How will banks fare when Amazon finally offers checking accounts?

The tech giant is in talks with JPMorgan Chase to create a product similar to a checking account.

Amazon is going beyond its traditional domain in retail to shake things up in the financial services industry as it reportedly enters into talks with big banks like JPMorgan Chase & Co. to create a product similar to a checking-account targeted for young adults in the US, management consulting firm Bain & Company said.

Checking and debit account components of banks are typically unprofitable especially a fee-free model aimed at a demographic that doesn’t possess large purchasing power like younger customers. Despite this obstacle, Amazon charges on as it can avoid additional costs borne by most banks because of its existing digital ties with its vast American userbase and a massive data platform on patterns in consumer behavior.

“It can afford to go after this previously unprofitable segment in part because it will be able to transform the economics of banking; Amazon does not have the burden of an expensive branch and contact center network, which we estimate comprises roughly 40% of a North American retail bank’s costs on average. Instead, Amazon could steer new customers to 'just ask Alexa,' its voice assistant on the Echo device,” said Bain.

Banks may have reason to fear although Amazon will not take on the mantle of a bank as its partner financial institution is likely to perform deposit functions whilst the tech company is largestly tasked with designing and managing customer experience and distribution.

However, once Amazon establishes itself as a co-branded player in the banking scene, the company is expected to expand its financial product offerings to lending, mortgages, property and casualty insurance, wealth management and term life insurance.

“If banks don’t reorient their approach and radically accelerate their rate of progress, they will watch technology firms steadily poach their business. At first, it will be the unprofitable slice that no one wants. Then the rest of the pie.”

What can banks do?
Retail banks should therefore up their digital game as Bain notes that they still lose to digital channels like Amazon with half of US consumers are disappointed with the scope of services offered in traditional banking websites. Banks should learn from Amazon’s tried and tested digital strategies and meet customer needs in innovative ways rather than just pushing products. They can also leverage existing distribution channels by partnering with tech firms to improve data capabilities, Bain added.

To do this, banks need to increasingly adopt Agile ways of working to streamline various operations from product design and management processes, customer feedback integration and eventual roll out as the approach has delivered substantial results for banks who leverage on its model. Bain illustrates that one bank managed to take Agile episode management to scale with more than 250 active teams whilst one team was able to generate an auto finance mobile prototype in one week which would have taken at least six months.

"Perhaps the greatest challenge to senior bank executives and board members is to recognize that Amazon has a completely different worldview focused on lifetime customer value, whilst most banks remain slaves to in-period “bad” profits. Banks and other financial services companies that focus on customers over products, on episodes over functions, on fast test-and-learn over business cases and on customer outcomes over internal consensus may stand up to Amazon’s flywheel when it spins into their market."