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.”

National Funding moved its contact center to the cloud to create a better customer experience

When Geoff Howard first joined National Funding, he heard from various people throughout his organization that the phone system needed work. Major work. That was November of 2015. By February 2016, the new vp of technology was interviewing vendors.

National Funding, a top 10 alternative lender that works with small businesses, found early on that it made sense to funnel prospects to a loan specialist. Small business owners are busy running their businesses. They’re on the floor of their restaurants or on site at a construction project. They need some hand holding.

“Even if it’s necessary to expand a business and deal with market uncertainty, borrowing money is a scary, and sometimes, daunting process for SMBs,” said Howard.

The firm has subsequently spent time designing digital interactions between interested borrowers and the firm’s customer-facing staff. Whether they come in via the phone or through the web, the San Diego-based company immediately assigns small business owners to a human being to help explain their credit options.

The challenge was, the old phone system, an on-premise PBX, required whoever answered the phone to transfer the caller to another extension. That extra step wasn’t a great experience for the caller and it wasn’t a good use of employee time.

In September 2016, Howard, who spent 14 years at Intuit in engineering, made his selection and chose to discard his firm’s old technology and shift to the cloud. He went with Five9, a cloud contact center software provider.

National Funding runs two major technology platforms: Salesforce as its CRM and a proprietary lending platform. Howard explained that the decision to go to Five9’s cloud solution was based primarily on how easy it was to integrate. Five9 integrates with Salesforce out of the box and has a set of APIs that National Funding used to hook up to its lending platform. Now, when a specialist answers a call, he does so with all the accompanying information about who’s on the other end of the call flashing on his computer screen.

Howard claims calls are getting routed faster, with average wait times under a minute. Calls are more evenly distributed among the firm’s specialists.

National Funding continues to test new communication channels as part of its digital interaction strategy. The company recently rolled out texting capabilities, so customers can send and receive short messages to their loan specialists. Its also testing other technologies in house, like chat.

This is important for a company that prides itself on customer service. Unlike other young alternative lenders, National Funding didn’t set out to build a 100% digital lender.

“Creating one to one interactions with loan specialists is core to what we do and that differentiates us,” he said. “We don’t see that as the right product and experience for most SMBs. We use technology to enable better human interactions.”