Insurance Journal, April 2018

Tech companies pose a clear challenge to banks and none more so than Amazon, which is reported to be in talks with JPMorgan Chase and other big retail banks to create a checking-account-like offering aimed at younger adults and those without checking accounts. This move would build on the company’s initial forays into financial products over recent years and be the start of its venturing into lending, mortgages, property/casualty insurance, wealth management and term life insurance, according to consultants at Bain & Co.

A recent Bain report on banking finds many financial services customers are all too ready and willing to ride the wave of disruption.

In its survey of more than 133,000 consumers across 22 countries, Bain & Co. found that more than half of U.S. respondents – and fully three quarters of those age 18 to 24 – are willing to buy a financial services product from established tech players, with Amazon atop the list of the most trusted. Apple and Google round out the top three.

While many in banking bet on fintech startups as the likely disruptors, Bain analysts contend established technology firms could pose the bigger threat. “Fintechs may have innovative products, but they struggle to build brand recognition or a distribution model that attracts many customers. Large technology firms already have established brands and customer access, which provide an almost unassailable distribution advantage,” the report notes.

According to Bain, Amazon is well positioned to succeed in U.S. banking because of its frequent purchases and customer reviews; a full commercial relationship including credit card on file; integration into consumers’ computers, smartphones, tablets, TVs and home audio devices; excellent service, including a great returns policy; and no major security breaches so far.

Once Amazon establishes a co-branded basic banking service, Bain & Co. expects the internet giant to move steadily but surely into other financial products including lending, mortgages, property/casualty insurance, wealth management and term life insurance.

Bain notes that Amazon could follow customers as they age and move through different life and family stages and it has the ability to personalize offers and communications. “Online shopping patterns already tell Amazon what it needs to know about customers’ life events, from getting married to having children to buying a house, which will allow the company to offer relevant financial services products—and information from those products will further increase the depth of the data,” the Bain report says.

“Amazon’s interest in banking is something we’ve anticipated for a while,” said Gerard du Toit, who leads Bain & Co.’s banking and payments sector in the Americas. “Checking and debit accounts are notoriously unprofitable, especially for a fee-free model aimed at younger customers, who often have little money to keep in the account. Most banks don’t relish serving this part of the market. But Amazon has a number of good reasons to dive in. Its incremental costs to do so will be almost nil and it stands to benefit in ways that go far beyond making money on bank accounts.”

Amazon can afford to go after this previously unprofitable segment in part because it can transform the economics of banking; Amazon does not have the burden of an expensive branch and contact center network – which Bain estimates comprises roughly 40 percent of a typical North American retail bank’s costs. The company can also avoid a lot of the customer acquisition costs borne by most direct banks because it already has digital relationships with so many Americans.

Amazon can also avoid dealing with bank regulatory compliance or managing the balance sheet. For example, Amazon’s retail banking partner would hold deposits, while Amazon would design and manage the customer experience and distribution.

Finally, Amazon can make it easy for customers to pay right from that account instead of with their credit cards, which impose fees for each transaction on Amazon or its third-party merchants. Bain estimates that Amazon could avoid more than $250 million in annual interchange fees in the U.S. alone.

“Amazon stands a very good chance of succeeding in banking, by disrupting the industry as it has in retailing,” said du Toit. “Customers indicate ample willingness to buy financial products from technology firms, and Amazon has earned their trust more than most other tech firms. It also possesses all the essential ingredients: digital prowess, a large customer base, an organization skilled at delivering pleasant customer experiences, and ample leeway to extend the brand into banking.”

Judging from the results the last time a tech giant named Google tried to sell insurance, Amazon also stands a good chance of failure. As Insurance Journal first reported in 2016, Google shut down its insurance sales operation Google Compare after only a year.

In doing so, the tech giant said that “the Google Compare service itself hasn’t driven the success we hoped for.”

In an analysis after the Google failure, experts told Insurance Journal that Google failed because it did not understand the insurance business. Some experts in online insurance shopping believe that Google realized it could make more money with its AdWords pay-per-click business than it could selling insurance and other financial products online.

Insurance Journal