Greetings,
US Q1 GDP growth was revised slightly lower from 2.2% to 2% driven by lower-than-expected growth in services. This slowdown in growth seems to be temporary as the Atlanta Fed is projecting a blistering 4.5% GDP growth rate for Q2.
This week was dominated by regulatory news including stress test results, a Supreme court decision on interchange, a new ILC application from NelNet, and favorable legislation for lenders and credit bureaus.
JPM, GS, and MS passed the Fed’s annual stress tests with conditions, forcing GS and MS to freeze shareholder payouts to 2017 levels. DB’s US unit failed the stress test, which featured a severe global recession, while BofA, Citi and Wells Fargo passed without conditions.
In a major win for Amex, the Supreme Court ruled that AmEx can prevent retailers from offering customers incentives to pay with cards that carry lower interchange fees.
AmEx scored another victory this week by launching a co-branded small business credit card with Amazon. Amazon has issued co-branded retail cards with Synchrony and Chase and this is Amazon’s first small business card. We further examine Amazon’s footprint and its ambitions below.
AmEx continues to grow its co-brand business after losing its exclusive partnership with Costco several years ago. AmEx is building on a string of wins following deals with Hilton and Marriott last year. That said, AmEx is facing greater competition from GS which recently announced a credit card partnership with Apple.
Nelnet, a leading private student loan provider servicer, has filed for an Industrial Loan Charter (ILC) to set up an online bank. Nelnet aims to provide a wide range of banking services through the proposed Utah-based entity. Regulators under the Trump administration appear more open to granting ILCs and their decisions on Nelnet’s and Square’s ILC applications might allow FinTech and BigTech firms to compete in the financial services space without the need for a banking partner.
The House has passed a bill to include consumers’ utility and telephone payments in generating credit scores. This is a positive step towards including all consumer financial obligations when generating a credit score. As we have noted in the past, borrowers are already prioritizing phone payments above car payments, and the incremental data should improve underwriting models.
Fintechs continue their partnerships with traditional finance companies. Venmo has launched a debit card with Mastercard that will allow customers to shop using the balance from their Venmo accounts.
Amazon Treading Carefully with Its Financial Services Ambitions
A new report by CB Insights details Amazon’s “barreling into” the financial services sector, notably in payments and lending. Our view on Amazon is more sober. In the absence of a clear regulatory swim lane, Amazon will continue to partner with financial institutions to provide lending services. The major lending products Amazon offers today are executed with highly regulated banking partners. Amazon for instance has developed co-brand relationships with JPM, Synchrony and AmEx.
Also, Amazon is courting major financial services institutions as customers of its cloud business so the company has a delicate balance that it needs to maintain between disrupting the financial services industry and losing its clients and partners.
Source: CB Insights
Amazon’s Payments Is Where To Focus
Amazon has invested in payments infrastructure over the last few years as it is the area closest to Amazon’s core business and making payments more cash efficient for Amazon and frictionless for customers is a key priority. Today, Amazon Pay has evolved into a digital wallet for customers and a payments network for both online and brick-and-mortar merchants. Amazon Pay is a threat to competing services such as ApplePay and longer-term, the credit card networks of AmEx, MasterCard, Visa and Discover.
Below is a timeline of some of the major Amazon Pay milestones:
Source: CB Insights
Amazon Pay was first launched in 2007 and the company later invested in BillMeLater, a retail financing provider. Most of the payments infrastructure has been centered around trying to capture credit card swipe fees (and avoid higher interchange fees) by having Amazon merchants use Amazon Pay. While the company does not disclose usage numbers, it is estimated that Amazon Pay has about 33 Mn users.
Another product, Amazon Cash, is a digital cash repository which allows anyone to shop on Amazon with cash. Amazon has tied up Western Union, MoneyGram and Coinstar to enable consumers to deposit cash into their Amazon accounts and then use it to shop on the website.
Amazon is also rumored to be in talks with JPM to offer a checking account. Amazon can combine its payments and non-FDIC insured Amazon Cash product to deliver on a range of customer payments needs.
Amazon’s Lending Products
Amazon has made a foray into consumer lending mainly with the help of co-branded credit cards. The company has also made ~$3 Bn in small business loans, but that standalone effort has now fallen to the wayside with the new small business lending partnership with AmEx.
Amazon’s small business lending initiatives could be thought of more as a way to enable their merchants to sell more products on the website. Amazon also has a vast dataset to predict buyer demand for a specific merchant’s products, which could potentially be used when underwriting the loan.
The retail cards are a way to deepen relationships with Prime Members and offer more loyalty features for the ever-more-expensive Prime program. Amazon’s co-branded credit card with JPM is a step in this direction.
Source: CB Insights
Amazon’s International Financial Products
Amazon’s international investments in fintech products have been concentrated in India where Amazon will finance commercial loans to Amazon’s sellers. However, unlike the model in the US where Amazon lends on its own balance sheet, Amazon will utilize a marketplace model with six participating banks at the outset. The lending program has grown 150% in the first five months of this year (total volumes are unreported).
