. There’s little that Amazon isn’t in to these days – of course, they still sell books, but its tech unit, Amazon Web Services (AWS), is one of the leading cloud technology providers around, powering both large and small clients all over the world.

Amazon’s payments division is also ramping very quickly. In 2013, after a couple of starts and stops, the company relaunched  Amazon Payments, giving Amazon customers the ability to pay for products and services on other sites using their Amazon accounts. In a way, early Amazon Payments acted a substitute for PayPal or a credit card when account holders went shopping online. Amazon said this January that its transaction volume had grown 150 percent year over year in its payment division but hasn’t given out a full reckoning of its activities in the payments space.

Integrating Amazon Payments in the ecommerce ecosystem

Like PayPal, Amazon is running the third party integration playbook as the next leg in its growth. Earlier this week at a European finance conference, the company announced it would enable merchants to integrate Amazon’s payment tools into their own websites.  By giving Amazon customers the ability to log in, authenticate, and pay with their Amazon accounts, an ecommerce site can offer the same ease and use Amazon is renowned for.

This gives Amazon a much broader footprint in payments, as merchants are certainly interested in reaching the nearly 300 million registered users Amazon already has. These customers wouldn’t need to re-register or input payment information on merchant partner websites. They could just checkout with their existing Amazon accounts and payment information on file. In turn, this would speed the conversion cycle and boost revenues for ecommerce sites that integrate Amazon Payments.

Growing out Amazon Payments beginning with leadership

To spearhead Amazon’s aggressive push into payments, the ecommerce firm hired PayPal’s Patrick Gauthier last year. Gauthier has played a key role throughout his career in building and expanding new payment technologies, most recently at PayPal where he grew their prepaid business seven-fold in just 18 months as the firm’s head of product strategy in retail services. Prior to PayPal, Gauthier spent 10 years at Visa spearheading next generation payment products and services.

Gauthier now leads the expansion of Amazon Payments with merchant integrations. Regarding the program, he told Bloomberg, “Why would we make it easy for customers to buy elsewhere? Because we know it solves a problem in their life…It deepens our relationship with customers.”

Amazon’s payments distribution strategy also has its payment functionality showing up in unexpected places. The firm’s new voice-controlled virtual assistant device, Echo, recently integrated with Capital One to allow users to synch their Amazon devices to track and pay Capital One credit card bills. Amazon also developed and now markets Dash buttons which are small, one-button household wifi devices that when pushed, automatically order a single product from the Amazon website.

Payments + lending

Amazon has also been active in the online lending space. This program, which began as invite-only in 2012, provides capital to merchants who sell on Amazon. Loan sizes run from $1000 to $600,000, with payback periods ranging from 90-180 days and interest rates fluctuating between 6-14%. Amazon has leant hundreds of millions of dollars as part of its lending program and in the summer of 2015, announced it had expanded its lending to select European markets.

Amazon’s activities in the online lending and payments space have shown that that the ecommerce giant is serious about being a major player in finance. With strong roots in ecommerce, it makes sense that payments would be a smart initial foothold for the retail giant. But who knows, Amazon may move deeper into finance. Will we see the Bank of Amazon in the near future?

 

 

In today’s market, is everyone an online lender?

hedgeable podcast

How do you compete when everyone’s an online lender?

The interest surrounding online lending has seen hundreds of millions billions of dollars (debt and equity) being poured into the space. In fact, the amount of money raised by US online lending startups through Q3 2015 was greater than all of 2014. Most of this capital has gone to pureplay startups — like $275M to Earnest, for example) to build out their technology stacks. Marketplace lenders have raised huge amounts of capital — from both the private and public markets — to attempt to get a foothold in the massive lending market. Online balance sheet lenders are participating heavily here, as well.

But that’s not all that’s happening. Ecommerce firms, without a traditional focus on finance, are getting into the action. PayPal just announced it had surpassed $1 billion in working capital it extended to its merchants. Amazon is expanding its lending program to sellers in multiple countries around the world. Chinese ecommerce sites and social networks and now, with Baidu getting into the game, a search engine, are providing financial services. And there are smart investors like Blue Elephant’s Brian Weinstein providing capital to get access to these new channels of finance.

So what does the market look like when everyone turns into an online lender?

 

Banks being disrupted…by search engines?

banks being disrupted by search engine

Traditional banks are finding out new competition lurks everywhere.

Pureplay startups like marketplace lenders, Lending Club and Prosper are originating billions of dollars of loans every quarter. Though volumes are small compared to total SMB outstanding loans (which in 2013 stood at $585 billion), some banks are turning to the marketplace lenders to buy loans, opting to partner instead of compete.

This move towards alternative lending, core to banking services, isn’t just a US phenomenon. Funding Circle, another leader among the current class of startup online lenders, has global aspirations.

Funding Circle’s co-founder, Sam Hodges recently explained to  Tradestreaming:

Our vision for Funding Circle is as a global lending exchange, where business from all over the world come to find finance from an army of investors, big and small. Small businesses are underserved in most of parts of the world, and we believe our marketplace model can help millions of businesses and investors to get a better deal. At the moment, we are focusing all of our energy on building a successful business here in the UK, USA and Europe.

