On Friday, the Fed released its nonfarm payroll report with exceptional results. Nonfarm payrolls rose by 313,000 in February, a considerable surprise to the upside, and unemployment stayed at 4.1%, its lowest rate since December 2000. The markets rallied on the back of the news, with the Nasdaq hitting an all-time-high and the VIX dropping over 11% to 14.64.
In securitization news, the A tranches CommonBond’s latest $234 Mn deal were rated AAA by Moody’s, a first for CommonBond. Senior bonds in SoFi’s student loan deals are regularly rated AAA, and now CommonBond has also achieved the AAA rating on its seniors. KBRA rated the senior bonds on OneMain’s latest $263 Mn deal at AAA, AA and A respectively.
Banking’s Amazon Moment
Amazon in early-stage talks with JP Morgan to offer a co-branded, mobile-friendly checking account to their customers. The accounts will target younger customers and those without bank accounts. This would be a co-branded partnership, and Amazon will not legally become a bank, which helps Amazon avoid regulatory compliance and balance sheet risk management.
Co-branded partnerships are not new, and banks have long partnered with retail institutions to launch co-branded credit cards. In a co-branded partnership, the financial partner deals with deposit or credit management, account servicing, and regulatory compliance, while the retail partner deals with marketing and customer acquisition. We have recently seen Barclays launch a credit card with Uber and Goldman Sachs potentially partner with Apple to finance device purchases. What is novel about this partnership is that it extends the same business model to checking accounts.
Benefits of Partnership
In the current regulatory environment, Amazon needs a partner as there is no clear regulatory swim lane for Amazon to compete head-on with the banks today. The Bank Holding Company Act demarcates commerce and banking. Partnering with JPM makes sense as it avoids Amazon having to comply with onerous banking regulations, but also makes it possible to offer products like checking accounts to its customers.
These strategic partnerships are also incredibly valuable to banks. As we pointed out in a prior newsletter, banks that do not establish a digital banking presence do not have a seat at the table. For banks, this is a battle for long-term customer relevance. Banking products are increasingly commoditized, and new generation customers want to bank with technology firms. They like the customer experience, the self-service nature, control, and value. These customers shudder at the idea of walking into a bank branch.
The customer segment that Amazon is targeting – younger generation, unbanked – generate notoriously low checking account and debit card fee-income for banks. Amazon has no legacy bank branch network, low customer acquisition cost and can make the economics work where most banks cannot. Banks also get access to a new customer acquisition channel, like Alexa where Amazon controls access and can leverage the customer data that their partner has gathered to offer better products to existing and new customers.
Goldman Sachs’ Marcus, and now Citibank, have seen the value of digital banking presence and are launching online-only banking offerings. JPM and Amazon are taking a slightly different route with a potential partnership.
Significance of this Partnership
Amazon has transformed retail and now sees an opportunity to disrupt finance. The financing and payments of retail transactions is a logical next step.
The primary motivation in the short-term is economics. Amazon pays about $250 MM in interchange fees – about 2% per transaction. Customers with an Amazon checking account can pay directly out of their checking accounts and avoid the network transaction fees. If Amazon captures even 25% of this opportunity, and adds $50 Mn to its bottom line, it would be accretive to its market capitalization by ~$10 Bn.
Amazon’s banking footprint today consists of its Visa Signature Rewards credit card issued by Chase, and Amazon Lending, a small business lender that has made ~$3 Bn in loans. It is conceivable that once Amazon’s customers sign up for a checking account, Amazon could sell them a variety of financial products like insurance and investment advice. Bain estimates that Amazon could establish a retail financial relationship with 70 Mn US customers, similar to that of Wells-Fargo.
Who might follow Amazon?
