Will Amazon Become the Next Big Bank?

Most Amazon Prime users say that if Amazon (AMZN 3.43%) were to offer a checking account, they'd be inclined to sign up.

In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss Amazon's banking ambitions and how far Amazon is likely to expand its reach into the financial industry.

A full transcript follows the video.

This video was recorded on Sept. 24, 2018.

Jason Moser: Amazon Prime -- which is the relationship now that seems like you probably should get it along with your social security number and Netflix subscription when you're born -- Amazon is at least being thrown around here in this banking conversation. Recently, Bain surveyed 6,000 U.S. consumers, asked them, if Amazon launched a free online bank account that came with 2% cash back on all Amazon.com purchases, would you sign up to try it? It was very interesting. The response there, almost 70% of those in the 18-34 age bracket said they would try it. About 50% in the 35-54 year old bracket said they would try it. Under 40% of those older than 55 said they would try it.

This makes me think about one of the greatest advantages banks have these days. I'm in that age bracket where I'm 35-54, and I'll just leave it at that. We've got this Bank of America account that we've had now for years. We have it because it was convenient at the time. It's become even more convenient with the online banking options. Frankly, we have so many things that are tied to this account now. Automatic deductions that come out, whether it's insurance or our mortgage, or just household bills every month, we have so much tied to this account and that banking relationship, it would be a lot of work to try to sever that relationship. There would probably be a lot of problems that come from it. It's not worth the work. I don't really bank with Bank of America because I love Bank of America. It's a means to an end. It would just be way more work at this point to quit.

For younger generations that don't have banking relationships yet, they're going to see this a lot differently. I think this question with Amazon comes up. I wonder, from your perspective, is it worth Amazon even fishing in these waters?

Matt Frankel: Maybe. One of the more interesting statistics from the survey that you just mentioned that I read was that 37% of people who don't even shop on Amazon right now would try an Amazon checking account if it gave them 2% rewards. That was one of the most interesting things that I saw. This could be a way for Amazon to bring even more customers into its ecosystem.

Having said that, I really don't see Amazon getting too deep into the banking business. One, it brings up a ton of regulatory headaches. Two, it's becoming a more crowded space. If Amazon, say, developed a brokerage platform, would people switch? Would I drop TD Ameritrade to go to Amazon? Probably not. If they had a personal lending platform, would people stop going to the more established personal lenders and go to Amazon? Probably not. I don't think it would be worth the regulatory headaches especially. And it's just not really a business Amazon really needs to be in now.

That said, I could definitely see them partnering with one of the big financial institutions. It's known that they've been in talks with JPMorgan Chase and Capital One, for example, when it comes to developing this checking account. I could see them doing what they do with their credit card -- putting their name on a credit card that's issued by another institution. So, JPMorgan Chase Amazon free checking, something to that effect. I could see them partnering with an institution. I don't see them becoming the bank itself.

Moser: I think that makes sense. I've got that Amazon Prime Visa and I've been really happy with it. We're Prime members, of course, so we make that money back in shipping just on toilet paper every year alone. But an Amazon Visa card, you look at the rewards, you get 5% cash back on purchases from Amazon.com and now Whole Foods. You get 2% back at restaurants, gas stations, drugstores. 1%, back on other purchases. So, you're right, they do a really good job of partnering up with leaders in that space, where they can offer a compelling value. I think with Amazon, the focus is always trying to figure out how to be as customer-centric as possible.

It takes me back to one of the things, I have seen it time and time again as an investor, it's one thing I've learned -- even if a company has the financial resources to do something, doesn't necessarily mean that they should. It's very difficult to pick up share on companies that have a big lead and already do something really well. I don't know that Amazon could really offer a checking account or a banking account and do much different than is already being done by a lot of the major players out there today. I think partnering up probably makes a little bit more sense, like you're saying.

I guess we'll see. Walmart certainly tested those waters a number of years back, and I guess they decided, ultimately, the juice wasn't worth the squeeze, as they say. Amazon is certainly trying everything they can to gain a little bit of an entry, it seems like, in everything we do.