This marketplace model could be implemented in the US as well. While Amazon may have the balance sheet to offer small business credit, a marketplace model similar to GreenSky might help the borrowers get the best cost of funding and in turn enable customers to do more business with Amazon.
Source: CB Insights
What’s Next for Amazon
While there is a lot of speculation about Amazon’s next move in the financial services sector, regulatory reality is a sobering. In the absence of a banking charter or even an Industrial Loan Charter, Amazon is beholden to partnering with banks to provide any financial service. As we noted above, a lot of these institutions are Amazon clients necessitating a fine balance in the disruptor-disrupted relationship.
The most likely anticipated next offering from Amazon could well be a co-branded checking account. This would help tie together the various payments and cash products into a cohesive offering. Amazon could potentially apply for an ILC and set up a full-fledged bank, but that might take away from Amazon’s primary motivation for providing financial services which is to reduce the friction in transacting on its website.
Industry Update:
- S. First-Quarter GDP Growth Revised Down to 2% on Services (Bloomberg, 6/28/18) Q1 GDP growth was revised slightly lower from 2.2% to 2% driven by lower-than-expected growth in services.
- S. Consumer Confidence Drops in June (WSJ, 6/26/18) US consumer confidence dropped slightly in June to 126.4 but is still close to multi-year highs as consumers remain optimistic about low unemployment.
- S. Consumer Spending Rose 0.2% in May (WSJ, 6/29/18) Core PCE, the Fed’s preferred inflation measure, rose by 0.2% in May and was up by 2.3% from a year earlier, keeping the Fed’s rate hike plans on track.
- Case-Shiller Home Price Index Loses a Bit of Steam (WSJ, 6/26/18) Rising interest rates are putting pressure on gains in home prices currently being supported by a supply squeeze, especially in single-family homes.
- Fed Test Slaps Wall Street Titans, Unleashes Record Payout (Bloomberg, 6/28/18) GS, MS, and JPM passed the Fed’s stress tests with conditions, limiting the shareholder payouts that the banks had planned for 2018.
- Nelnet files application to start a bank (Lincoln Journal Star, 6/28/18) Nelnet, a private student loan provider, has filed an application for an industrial-chartered bank to launch its internet bank. Regulators have been more favorable towards ILCs lately and this could open up a regulatory swim lane for FinTechs to compete in the banking space.
- House passes bill allowing telecom, utility payments in credit scores (American Banker, 6/25/18) Telecom and utility payments will now be included in consumers’ credit scores calculations. Borrowers are already prioritizing phone payments above car payments, and this change should help derive a more accurate credit score.
- Capital One Co-Founder Is Making a Bet on Risky Borrowers (Bloomberg, 6/21/18) Nigel Morris, co-founder of Capital One, is joining the board of LendUp, a subprime lender, that makes personal loans and offers credit cards.
- Supreme Court Rules for American Express in Swipe-Fee Antitrust Case (WSJ, 6/25/18) In a major victory, AmEx can prevent retailers from offering customers incentives to pay with cheaper cards. AmEx charges retailers higher fees for access to its cardholders who the company claims are wealthier and spend more.
- Supreme Court’s AmEx Ruling Hands Win to the Rich and Creditworthy (Bloomberg, 6/25/18) AmEx will be able to support its loyalty programs for wealthy customers with its higher interchange fees, potentially leaving poorer customers feeling the pinch who don’t have access to such programs.
- AmEx Turns to Amazon for Credit Card Focused on Small Businesses (WSJ, 6/26/18) In tech-finance partnerships, AmEx is launching a co-branded credit card with Amazon to target small business customers, as the company looks to broaden its small business lending footprint.
- KeyBank Acquires Digital Lending Platform for Small Businesses Bolstr (CrowdFund Insider, 6/20/18) In continuing bank-fintech partnerships, KeyBank has acquired Bolstr and plans to use its underwriting software to make small business loans.
- Venmo officially launches its own MasterCard-branded debit card (Tech Crunch, 6/25/18) Venmo’s debit card will allow customers to shop wherever MasterCard is accepted using the balance from their Venmo accounts.
- Everything You Need to Know About What Amazon Is Doing in Financial Services (CB Insights, June 2018) This report from CB Insights details Amazon’s activity in the financial services sector and outlines potential paths forward.
- Marcus, Goldman Sachs’s Consumer Lending Arm, Is Not Adding Credit Cards Products … Yet (Bank Innovation, 6/25/18) GS is not focusing on launching credit cards yet as they believe that credit card products need a lot of innovation.
- SoFi’s Latest Product Called “SoFi Money” is Here (Lend Academy, 6/20/18) SoFi has officially launched SoFi Money, a hybrid checking and savings account, as the company looks to round out its offerings and deepen customer relations.
- The challenges for a new ‘bank’ with a famous parent (American Banker, 6/22/18) JP Morgan is staying strictly behind-the-scenes when it comes to branding Finn as a new mobile bank.
Lighter Fare:
- Inside the effort to print lungs and breathe life into them with stem cells (MIT Technology Review, 6/28/18) 3-D printed artificial organs hold the promise to reduce organ shortages and increase human longevity.