It’s become an unfortunate staple of the times that tech companies regularly get reporters to act as stenographers, even when the companies have too obviously fuzzy ideas about mature industries with high barriers to entry like banking. In the same vein, when the tech company with a hairball scheme is a big name like Amazon or Apple, readers who ought to know better seem to turn off their critical thinking apparatus entirely.
That means that rather than yours truly doing a high level shellacking, I have to call in the heavy artillery, in the form of our payments system expert Clive, to go scorched earth. Even then, it seems to take an undue amount of repetition to get across the idea that just because the protagonist has a lot of dough and clever developers does not mean that it can get where it thinks it wants to go without spending vastly more time and money that it would ever be worth.
Today’s object lesson is a breathless and suitably vague story in the Wall Street Journal, , about Amazon wanting to get into the banking biz. Rest assured, even the headline is wrong unless you accept an awfully liberal definition what Amazon getting into checking accounts would amount to.
Amazon’s need to talk up and make gestures about conquering new markets is a reminder of how much investors want to see more growth from the Seattle giant. The law of large numbers alone says it is going to run out of runway.
Amazon.com Inc. is in talks with big banks including JPMorgan Chase & Co. about building a checking-account-like product the online retailer could offer its customers….
The effort is still in its early stages and may not come to fruition…
After several paragraphs about what a gee whiz company Amazon is, we get to this:
In banking, however, Amazon appears to be arriving more as a partner than a disrupter.
Last fall, it put out a request for proposals from several banks for a hybrid-type checking account and is weighing pitches from firms including JPMorgan and Capital One Financial Corp. , some of the people said. It is too early to say exactly what the product will look like, including whether it would give customers the ability to write checks, directly pay bills, or access to a nationwide ATM network.
So there’s no product concept here, just a nebulous belief on Amazon’s behalf that because it gets an absolutely ginormous volume of customer orders and has the interface to payments processors, surely it can leverage that somehow into taking a bigger chunk out of banks. Mind you, it does so to a degree already by offering what is called a co-branded credit card, which runs over a bank’s payment platform (in this case, Chase’s). These have been around for over two decades. Amazon’s arrangement with Chase supposedly has some novel features, which likely means Amazon was able to extract a better economic deal and probably some more services (like enhanced reporting) than the normal co-branded card deal because Amazon.
Now let us turn the microphone over to our Clive:
Ridiculous. Ridiculous. Ridiculous.
Highlighting the sheer implausibly of any concept that Amazon could offer a useable product merely through its own platform, the Journal suggests that an Amazon Pay based proposition would be a “proposal to start offering a product similar to checking account”. Which is an attempt to finesse a retail money management product must-do — the ability to issue checks and be route-able via an ACH (Automated Clearing House) routing number.
This mish-mashing of two entirely different product designs (credit card accounts and checking accounts) illustrates the dreamland which the supposed Amazon game changer is occupying.
Now, it isn’t unheard of to have a credit card product linked to a checking account (the credit card’s line of credit is aligned to the checking account and if you write, say, a check where there’s no funds in the checking account to cover it, you automatically drawn down on your credit card limit). But these are merely gimmicks and marketing novelties. They don’t give ACH routing to the credit card account directly.
As soon as Amazon wants to offer ACH eligibility in its own right on its own product — and/or act as a deposit taker— it inevitably becomes a FDIC-registered bank. With all of the constraints that entails.
Again, there’s nothing in Amazon itself and nothing in Amazon Pay as a product that allows it a competitive advantage when trying to be a bank. This, presumably, is why it is proposing to be allied with JPM — it can’t in anything other than the longest of the long-term do what JPM does especially better or cheaper.
Amazon has to utilise the existing components of the banking system to a degree. Replicating them or procuring them (money transmission infrastructure and system access nodes, a core banking system, the card schemes, banking licences, a back office operation) is unavoidable. And some things like the card schemes and the banking licensing are not going to offer you any special functionality or flexibility just because you’re Amazon. They can’t vary their terms, the same terms have to apply to all — because they are systems themselves or they have to have conformation across all participants.
And the idea that Amazon could in short order could even begin to provide the same scale and sophistication that the card schemes provide is ludicrous. Mastercard’s near-1000 page Scheme Rules, for example, did not write itself overnight. It is the product of 40+ years of experience, local market compliance provisions and the school of hard knocks as it has had to fix its system in response to real events which have impacted the network.
And Amazon thinks it can come up with its own scheme overnight? With no subject matter expertise? And it presumably wants to operate in all major markets (North America, Central and South America, Asia Pacific and EMEA) — so to replicate what the existing schemes provide in terms of a homogeneous global service offer, it’ll need a globally co-ordinated launch.
But all it knows how to do in terms of a retail/consumer operation is a distribution operation. It seriously expects to be able to scale up as it will need to do?
Then we’ve got the merchant side. Even if Amazon is willing to subsidise merchant terminal equipment to support its alternate Amazon based method, it’ll need to be in the short to medium term backwards compatible with the existing card schemes. The merchants might expect to be quite happy with the updated EPoS hardware for either free or less than cost price — but it is not necessarily feasible for them to adopt new devices. Small merchant operations in mom and pop stores typically use stand-alone devices to payment acquiring but once you get to larger chains, their EPoS machines are integrated into their cash handling or teller hardware.
And for even bigger fish, it’s even more problematic — Walmart has a worldwide standard checkout hardware system with bespoke user/checkout interfaces and deep integration into its inventory and stock management system. Amazon really thinks that Walmart will allow it to insert itself into its proprietary systems?
Finally, any suggestion that somehow Amazon has some wonderful insight into customer ID is pure fantasy. Now, Amazon may be able to derive some very accurate estimations based on what information it can obtain from your Amazon ID or a Prime account and the Alexa devices you sign in on. I’m sure that Amazon could work out that my name, combined with my chosen payment card which is associated with my Amazon ID, belong to a person who spends most of their time at the GPS location where an Alexa is normally physically located at or where I get their orders delivered to. But that is in no way suitable for Financial Services Know Your Customer (KYC) requirements.
KYC is an obligation for the financial services company offering the services. It cannot outsource that to a 3rd party and then, if it is found to not be compliant, tell the regulatory bodies “oh, sorry about that, but it’s not our fault, it’s Amazon’s, please go and beat them up instead”.
One of the commonly accepted logical fallacies is where people assign higher credibility to a proponent of and idea just because they’re successful or have a lot of covetable assets (it goes something like that). It appears that because Amazon has billions in the bank, people just hear its name and, no matter how dumb the proposition, it’s simply accepted unquestionably.