Could Amazon Wallet Create a Whole New Way to Pay for Things?

Aside from Starbucks, there have been very few success stories in companies getting customers to use their smartphones to pay for purchases -- and the coffee giant's efforts have not extended outside its stores. 

Now, Amazon (AMZN -1.11%), which has 244 million customer credit cards on file, has begun to move into the alternate payment space with the beta launch of Amazon Wallet. For now, this is the retail giant putting a toe in the water of the huge potential market. But if you look at moves the company has made and comments from some of its executives, it's easy to see that offering a full-fledged credit card alternative is not entirely out of the question for Amazon.

Industry sources told Re/code that Amazon CEO Jeff Bezos has identified payments as one of the company's top areas of focus and investment. Amazon payments boss Tom Taylor acknowledged as much in a interview with the online publication.

"Jeff's told us it's something we need to be successful in, and should be successful in," Taylor said. "The pressure I feel from Jeff is, 'Go faster.' "

It was reported in January that Amazon was considering offering a Kindle-based checkout system to physical retailers. To accelerate the project, Amazon bought certain technology and hired engineers last year from GoPago, a San Francisco start-up that offered checkout systems linked to a smartphone app, The Wall Street Journal reported.

A Kindle-based checkout system for retailers and a smartphone-based payment app would position the company to give customers an alternative to pulling out a credit card.

What is Wallet?
At first, Amazon Wallet is an app that allows customers to scan, store, and use gift cards. The company describes it as follows: "Amazon Wallet comes with the ability to look up balances on your gift cards. After you add a card to your Amazon Wallet, the gift card balance will automatically appear for supported merchants."

Not all gift cards are supported, but the company has a pretty extensive list of launch partners, which it lists here. The beta test of the app is available only for Android phones and comes pre-installed on the Amazon Fire phone. 

The initial functionality is small. Organizing and tracking gift cards is useful, but it's hardly a full-fledged payment alternative.

What makes Wallet interesting, however, is what the system could become.

If Amazon gets customers using its app to pay from a gift card at a retailer -- be it Whole Foods or The Cheesecake Factory -- then it's not hard to imagine it allowing people to pay via their Amazon account. By acting like a mobile version of eBay's (EBAY -1.59%) PayPal, Amazon could link the credit card info it has on file to a payment system and facilitate checkout in the same way a credit card company does.

The challenge here is not getting customers to accept it -- hundreds of millions of people already trust Amazon. It's finding a way to make money.

Amazon might be processing the payment, but it's still ultimately charging a credit card. Amazon may have the clout to negotiate low fees with credit card companies, but it still pays them a cut. To make its plans work, Amazon needs to find a way charge retailers no more per transaction than their credit card companies. At the same time, the online retailer must make deals with at least Visa and Mastercard where it pays less in fees than it's charging customers.

It's a thin-margin business, but a tiny piece of millions -- ultimately billions -- of transactions can add up fast. It's also possible that at some point, Amazon could incentivize customers to link their accounts directly to their bank in order to cut the card companies out of the loop.

What is the Kindle retail checkout system?
The efforts to create a Kindle-based checkout system for retailers fits nicely into an overall strategy alongside Wallet. Details of that offering have not been formalized, and the project has not been launched. But it would compete with both traditional point-of-sale systems and modern ones like the offering from Square. The Square credit card reader attaches to a smartphone or a tablet, allowing a store to handle customer checkout without a traditional register.

The theoretical Amazon system would be tied into its Kindle tablet and could clearly be optimized to take advantage of any future payment options offered through Wallet.

Though Square and other alternative retail payment systems have struggled, the market is huge. Some 90% of retail transactions still take place in physical stores, according to The Wall Street Journal. Amazon could make money simply selling a Kindle-based point-of-sale, or POS, system that tracks inventory and processes transactions. The price tags for current POS offerings like Intuit's (INTU 0.28%) QuickBooks Point of Sale can run into tens of thousands of dollars just for a three- to five-station setup. Add in multiple locations, and the cost of putting in a POS is huge for most stores -- many of which have to finance the purchase.

Intuit -- and other POS providers -- also use their POS offerings as a way to sell stores everything from credit card processing services to websites. There is no reason to believe Amazon could not do the same.

Retailers, especially smaller ones, need cheaper, versatile POS systems that don't require taking on debt. If Amazon could offer similar or better functionality at a much lower price, along with the ability to easily add roving checkout stations during busy times, the company could grab a sizable share of the market.

What will Amazon do?
Amazon has huge assets in both the level of trust its customers have in the brand and the fact that it has so many credit card numbers on file. In an age where data theft is a real danger and major retailers have been rocked by scandals that involve stealing credit card information, it may be the perfect time for an alternative payment method from a brand that has shown it can be trusted with secure data.

Now may also be the perfect time to launch an alternative retail point-of-sale option, as more stores are rethinking the traditional cash register. That market is ripe for disruption, and current alternatives, including Square, have not made much headway.

Perhaps Amazon -- which certainly has the brand recognition -- is the company to help stores finally cast off their expensive POS systems in favor of something better and cheaper.