One of Jeff Bezos' most famous quotes is a warning to Wall Street
- Amazon is reportedly in talks with several large banks to launch a "checking account-like product," the Wall Street Journal reported Monday morning.
- The report helps answer one of the most oft-asked questions on Wall Street: When's Amazon going to show up? It also sheds light on how Amazon might get in to the business of banking.
- JPMorgan Chase, one of the banks Amazon is reportedly in talks with, has clearly been thinking about the Amazon effect for some time.
- Speaking at JPMorgan's investor day, CEO Jamie Dimon quoted Amazon's CEO, saying: "Jeff Bezos says 'Your margin is my opportunity.'"
- The risk for Wall Street is that it's now their margin that's Amazon's opportunity.
Finally.
The Wall Street Journal reported Monday morning that Amazon is in talks with several banks to launch a "checking account-like product." The report helps answer one of the most oft-asked questions on Wall Street: When's Amazon going to show up? It also confirms predictions for how a company like Amazon might enter the market.
In particular, management consultancy McKinsey in October published a report focused on the role "platform companies" might play in finance, and how traditional finance might meet the challenge.
The report is full of management consulting language, with references to "digital pioneers" bridging "the value chains of various industries in order." But in essence, it's really about customer relationships. And right now, it's the platform companies that have the strongest customer relationships.
In the US, consider that millennials list Amazon as the app they can't live without, or that 73% of millennials say they would be more excited about a new financial services offering from Google, Amazon, Paypal, or Square than their bank.
The opportunity for these platform companies then is clear. It's a question of intent and execution. And the WSJ's report seems to confirm predictions that Amazon will likely focus on the distribution, rather than the manufacture, of financial products. One banker told McKinsey:
"There might be a time in the future where I might turn to my two kids and say, 'Who are you banking with at the moment?' And they say money's with HSBC but I really like using the Amazon front end for this, that, and the other. Those are the kind of possibilities we might have to face."
Amazon's plans aren't concrete yet, according to WSJ, but that sounds a little like what it's in the early stages of trying to do. In that scenario, it's Amazon that looks after customer acquisition and experience, and HSBC or another bank that actually stores the money and moves it around.
The threat for finance is that it's the origination and sales bit of the finance pie that's most profitable, generating 65% of global banking profits, with an ROE of 20%, according to McKinsey. In contrast, the manufacturing bit of the business, the core business of financing and lending from a bank's balance sheet, generated 35% of profits, with an ROE of 4.4%.
And pricing power becomes a concern when it's Amazon (or another platform company) that owns the customer relationship, as evidenced in the retail sector, where big brands have sought to build their own direct-to-consumer sales channels to offset the impact of Amazon's pricing power.
"Pricing is a concern: if banks are cut out of the primary customer relationship, can they set prices high enough to make a return?" McKinsey asked last year, answering that in many cases they could.
And JPMorgan Chase, one of the banks Amazon is reportedly in talks with, has clearly been thinking about the Amazon effect for some time.
"Jeff Bezos says 'Your margin is my opportunity,'" JPMorgan CEO Jamie Dimon said in the Q&A portion of the bank's investor day last week. "You know, that's called competition. And so some of it gets passed on to the customer in terms of lower prices and lower spreads."
The risk for Wall Street is that it's now their margin that's Amazon's opportunity.