Asset Based Lending
Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewinnovation factory and its lessons
I have written about Amazon before, and quite recently too. And yet, when the audacious Whole Foods purchase was announced, I gained even more respect for this visionary company. I also am more concerned about our industry’s future in the payments space than ever before.
Amazon’s vision is simple yet encompassing: “…be the earth’s most customer-centric company; to build a place where customers can come and discover anything they might want to buy online”. The company has been an e-commerce leader and digital payment innovator for over 20 years. What started as a digital bookstore has become a giant distribution center for literally everything.
For example, as Dick and I were enjoying a salad in Vietnam, I inquired about the dressing and was told it contains a specific fish sauce that gives it that delicious taste. We looked all over the market for it and couldn’t find it. I clicked on the Amazon app and there it was. A mind blowing experience.
Amazon offers similar breakthrough experiences time and time again, feeding my (and millions of others’) addiction to its seamless execution. Have you experienced your first “dash button” yet? Or “subscribe and save”? Either will change your life – for the better! Both offer unimaginable convenience that frees the customer from carrying bulky or heavy items home from Costco or, even more impressively, from having to ensure they won’t run out of staple products. Amazon does that for you.
I’m not even talking about Echo, Alexa etc. Those products have competitors and alternative offerings. But the Amazon experience is unique. Plus it is very difficult and expensive to duplicate, given the fixed cost associated with building that unique experience.
Then came Amazon Go, the first grocery store. The concept promises the ultimate grocery shopping experience: Walk into your local Amazon Go, grab what you need off the shelves (the technology magically knows what is added to the cart), confirm the purchase, and leave, without ever standing in a checkout line. Think of the ramifications:
• No need for checkout staff
• Seamlessness beyond imagination
• Fantastic customer experience
In other words, a revolutionary concept that is less expensive to deliver while delighting customers.
As Forbes magazine opined, “… but it should be obvious that its end game isn’t to become a leader in the notoriously low-margin grocery industry, which averages just 1-3%. I predict Amazon Go is part of a strategy to grow its payments business and continue expanding into physical retail. And, like everything Amazon does—from the Echo to video streaming—drive traffic to Amazon.com.”
Amazon has been in the payments business for some time, but without posing a visible threat to depository institutions. Their initial payments offerings were designed to support and enable their retail business. Today, the product line has expended markedly.
Note that Amazon Payments is similar in strategy to Amazon’s cloud-computing platform, Amazon Web Services, which generated over half of Amazon’s operating income in 2015. The volume is staggering: Amazon handled $200B in total payments in 2015, and the growth since then has been exponential. Amazon Payments has the additional benefit of producing revenues that support the core business as well as, through physical distribution, create an incredible customer experience and reset customer expectations for the payment process.
Why is amazon focusing on payments? They effort is consistent with the company’s vision:
O Make shopping easier and more rewarding
O Deepen relationships and connections with customers
O Generate revenue to lower acceptance costs
O Continue its customer-centric approach to development and service delivery
Amazon Payments allows customers to shop securely across different online merchants using a single Amazon login. Earlier this year, Amazon launched its Global Partner Program, designed to bring more retailers onto its payments platform that allows customers to make purchases across multiple retailers using an Amazon login.
And now, with Amazon Go’s underlying technology, Amazon can make it available to major retailers providing they accept Amazon Payments, of course. What retailer would decline a next-generation technology that would transform the customer experience, reduce theft, and allow for major reductions in labor—the second largest expense in retail? No payments company would be able to offer retailers anything even remotely like Amazon Go’s technology.
The Whole Foods acquisition appears to be in complete alignment with Amazon’s view of the world of retail. Amazon is using Big Data to reverse-engineer retail in a way that might change it forever.
The firm’s move marks the beginning of the end of retail as we've known it. It also impact execution in the payments space. Our industry depends on payments as a major source of income. This type of disruption can be more significant to us that the Lending Clubs of this world.
Amazon has approached Retailing in a scientific way since the very beginning. In the Amazon world, every transaction is recorded, every buyer is known, every inventory movement is known, and perhaps more importantly, every possible next order can be suggested based on what visitors buy and browse. This playbook, based on the belief that all data must be collected, analyzed and used, is drastically different from retail’s traditional way of thinking.
Our industry SHOULD be able to accomplish all these things and has made many attempts at doing so, from “next most likely to buy” models to detailed staffing models. But the seamlessness offered by Amazon is way beyond the experience we currently offer, and can meaningfully reduce our revenue if the Amazon payments method is adopted by many retailers.
Here are some of the payments options currently offered by Amazon that are already nipping at our heels.
• Pay with Amazon turns Amazon’s card vault into a digital wallet, allowing third-party merchants to leverage stored payment and shipping information. Over 23 million people (8% of Amazon’s base) have used Pay with Amazon since 2013. Amazon sayss Pay with Amazon generates higher conversion rates and higher average tickets at small and midsize e-tailers.
• Sell with Amazon is Amazon’s marketplace program for third-party sellers. Amazon now hosts 2 million sellers. Sell on Amazon is a combined distribution and payment service. Sellers can also engage Amazon for marketing and fulfillment. Third-party sales now account for about half of Amazon’s items sold and, according to Channel Advisor, 58% of Amazon’s retail revenue.
• 1-CLICK. Amazon was the first to offer one-click checkout; in fact, the company holds a U.S. patent on it. When enabled, 1-Click virtually eliminates the checkout process by billing a default payment method and address. Amazon does not publicize the impact of 1-Click, but other express checkout systems in the market generates 20-30% higher checkout conversion.
• AMAZON MONTHLY PAYMENTS. Amazon offers no-interest installment purchase plans for select Amazon branded products, such as the Kindle e-reader.
• AMAZON LENDING. Since late 2011 Amazon has provided $1.5 billion in short-term loans to its marketplace sellers in the U.S., UK, and Japan. The program had $400 million outstanding at the end of 2015. The loans resemble a merchant cash advance with repayment debited from Sell on Amazon proceeds, except Amazon debits a fixed repayment amount, not a percent of sales. Sellers responding to a WSJ survey reported average loan sizes anywhere from $1,000 to $38,000 with interest rates hovering around 14% APR. If approved, funds are transferred to Amazon Seller accounts within five business days.
One interesting – and reassuring – element of the Amazon-Whole Foods union is the reaffirmation of the important of physical distribution. At the same time, it confirms the transformation of the customer experience in a physical outlet in a way heretofore unimaginable. Banks can use biometrics and similar tools to transform the customer experience in their branches to better leverage the branch, reduce non-value-add staff and ultimately delight the customer beyond their expectations.
This article isn’t about Amazon. It is about such a sweeping change that is near impossible to envision, and yet someone has dreamt it and made it real. As I wrote in the past, banks can’t possibly invest the dollars or brainpower that companies like Amazon are putting into creating the future for the global customer. What we CAN do is dream with the dreamers, partner with them and realize that we are in a unique era of change.