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.


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