Big Tech firms have aspirations to provide financial services, as finance and data make a good mix. Financial Innovation Now has members including Amazon, Apple, Google, Intuit and PayPal and its mission is to modernize the way consumers and businesses manage money and conduct commerce. Here’s a quick rundown on where these players stand:
We’ve seen this playbook elsewhere, most notably in Asia where a frictionless mobile-only banking system has emerged. Alibaba now has the world’s largest money market fund and has issued $96 Bn in loans in five years. Alibaba also started online bank MYbank, which approves loans instantly using automated processes based on consumers’ financial history. Rakuten in Japan has also built financial services and operates the country’s largest Internet bank and third-largest credit card company by transaction value. We can eventually expect similar outcomes if regulations allow technology firms to get a banking charter.
PeerIQ in the News:
- PeerIQ’s CEO Ram Ahluwalia was on Bloomberg Radio to discuss Amazon’s move into banking (3/6/18)
- P2P Lending Securitization May Reach $18b in 2018, PeerIQ Says (Bloomberg First Word, 3/8/18)
- Next Up for Amazon: Checking Accounts (WSJ, 3/5/18) Amazon’s potential partnership with JPM to offer checking accounts paves the way for the technology company to enter banking services with an established partner.
- Banking’s Amazon Moment (Bain Brief, 3/5/18) Amazon could eventually build a financial relationship with 70 Mn customers and offer a wide array of products like insurance and investment advice.
- How would regulators react to Amazon-JPM checking partnership? (American Banker, 3/5/18) As Amazon is not becoming a bank, CFPB and FDIC rules should apply seamlessly to any checking accounts offered through JPM.
- Will Amazon Pitch Financial Advice to Millennials? (FA, 3/6/2018) The next logical for Amazon would be to offer financial and investment advice to its existing checking account customers.
- Amazon hiring head of newly-formed mortgage lending division (Housingwire, 3/8/18) Amazon’s ambitions in the financial sector are not limited to checking accounts, with the company trying to also enter the mortgage market.
- Citigroup moving toward ‘national digital bank’: CFO (Reuters, 3/6/18) Citi is looking to launch a digital bank soon, following in the steps of Goldman’s Marcus. Banks have been shutting branches in favor of digital banking.
- Goldman Sachs is recruiting at least 6 people for the UK launch of its online lender Marcus (Business Insider, 3/6/18) Goldman is looking to launch Marcus in the UK market as part of its larger digital banking strategy.
- Banks Want a Bigger Piece of Your Student Loan (WSJ, 3/7/18) Banks are lobbying to get a larger piece of the lucrative $107 Bn annual student loan market.
- Credit-Card Losses Surge at Small Banks (WSJ, 3/4/18) Credit normalization continues with smaller banks seeing the initial impact from rising charge-off rates at 7.2%, still well below historical highs.
- Citigroup, Kabbage Form Consortium on Fintech Cybersecurity (WSJ, 3/6/18) Collaboration between banks and FinTech lenders continues as Citi and Kabbage team up to address cybersecurity issues in online banking.
- Bipartisan Opportunities to Legislate U.S. FinTech in the 21st Century (Milken Institute, 3/1/18) Bi-partisan legislation to clarify valid-when-made and true lender rules, and unify state regulations for mobile banking is being considered.
- Online Lender CommonBond Receives First AAA Rated Securitization (CrowdFund Insider, 3/7/18) A tranches CommonBond’s latest $234 Mn deal have been rated AAA, a first for CommonBond.
- KBRA pre-sale report on OMFIT 2018-2 (KBRA, 3/8/2018) KBRA rated the senior bonds on OneMain’s latest $263 Mn deal at AAA, AA and A respectively.
- SoFi Is Paying Top Dollar To Acquire Its Prime Customers (FastCompany, 3/8/18) SoFi’s focus on the prime customer has it spending $756 per acquisition, roughly twice what its competitors spend.
- A Dialogue with Peter Renton: Cryptocurrency and Beyond (deBanked, 3/2/18) The co-founder of LendIt talks about broadening its scope beyond online lending to all of FinTech.
- This heated jacket uses AI, Alexa, and other buzzwords to keep you perfectly snug (MIT Tech Review, 2/21/18) A thermal jacket that is controlled by apps and uses machine learning to customize temperature is coming.