Payments are at the heart of Amazon's growth strategy

As one of the largest merchants on the web, Amazon holds considerable power in payments, with very favorable acceptance economics thanks to the sheer volume of transactions it handles. Capitalizing on its advantageous acceptance cost structure, Amazon has spent the past decade, unbeknownst to many, simultaneously developing a payments business outside of Amazon.com. This business is not dissimilar to Amazon Web Services (AWS) in that Amazon has taken a core part of its infrastructure – in this case, payments and the checkout experience – and productized it for other businesses to consume.

Amazon's efforts on the payments front are beginning to gain visibility as they increasingly intersect with various other components of its broader strategy to deepen customer relationships and expand its influence beyond the confines of its own website. This report details several core and emerging components of Amazon's payments strategy and the strategic developments that could be on the horizon.

Payments are a highly strategic component of Amazon's many growth initiatives inside and outside of Amazon.com. Certain areas of its payments strategy can continue to be developed organically thanks to assets that include its massive database of customer payment credentials, favorable acceptance economics, loyal customers and a large native app installed base. More specialized and emerging areas of its strategy, such as brick-and-mortar point of sale, may require inorganic growth to expedite merchant reach. As Amazon looks to extend its payments services to more third-party businesses, among its largest challenges will be convincing merchants to think of Amazon as a partner, not an existential threat. Amazon's Marketplace model in some ways shows a path forward here, but more work remains to dispel widespread concerns over Amazon's true intentions in payments.

As Amazon looks to drive growth and further diversify its business, payments continue to play a central role in its strategy. Payments are a critical area for Amazon for numerous reasons:

• Reducing costs. As a high-volume merchant with slim margins, acceptance costs are a significant drag on Amazon's bottom line. Even slight reductions in acceptance fees, through negotiations with payment partners and tender steering, can have a major impact on Amazon's net margins.
  
• Driving loyalty. Prime Members are a large and highly active part of Amazon's customer base, with recent estimates putting the number of accounts at 65-80 million. A significant driver of revenue and growth, Amazon continues to invest in special perks to keep members engaged and satisfied. Access to payment options with favorable incentives has become an important part of those perks.
  
• Fueling expansion. Payments underpin nearly all of Amazon's new commerce initiatives and services. By operating a payments business and offering certain strategic payment products, Amazon has greater control over the user experience, and ultimately the innovations it brings to market.
  

As Amazon evolves, its payments strategy is becoming more multi-facilitated and complex. Below, we discuss several critical areas of its payments strategy that are in varying stages of evolution.

Merchant services

Amazon has operated its own merchant-services business, Amazon Pay (formerly known as Amazon Payments), since 2007. It is primarily targeted at SMB e-commerce merchants, allowing them to accept and process payments on their own websites for 2.9% plus $0.30 for domestic US transactions. As of 2013, the service also includes a digital wallet (at the time known as Pay with Amazon, but since rebranded to Amazon Pay) that leverages users' stored Amazon payment and login credentials to provide a one-click checkout experience on partner merchants' websites. Amazon Pay closely mirrors PayPal in that it operates as both a payment facilitator and digital wallet.

Amazon more recently expanded its go-to-market efforts for Amazon Pay with the unveiling of its Global Partner Program in April 2016. The program, which already counts major partners such as BigCommerce, Shopify and PrestaShop, intends to ease and broaden Amazon Pay integration with online commerce platforms.

Moving forward, we can see Amazon expanding Amazon Pay by unbundling certain services. Fraud prevention, for instance, is a component of Amazon Pay that could thrive as a stand-alone service while increasing its appeal to enterprise customers that have been wary of Amazon's true intentions in payments. We can also envision Amazon taking more steps to expand Amazon Pay to brick-and-mortar businesses through integrations with POS systems like ShopKeep and Clover.

Consumer payments

Amazon's core payment products for shoppers include a Synchrony Bank-issued store card and a cobranded Visa card, both of which provide cardholders with 5% in Amazon rewards for Amazon.com purchases. More recent additions to its consumer payments strategy include Amazon Cash, a service that allows shoppers to add cash to their Amazon.com balance via a barcode at select retailers like CVS, and Prime Reload, which offers a 2% Amazon rewards incentive for Prime members that fund their Amazon gift card balance with a bank account. The combination of its many payments initiatives is intended to drive a number of favorable business outcomes, including heightened shopper loyalty, increased spend, reduced acceptance costs and exposure to new customer segments.

