January 3, 2020
Let’s start with coining the term, shall we?
The notion of “Amazonization” describes the phenomenon of large-scale disruption that occurred in the retail domain following the aftermath of Amazon’s game-changing modus operandi.
However, the term itself isn’t new. Amazonization is the younger (yet not that vile) sibling of “Walmartization” that took North America by storm in the 1990s and early 2000s. Born in the first dot-com era, the growth of Amazon has been particularly exponential since 2010 as the retail giant has more than quintupled in value.
How is that possible? If you want a quick answer, the mission of Amazon has perfectly coincided with the expectations of customers. From the very start, its founder Jeff Bezos has been very clear on his expectations from the business. He wanted his company to become “Earth’s most customer-centric company” with a strong emphasis on personalization. “We see our customers as guests to a party, and we are the hosts,” said Bezos.“It’s our job every day to make every important aspect of the customer experience a little bit better.” Bezos elaborated on his idea in his letter to shareholders, saying, “Today, online commerce saves customers money and precious time. Tomorrow, through personalization, online commerce will accelerate the very process of discovery.”
The end is history. Amazon has changed the shopping process for good, and what’s more, it made customers reconsider their expectations of shopping. Thanks to Amazonization, we no longer have to visit a brick-and-mortar store as nearly any product can be ordered online.
In a nutshell, Amazon paved the way for a revolution in many business domains. When talking about finance, we’re faced with a host of questions. Will Amazon encroach on banks’ territory? If so, should banks and financial institutions Amazonize themselves? And what is the possible effect of Amazonization in the finance sector? Amazon’s expansion spreads like wildfire: according to various reports, the e-commerce giant has plans to enter the grocery, fashion, and healthcare businesses. The financial domain is no exception.
In March of this year, Amazon addressed banks such as JPMorgan Chase and Capital One on the issue of developing a checking account style product for its clients. According to Bain and Co’s report, within five years, the banking service from Amazon may reach more than 70 million customer accounts in the US. In other words, it may become equal to the size of Wells Fargo, the third-largest American bank. If Amazon goes the banking route, it will connect millions of consumers looking for various financial services like lending and deposit, opening accounts, underwriting, KYC, or processing.
It’s no wonder bank executives are closely watching the tech industry and, in particular, Amazon. For some of them, technology innovations are a source of inspiration, while others consider it a threat to the establishment. One way or another, this love-hate relationship may be observed in the growing number of Amazon, Apple, Facebook, and Google’s mentions during conference calls.
But what exactly does “Amazonization of banking” mean? According to David Birch, a renowned author, advisor, and commentator on digital financial services, “it is a process whereby products are manufactured as API services and distributed throughout the consumption of API services. This gives the three-part model that Chris Skinner describes as a practical technological backbone to make it work.”
According to Skinner, this three-part model includes the back-office doing analytics, the middle-office dealing with APIs while the front-office opens applications on their smart devices. Banks observe Amazon through its circle of interactions between products, pricing, and client experience. All they want to do is re-create this circle.
Robert Porier, Senior Vice President – Banking Solutions, provides an excellent explanation: “Banks are looking to replicate the Amazon value proposition platform to clients focused on driving the client experience based on product recommendations that are relevant and appropriate for the client.”
In essence, they want to be more platform-oriented:
Remember the line saying that Amazonization has changed the way customers expect services to be delivered? That’s the key phrase to understand why so many banks are turning to platform-based models: they want to meet the evolving expectations of digital-age clientele.
The model represents a single platform that facilitates the exchange of information between bank units, clients, and third parties. This workflow simplifies the bank’s interactions with its customers who have multiple retail and commercial accounts with the same institution. All in all, the introduction of digital platforms enables banks to be more responsive and relevant to their customers.
Modern technology is all about information flow, and as anyone who has shopped on Amazon would agree that it is the master of exploring data. This platform model creates a single holistic picture and provides banks with more significant insights into the customer relationship. The possible Amazonization of banks stands on the two cornerstones above.
Data: Banks have arrays of verified and reliable customer data in addition to “supplementary” information from personal conversations with clients. It’s worth noting, though, that many banks still suffer from limitations associated with legacy technology.
Established Network: Banks have years of experience in providing a wide range of financial services, plus they already have large customer bases.
There’s one more critical aspect to consider when talking about the Amazonization of finance – the generation of millennials. Millennials have grown up with a mobile device that is also a payment device. The guide “How Millennials Want to Work and Live” claims that “they are first-generation digital natives who feel at home on the Internet. Technology – particularly gadgets like smartphones, but also tablets and laptops – have revolutionized the way they connect and interact with one another and the rest of the world. While the vast majority of Americans surf the Web from a desktop or laptop computer at home or work, 85% of millennials access the Internet from their phones – more than all other generations.”
Let’s observe the demographic situation in the USA, Amazon’s home turf. As of today, this group represents the largest segment in the US’ workforce. According to the U.S. Bureau of Labor Statistics, it will be 75% by 2030. Given that millennials are the driving force behind growing businesses, banks need to catch up with them, and Amazonization is the perfect model for this purpose. Perhaps the first thing that banks need to do is to change their public image as there’s a certain level of mistrust in the air.
Even with all their resources, banks still don’t know how to handle data properly. And that’s where partnerships come in handy. After all, not just any bank can develop their own technology within short timeframes. Besides, banks don’t have the capacity to continually research and develop new technological trends, analyze big data, and make sense of it. To put it briefly, it’s just not their thing.
One of the greatest examples of such partnerships is Starling Bank. In partnership with AWS, this fully UK-licensed banking platform is disrupting one of the most established domains in the world. Via the mobile app, Starling customers can manage their current accounts, including instantly adjustable overdrafts and integrations with Apple Pay and Android Pay, not to mention international security and zero roaming fees.
The push for technical innovation is not merely for convenience. Notable regulators such as the FCA, the PRA, or FSCS have fully supported the idea. They regard Starling as the guiding star of making banking more transparent and secure, still haunted by the memory of the 2008 crisis.
Banks must accelerate their adaptation to the pace of the new Internet-influenced reality. The old saying goes: if you can’t beat them, join them. That pretty much sums up why financial institutions need to become technology companies in their own right, or at least make sure they have those resources at their disposal.
Banks have to take their digital presence to a new level. As Jeff Bezos states, “If you make customers unhappy in the physical world, they might each tell six friends. If you make customers unhappy on the Internet, they can each tell 6,000.”
The same rule applies to banks. It would be safe to conclude that it will be extremely difficult to take care of growing customers’ needs with the same level of personalized attention and detail. Fair enough, a disruptive banking platform may still be on the horizon, and the banking industry hasn’t faced its Uber moment yet. Well, there’s nothing to worry about. That only means that banks themselves have an excellent opportunity to drive the future of the industry through innovative vision and partnerships.