Amazon.com, Inc.'s Answer to Square: How Big Could It Be?

Another day, another high-growth industry disrupted by Amazon.com (NASDAQ: AMZN  ) . In a clear swipe at Square and eBay's (NASDAQ: EBAY  ) PayPal Here, the online retail behemoth just launched a new secure credit card reader called Amazon Local Register.

Amazon's Local Register Secure Card Reader, Credit: Amazon.com,

And it's hard to blame them. Though Amazon's online retail presence continues to grow quickly -- with net product sales jumping 19.6% to $15.25 billion last quarter -- research from A.T. Kearney estimates 90% of all U.S. retail sales in 2013 still came from brick and mortar stores.

In true Amazon fashion, Local Register also undercuts the prices of its primary competition. For customers who sign up for Amazon Local Register before Oct. 31, 2014, all major credit cards will be accepted for 1.75% per swipe until Jan. 1, 2016. After that, Amazon's per-swipe fee reverts to 2.5% -- still notably lower than the 2.75% and 2.7% charged by Square and PayPal Here, respectively. Amazon Local Register will also charge just 2.75% for each manually keyed transaction, compared to 3.5% + $0.15 per transaction from both Square and PayPal Here. 

So how big could Amazon Local Register be?

First, it's unclear how much revenue eBay generates from its PayPal Here card reader operations, but eBay has stated PayPal is its single fastest growing business. Specifically, PayPal's active registered accounts have grown by double digits over the last year to 150 million -- compared to more than 250 million for Amazon, by the way -- which translated to 20% year-over-year revenue growth on a constant currency basis to $1.9 billion.

Meanwhile, Square expects total transaction volume to grow by roughly 50% in 2014 to $30 billion, which should result in sales of nearly $1 billion. However, The Wall Street Journal estimates roughly 70%-80% of Square's revenue ultimately gets kicked back to credit card companies, which would put Square's 2014 net revenue somewhere in the range of $200 million-$300 million.

Assuming a similar split for Amazon, and if Amazon Local Register is able to eventually follow suit and achieve $30 billion in annual transaction volume, it would mean total sales of roughly $810 million, and incremental annual net revenue of $162 million-$243 million. That's certainly nothing to scoff at, but at the midpoint still only represents around one quarter of 1% of Amazon's current annual revenue run rate.

Even then, however, Square is reportedly unprofitable with its higher fees, so it's obvious Amazon is once again foregoing short-term profits in the name of growing revenue. At the same time, the wider scopes of both Amazon and eBay's other segments provide a key advantage over Square here, as both can rely on supplemental positive cash flow to sustain their respective card reader businesses as they shuffle for market share.

Of course, we should also keep in mind Amazon Local Register might suffer from one key disadvantage: Namely, that the very customers it's targeting might be loathe to support the retail monster which undercuts the prices of their merchandise in the first place. But you might be surprised, especially considering Amazon's Marketplace Sellers community already includes more than two million businesses of all sizes, which Amazon previously stated have sold more than a billion units through Amazon.com worth "tens of billions of dollars."

In the end, as long as any meaningful slice of retail sales are still happening offline, it makes plenty of sense for Amazon to introduce new services to grab as large a piece of the pie as possible. However small its impact on Amazon's overall near-term results, Amazon Local Register appears capable of helping it do just that.

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  • Report this Comment On August 19, 2014, at 11:10 PM, qhkog wrote:

    This interesting article indirectly suggests that PayPal might have a structural advantage in the mobile credit card processing industry. Perhaps someone can clarify the following statement for me: "The Wall Street Journal estimates roughly 70%-80% of Square's revenue ultimately gets kicked back to credit card companies". Don't PayPal and Amazon also have a similar credit card company kickback percentage? If not, why not? Thanks….

  • Report this Comment On August 20, 2014, at 10:50 AM, TMFSymington wrote:

    @ghkog, Thanks, happy to clarify. Notice that statement doesn't mean "only" Square has such an agreement. The next paragraph begins "Assuming a similar split for Amazon," and uses the 70% to 80% split in calculating Amazon's potential incremental net revenue.

    Thanks for reading, and Fool on!

    Steve (TMFSymington)

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