There are high hopes for marketplace lending. Some investors, like Foundation Capital’s Charles Moldow, are betting on the market, between cannibalization and traditional banks moving into marketplace lending themselves, can grow to be a trillion dollars.

From banks to ecommerce platform

It’s not just marketplace lenders taking aim at banks. Traditional ecommerce players want in, too. Amazon is offering loans to handpicked sellers on goods on its ecommerce platform.

Like marketplace lending, ecommerce firms entering financial services isnt’ just happening in the US: PayPal’s Working Capital loans for small businesses has lent more than $1 billion to over 60,000 small businesses in the U.S., U.K. and Australia. Alibaba, the giant Chinese ecommerce platform, launched a money market fund for sellers to store their working capital. Within just 10 months, the fund, called Yu’e Bao had more than $90 billion in short term capital. That’s money that used to be kept in banks.

Search engines becoming lenders

On the heels of Alibaba’s success in money markets, Chinese search engine Baidu appears ready to launch its own banking solution. Looking to avoid some of the regulatory commotion around Alibaba’s own financial service offering, Baidu intends to partner with Citic, the 7th largest Chinese bank with 600 physical locations.

While Google got out of the direct lending business to its advertisers, it is now running a pilot with Lending Club. The marketplace lender is offering advertisers on Google a loan to fund their AdWords campaigns.

The nature of banking is changing and therefore, the players leading the charge are rearranging themselves. [x_pullquote cite=”TechCrunch” type=”right”]This year, over $11 billion has been invested in financial technology services companies. That’s up over $5 billion from the previous year, and the highest amount invested into financial services technology companies in the past five years[/x_pullquote]Pureplay lenders are filling an important role and ecommerce platforms have found a way to offer financing to some of their best customers. As this plays out, there are more companies popping up to help banks compete. Firms like LendKey provide banks with the tools, technology, and process optimization employed by nimble tech startups. More companies keep launching to help make the banking sector more competitive to the demands placed on them by consumers who are demanding the same speed, transparency, and service commonplace in other industries disrupted by technology.

This opportunity hasn’t been lost on investors, who are pouring money into alternative financing businesses. Lending Club and OnDeck both had well-received IPOs that gave the companies billion dollar marketcaps.

In 2015, there’s been hundreds of millions of dollars invested into alternative lenders. Just this week, alt lender Earnest announced a round of $275 million (equity and debt).

 

Regulation and branding will assure that banks aren’t going away but it’s getting more complicated to compete in core banking services. Direct competitors are emerging to challenge banks head on while others, like ecommerce players, are indirectly competing indirectly with them. Through general growth, partnerships, and some disruption, the banking industry is quickly evolving.

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Breaking: Yahoo Finance Message Boards raided by FBI

In an incredible twist, the FBI and DOJ have raided the Yahoo Message Boards today as part of an expanding investigation into insider trading.  According to most recent reports, the FBI is investigating numerous players in the investment field (including 6 hedge funds) in what pundits are calling Insider Trading Fest(ivus)

Posing as bigdaddywantmoney123 and insiderhoneypot, two detectives have been monitoring suspicious activity for the past 7-11 years on the industry’s most active site to share useless, inane, political opinions.

After serving a warrant to…um…eh…(WTF?? Who’s in charge over there at Yahoo?!), the FBI sent a team of forensic detectives to do their thing on the Yahoo Finance Message Boards on a set of servers located in Sunnyvale, CA.

The smoking guns

$BIDU: On the Baidu ($BIDU) message board, asiantradermakingseriousyuan said that his cousin’s brother’s wife who lives in Beijing knows BIDU’s CEO’s brother’s nanny and she says the company is on fire. Clearly, impactful nonpublic information.  Google, here we come!

$AAPL: Over on the media device juggernaut’s boards, user macforlifebaby said that he’s got an in with a janitor who cleans Steve Job’s dentist’s office and reportedly, the Apple Computer CEO had a least three teeth whitenings in the past 3 years.  Heady stuff — what you trying to hide, Steve, eh??

$AMZN: This one’s really good. You know the hot Kindle book reader device sold by Amazon.com.  Well, supposedly, someone’s posting on the message boards who works at UPS in Seattle and he estimated that he’s picking up more boxes this year than ever before at the retailing giant.  God, that’s good info!

$PCLN: This one seems a bit far-fetched but illustrates how individual investors are not playing on a level playing field when it comes to investing.  So, you know how you can bid on hotel rooms on Priceline.com?  Well the stock is one of the best performers over the past 12 months and IwanttohaveWilliamShatnersbaby says that he (she?) noticed that hotels in New York city are going for less than they were 3 months ago.  Short it baby!!

In all seriousness, the FBI is taking these allegations seriously and says its aim is to prevent leakage of potentially tradeable info onto the message boards.  The FBI has suggested the Internet to be turned off periodically and power cut to those homes suspected of aiding and abetting these criminals.