We anticipate that Amazon's consumer-facing digital wallet, Amazon Pay, will be a central pillar in many of its emerging commerce initiatives, as already demonstrated by Amazon Pay Places. As of early 2017, the wallet counted 33 million customers that have used it for a purchase, up from 23 million in April 2016. According to the company, half of those users are Prime members. For card issuers, the message is that top-of-wallet with Amazon is becoming even more important than it already has been. Tactics like integrated pay-with-points incentives, as Discover has done with its Cash Back Bonus, will be important for becoming cardholders' preferred payment choice.

We believe Amazon will become more aggressive in guiding shoppers to more cost-effective payment methods. Prime Reload foreshadows this strategy, and more aggressive execution on this initiative could significantly drive down its acceptance costs by pushing shoppers away from traditional cards, which entail much higher transaction fees as compared with bank-account-funded transactions. Amazon could also leverage Prime Reload to drive Amazon Pay adoption by offering merchant partners reduced acceptance costs and providing users with special incentives or rewards.

Wallet

Few recall that Amazon piloted its own digital wallet in mid-2014. The initiative, dubbed Amazon Wallet, was limited to storing and redeeming merchant gift cards. While it was shuttered in January 2015, some of the recent enhancements Amazon has made to its own app – namely Amazon Pay Places and Amazon Restaurants – have it looking more like what Amazon Wallet aspired to be.

By adding wallet-like features to its existing app, Amazon leverages the app's massive installed base to reach customers faster with new enhancements. We anticipate that Amazon will continue to integrate features into its existing app that make it more wallet-like, perhaps even bringing back its little-known P2P payments service, Amazon WebPay, which was shuttered in 2014. This approach would more closely align Amazon's app with Alipay, the wildly successful Chinese lifestyle wallet that touches many areas of commerce and finance. Augmenting its app would also play an important role in helping Amazon broaden its offline strategy by serving as a platform to drive new merchant-focused services (e.g., point of sale, offers).

Point of sale

Another little-known area where Amazon has experimented is at the point of sale. The e-commerce giant bought select assets from floundering tablet POS startup GoPago in 2013 to build out its mobile POS offering, Local Register, which it later launched in summer 2014. The Square-like service, which provided a full-stack mobile card acceptance and processing solution for SMB merchants, was shut down in late 2015.

Amazon's initial go at the POS may have been too early. However, we see a window of opportunity emerging now that Amazon's push into the offline world is accelerating thanks to its Whole Foods acquisition and Amazon Go initiative. It's conceivable that we will see Amazon revisit its approach to Local Register in coming years. We can imagine Amazon offering an 'Amazon Go in-a-box' solution that would allow SMBs to offer a checkout-free, in-store shopping experience to Amazon Pay users – similar to how Amazon Pay already works online. A focus at the POS would also help Amazon catalyze more recent initiatives like Amazon Pay Places while better extending its omnichannel value proposition for Marketplace sellers.

Lending

Launched in 2011, Amazon Lending utilizes the rich financial performance insight Amazon has on individual Marketplace sellers to provide them with loans. Making lending decisions derived from its own data means Amazon can mitigate risk while helping its Marketplace partners expand their businesses, thereby indirectly growing its own retail business. The service has seen accelerated momentum recently, with $1bn in loans dispersed to over 20,000 merchants in the US, Japan and the UK from June 2016-2017.

Conceivably, Amazon could apply the same lending model to its own shoppers by providing financing options for Prime members on select products. Amazon admittedly provides a similar incentive for customers that use the Prime Store Card, but we can envision it broadening the initiative to all Prime members with a model similar to Klarna or PayPal Credit. Amazon could then integrate the financing functionality within Amazon Pay and extend the service to other merchants. Such a move could breed a variety of favorable economics, such as increased average order value and conversions. A step in this direction would broaden the competitive pressure of Amazon on payment networks like Visa and Mastercard by eating into their Amazon transaction volume, particularly for high-value purchases.