Just weeks after news leaked that Amazon (NASDAQ:AMZN) might be interested in launching a checking account-like product, The Wall Street Journal is reporting that the company might also be looking into debuting a new peer-to-peer (P2P) payment platform. While details are far from set on how such a service might operate, one idea being floated is to enable Alexa, Amazon's voice-based smart-home companion, to make payments to friends and family members.
If the information leaked to The Wall Street Journal is accurate, it wouldn't be Amazon's first foray into P2P payments. Years ago, Amazon operated WebPay, a service that allowed Amazon Payments members to send and request money by entering the amount and a contact's email address on a web page. Amazon eventually shut the service down after it failed to gain traction. As the company explained on its site at the time, "We are not addressing a customer pain point particularly better than anyone else."
In early 2017, however, Amazon began testing a P2P platform in India.
Obstacles still to be overcome for voice
The primary problem with using Alexa to facilitate P2P transactions is that the platform is not yet able to confirm an identity solely through customers' voices, according to American Banker. But banking executives believe that technology is currently in the works and just months, not years, away. While Amazon's Alexa, Alphabet's Google Pay, and Apple Pay could all use second-factor authentication, a frictionless experience is what all three are pursuing.
U.S. Bank vice president Gareth Gaston said that's why he believes all three are working toward having voice become a form of identification verification. According to Gaston, as quoted by American Banker:
Amazon, Google, and Apple don't want to create friction, the entire being of those companies is ease of use. My base assumption and faith is that they're working on some form of voice authentication that we will be able to hook into, with or without the use of a third party vendor. ... I do see it ... in the not-too-distant future.
Why P2P is the place to be
Before 2017, PayPal (NASDAQ:PYPL) dominated the P2P arena with its core platform along with Venmo, its subsidiary P2P app that's popular with millennials. Last year, however, several new P2P players emerged, making for a crowded field. Big banks collaborated to launch Zelle, a digital P2P platform that's embedded into most big banks' mobile apps and online sites. Apple Pay Cash debuted late last year allowing iPhone owners to exchange funds using iMessage.
One might wonder why so many companies are pursuing a field with little to no profit. However, the goal with P2P payments isn't to make money but to increase user engagement with the larger platform. For PayPal, P2P is a means to get users to interact with and use their PayPal accounts more, and thus far, it seems to be working. In the company's fourth quarter, transactions per active account increased to 33.6 over the trailing 12 months, an 8% increase year over year.
With Apple, the goal is similar. The more comfortable iPhone owners become using iMessage for P2P payments, the less likely it is they'll buy another brand's phone when it's time to upgrade. With Zelle, banks don't want their account holders to leave their ecosystems to handle financial transactions.
For Amazon, the goal is undoubtedly the same. The more users interact with Alexa, the more they'll probably use it for other things -- namely, making purchases from Amazon. Not coincidentally, Echo owners spend significantly more (link opens PDF) than non-Echo owners on Amazon.
Enough of a network effect?
The smart-speaker device category is certainly growing. Approximately 12% of U.S. consumers have a smart speaker and about 17% have used their voice, whether via Alexa, Siri, Google Assistant, or another voice-activated platform, to make a purchase, according to one Mastercard study. Is that enough of a network to make a new P2P platform operated by Amazon worthwhile? It's hard to know.
The limiting factor to most P2P services is that each network is limited to a certain medium. For instance, only iPhone owners can use Apple Pay. While most big banks participate in Zelle, there are still plenty of smaller community banks and credit unions that do not belong to Zelle's network.
Up to now, that has given PayPal an advantage in this space. Both PayPal's core service and Venmo are truly agnostic in that they can be used from any device and do not require users to belong to any specific bank or shop at a particular retailer.
Hurdles ahead for Amazon Payments
That being said, if any retailer has the network effect necessary to launch such a platform, it's undoubtedly Amazon. While the company has never released how many Prime members it has, recent outside estimates peg it close to 90 million. While that's an impressive number, it's still significantly less than PayPal's 227 million active user accounts.
Amazon's other plans for its payments business face obstacles, too. Amazon Payments likely will receive pushback from most retailers, as they will be reluctant to give a major competitor access to valuable transaction data. Of course, Amazon Pay Places might receive a warmer reception from restaurants that don't view Amazon as competition and will welcome the frictionless payment method, allowing customers to order ahead using their Amazon accounts. Last I heard, Amazon was not yet planning to enter the casual restaurant business.
Still, if there's one name I wouldn't count out in any endeavor, it would be Amazon. While there are many hurdles ahead for the company in the banking industry and establishing a dynamic P2P platform, the company has dominated the smart-speaker market up until now and has a vast Prime member base at its disposal. If it can leverage these two advantages, it wouldn't be surprising to see Amazon as another worthy entrant in the growing P2P space.