Why the Next Frontier for Amazon.com, Inc. (AMZN) Stock Could Be Finance

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People are always on the lookout for the next industry Amazon.com, Inc. (NASDAQ:AMZN) has in its crosshairs, and some think finance might be next. After all, Amazon stock’s Chinese counterpart, Alibaba Group Holding Ltd (NYSE:BABA) spearheaded a digital finance revolution in China through its payment arm, Alipay.

Why the Next Frontier for Amazon.com, Inc. (AMZN) Stock Could Be Finance

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Banks look at AMZN with a degree of trepidation; the behemoth has already disrupted everything from retail to entertainment to shipping.

When Amazon enters an industry, it moves fast and it is willing to operate at razor-thin margins to grow market share. AMZN stock takes no prisoners, and the company is responsible for much of the pain felt today by brick-and-mortar retailers such as J C Penney Company Inc (NYSE:JCP) and Sears Holdings Corp (NASDAQ:SHLD).

Banks know that tech companies like Amazon and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) hold some advantages. Millennials are more likely to trust tech companies than banks. Also, tech companies can operate at lower costs than banks, since they don’t have branches. A McKinsey report found that the lack of branches gives fintech lenders a 400-basis-point advantage over banks. Tech giants also have lower customer acquisition costs and greater digital competency than banks.

It looks like Amazon stock is deepening its involvement in finance. AMZN already began offering loans to sellers on its online marketplace in 2012, and expanded this to eight more countries, including Germany and China, in 2015. And Amazon rolled out a payments service in 2013, which doubled in transaction value in 2016 and reached 33 million customers.

In the near-term, it looks like AMZN stock will focus on doing two things: building its payment system and cross-selling financial products from banks to its millions of users.

In the long-term, Amazon stock could end up as a major force in finance. As Huy Nguyen Trieu, a fintech expert and former Citi MD, writes: “the tech giants such as Amazon, Google or Apple will continue their expansion into financial services and are likely to play an important role in the financial ecosystem — in the same way that Alibaba has done in China.”

The venture capitalist Alex Rampell sees Amazon succeeding in finance as well. Alphabet, Facebook Inc (NASDAQ:FB) and Apple Inc. (NASDAQ:AAPL), earn high margins from monetizing data or selling computer products, and this might deter them from entering finance. However, AMZN stock does not fear low-margin businesses.

Will Amazon Stock Dominate the Payments Game?

Currently, Paypal Holdings Inc (NASDAQ:PYPL) dominates online payments in the United States, with 200 million active accounts worldwide. The number of PayPal users dwarfs those of Amazon Payments by a factor of six. PayPal also holds an advantage over Amazon Pay in that other retailers such as Wal-Mart Stores Inc (NYSE:WMT) and Target Corporation (NYSE:TGT) do not want to take Amazon Pay, fearing that the data might give Amazon a competitive advantage. PayPal, on the other hand, is just a payments service, and doesn’t compete with retailers like Walmart.

Currently, Amazon and PayPal are in talks to allow users to pay with PayPal on Amazon. Amazon’s competitor eBay Inc (NASDAQ:EBAY) owned PayPal until the two split in 2015. Now, the two are free to work together.

And the two will both benefit. This would increase PayPal’s presence and drive business for PayPal, which has been absent from Amazon. And infrequent AMZN users might not want to put down a credit card on the site, so adding PayPal reduces friction.

But the truce between Amazon stock and PayPal might not last forever. AMZN could license its next-generation Amazon Go store technology to brick-and-mortar retailers in exchange for them allowing Amazon Pay.

As Andrew Melville notes in Forbes:

“Few retailers, even those worried about competition from Amazon, would be able to decline a free next-generation technology that would transform the customer experience, reduce theft, and allow for major reductions in labor — the second largest expense in retail. And no payments company would be able to offer retailers anything even remotely like Amazon Go’s technology.”

More grocery stores might then accept payment via Amazon Pay, helping AMZN’s mobile wallet gain critical mass. And, as Alipay has shown in China, once Amazon gains ground in payments, it can build a broader internet finance ecosystem.

AMZN Stock: Opportunities for Cross-Selling Financial Products

Amazon could also partner with banks to provide its users with financial services such as loans.

Last year, AMZN partnered with Wells Fargo & Co (NYSE:WFC) to offer student loans at discounted rates to Amazon Student Prime subscribers. Student Prime subscribers could get a 0.5% discount on loans. However, Amazon quickly ended this amid public pressure from consumer watchdogs.

This January, Amazon announced the new Amazon Prime Rewards Visa Signature credit card, issued through JPMorgan Chase & Co. (NYSE:JPM). This card gives customers 5% cashback on purchases from AMZN and eliminates fees for foreign transactions. This further encourages shopping on Amazon and makes Prime membership more attractive, while giving Chase income from transactions.

Amazon and the Banks

It looks like the relationship between AMZN stock and the banks will be complicated. In some areas, Amazon and the banks will be partners, with banks issuing financial products sold on its website to Prime subscribers. At the same time, AMZN will be a supplier to the banks, providing them with cloud services via Amazon Web Services.

In other cases, they may end up as competitors. Mobile wallets such as Amazon Pay could potentially replace credit cards, and deprive banks of payment revenues and data on customer spending patterns.

And in these partnerships, who would have the upper hand? banks or Amazon stock? Remember, AMZN would be interacting directly with customers and holding the user data.

Although the relationship between tech companies and banks is nuanced, banks still have reason to be concerned.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/amazon-com-inc-amzn-stock-finance/.

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