What Amazon’s flirtation with checking means for wealth management

Amazon is finally revealing its designs to enter the financial industry. Should advisors worry?

There’s no immediate threat. The e-commerce giant will first need to work through regulators and industry to find its footing. Even the fear of it becoming a bank as many banking industry officials had long feared, may be muted if it decides to partner with banks.

But there is one detail that advisors should pick up on. According to the report on Monday Amazon's checking account plan will take aim at the one market that other fintechs and digital-first firms have already latched onto: the embryonic customer.

That should be a wake-up call for the advisors who expect that the children of their long-standing customers will simply continue the advice relationship with them. In fact, there are a host of competitors, be-it robo advisors such as Betterment or Wealthfront, microinvesting apps such as Acorns and emerging entries from outside wealth management (yes, Overstock) that all want to claim that future client.

The market is drawn to the fact that millennials are more likely to switch investment advice providers to find a better fit than older investors are, according to A.T. Kearney. In 2017, 53% of mass affluent investors ages 18 to 24 switched primary investment firms, according to a recent study it conducted.

Banking, then, is a way in. Young adults are the customers who are most likely to want a bank account from a tech giant like Amazon. Folks in their 20s, 30s and 40s are substantially more likely to have an Amazon Prime account than their parents.

Daniel Acker/Bloomberg

In one recent survey, the consulting giant Bain found that 75% of respondents between the ages of 18 and 34 said that they would try a tech firm’s deposit account, credit card, investment or mortgage.

“One thing that’s been interesting is the level of trust in players like Amazon has increased over the last few years,” said Maureen Burns, a partner in Bain’s financial services practice.

Referring to millennials, she said, “As these companies have become so pervasive and such a big part of their lives, customer trust has increased.”

One consequence of that demographic split is that large banks may be more likely to lose customers to Amazon than small banks. Young adults have been drawn in recent years to the big banks’ digital prowess.

In a recent survey, Cornerstone Advisors asked bank customers whether they would open a free checking account from Amazon if it were to offer one. Among megabank customers, 35% said yes. At community banks, only 12% gave the same answer.

Financial advisors should also note that many of the new competitors are coming to wealth management in a roundabout fashion, offering one traditional service in a new, simplified and mobile experience, gathering up minuscule millennial accounts by the hundreds of thousands, and then cross-selling that customer into other products, including basic financial advice; think Ally Bank, Robinhood or Stash.

Amazon already has a partner taking steps to counter that trend. Just a few weeks ago, Amazon and JPMorgan Chase announced that they were two of the key players in a joint venture that would somehow seek to drain the expense of out employer health plans and improve patient care. JPMorgan already has its own robo advisor in the works, along with a new mobile-only banking and personal finance management app squarely aimed at millennials.

A deal with Amazon then could grant banks the ability to cross-sell a large base of new customers — and to do so in a highly personalized way.

As foot traffic has dwindled at brick-and-mortar branches in recent years, banks have looked for new ways to pitch products, such as checking accounts, to customers online. So far their efforts have mostly fallen flat, in large part because of the collective shortcomings of the industry’s core banking technology, Burns said.

But a deal with Amazon could give JPMorgan Chase or Capital One new — and highly lucrative — opportunities to sell financial products.

“It could open up a whole new world of cross-selling potential,” Burns said, though she cautioned that the benefits would depend on how the partnership is structured. “If you just think about the sheer amount of data, it would enable a level of personalization and analytics that frankly would make a new level of cross-selling possible.”

Representatives of JPMorgan and Capital One declined to comment for this story, and Amazon did not respond to a request for comment.

Additionally, a bank would benefit from potentially being able to access Amazon’s troves of customer data.

Ron Shevlin, director of research at Cornerstone Advisors, pointed to the recent efforts at JPMorgan to attract high-spending millennials through its Sapphire Reserve credit card. If the bank were to gain access to the data Amazon has on customers’ spending patterns, the New York megabank could better target its credit card rewards.

“You’ve got your Sapphire customers, and you want to go after the big spenders,” Shevlin said. “Well, hello, Amazon Prime will tell you everything you want to know — who the big spenders are, and the big [spending] categories.”

Amazon already has a tremendous amount of information about its customers. But the company knows more about what its customers buy from Amazon than it does about their spending behavior elsewhere.

Depending on how a potential partnership is structured, an Amazon bank account could give the tech behemoth a deeper understanding of U.S. consumers.

“Giving them access to bank-account level data would give them a whole new treasure trove of information about their customers,” said Julie Hill, a banking law professor at the University of Alabama. “I do think that is the scariest part of this.”

James Wester, research director at IDC Financial Insights, said that Amazon is likely to face questions about its access to and use of consumer data if the bank account becomes reality.

“It’s going to be something that they’re going to have to have a ready answer for,” Wester said. “As a consumer, I’m going to start thinking, ‘Oh, they’re looking at all my purchase behavior.’ ”

The issue of how much control over customer data Amazon is able to wrest also has big consequences as it is part of the equally large question of who controls the customer.

The Seattle-based tech giant inspires fear across so many industries in large part because of its maniacal focus on customer experience. From its one-click checkout process to its same-day delivery service, the Jeff Bezos-led company is constantly striving to raise the bar on consumers’ expectations.

Amazon’s well-established blueprint suggests that any partner will have to take a backseat when it comes to customer experience. That could mean that when customers encounter a snag, they will talk to an Amazon employee. Or it could mean that Amazon will establish strict parameters regarding the customer service that is provided by the bank.

Either way, Amazon’s latest moves are likely to stoke fears in the banking industry that tech giants will extract a large portion of their profits by establishing control of customer relationships.

“Amazon, as a business matter, always seeks to control the front end,” said Todd Baker, a banking industry consultant.