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.

PayPal-TIO deal could increase Venmo revenue, utility

PayPal’s merger strategy has long been focused on digital offerings. Reaching the physical world, however, has been a real challenge for the payments giant.

Now PayPal is trying to change that. The recently announced acquisition of Canadian bill pay service TIO Networks for $233 million would not just give them greater reach but a greater opportunity to work more with people who are excluded from the banking system.

“It’s been clear for a while that PayPal has a vision to democratize financial services,” said Anuj Nayar, head of global initiatives at PayPal. “A lot of this stuff we’re doing specifically to hit the underserved. People are being disenfranchised … it’s incredible how high a proportion of the U.S. population couldn’t raise $400 in an emergency.”

About 15 percent of U.S. consumers don’t have a bank account, according to Pew Charitable Trusts. For many of them, digital financial services seem ill-suited to their needs since they deal mostly in paper checks or cash. And while targeting people off the financial grid is laudable, the deal, which is scheduled to close in the second half of 2017, is as much about the transaction volumes PayPal would acquire, if not more, as servicing the unbanked.

When the company announced its quarterly earnings at the end of January it highlighted the successful growth of PayPal-owned Venmo, which processed $5.6 billion over the quarter, up 126 percent from the previous quarter. But Venmo transfers are free for users and PayPal doesn’t make much from them. Similarly, people making cash payments to billers are probably doing so through a kiosk or 7Eleven, Family Dollar or other retailer, said Michael Moeser, Javelin Strategy & Research’s director of payments.

“PayPal makes [revenue] when you use its wallet at a merchant,” he said. So by bringing billers into its network PayPal argues that it’s creating more opportunities to generate fee revenue.

If PayPal can get data on people who are outside the mainstream financial system, and as a result, aren’t on the radars of credit bureaus, it could potentially help build and maintain records of the volumes of data that show people’s financial integrity and responsibility, said Ramesh Siromani, a partner in the financial institutions practice of A.T. Kearney, a global strategy and management consulting firm.

As important as it is to bring attention to and target these customers, this deal, for PayPal, is still all about adding more ways to get volume into its business that wasn’t previously there. TIO processed $7 billion in bill payments in 2016. It boasts 14 million customers, 10,000 biller partners and 65,000 retail locations.

In the long term, PayPal could use the TIO network to bring more utility to the Venmo app, Moeser suggested. PayPal declined to comment.

“Say you and your three roommates get a collective utility bill, and one person is getting the funds from the other roommates so he or she can pay that utility bill,” he said. “When you get money from your roommates you don’t have to go to a separate function or log into your mobile or online banking, you could do it all from your Venmo wallet and there’s an opportunity for Venmo to get some sort of interchange [fee] from that biller.”

Nayar did not comment on the company’s future plans beyond the deal, which has still not been completed. For now, he said, PayPal is focused on serving customer needs, and finding a way to bring people with limited financial access into its business and into the mainstream financial system is on deck.

“Across the board we’re focusing on needs of customers,” Nayar said. “PayPal’s are two fold: merchants and consumers. For both of them there is a massive unmet need and PayPal is sort of the only global third party payments network that does it all at scale — we have three digital wallets in total,” he added, referring to the PayPal digital wallet, Venmo and Xoom.

For the last five to 10 years, the conversation around financial inclusion has drawn attention to the exorbitant fees people end up paying just to cash a check or send money to family in a different country. In that time, technology developers have built software that allows them to perform these basic functions for little to no fee, and more quickly.

Adopting these technologies aren’t as easy as it sounds though, said David Sica, a principal at venture capital firm Nyca partners. There’s a huge financial literacy component that could be addressed through great marketing and product design.

“What often gets missed is the consumers trust that check casher, they trust the service that for the last 20 times they’ve used it does what it’s supposed to do,” he said. “If I’m a check cashing customer, I’m not going to rock the boat. I’m going to go where I know I can cash the check and remit and I’m fine paying the fees because it’s more important to get it done. It’s unrealistic to think the unbanked, underserved population will start acting and behaving like a Venmo customer on day one.”

Who are the top business development peeps in online finance?

Biz dev is the lifeblood of online finance (hey, I should know).

It’s deals and partnerships that are driving the growth of many of these top online finance startups.

I went through this list and named the top biz dev people in Finance 2.0. But the list is very incomplete — who do YOU think belongs on the list? 

Who’s the top business development person in online finance?  Vote below.

[listly id=”ju” theme=”light” layout=”full” numbered=”yes” image=”yes” items=”all”]

Optimizing purchasing decisions and when to buy

Lifehacker had a great email yesterday entitled The Best Times to Buy Anything in 2011.

Well-researched and totally tweaked by crowdsourcing this information, this post defines the most optimal times to purchase specific items throughout the year based on varying criteria.

For example, for some reason, laptops go cheap in April as do Broadway tickets in the 3rd quarter.

My favorite?  I’ll look to buy a car in September, an off-color car in December, and as one commenter suggested, try buying a car on Super Bowl Sunday — the salespeople are distracted and open to low ball offers.

Much of this information and concepts were described in Buy Ketchup in May and Fly at Noon (affiliate link). You can find the author’s website here.

Source

The Best Times to Buy Anything in 2011 (Lifehacker)

More sources for well-timed buying (Lifehacker)