The Biggest Obstacle Facing Amazon Payments
Amazon Payments is a platform that allows Amazon.com (NASDAQ: AMZN) account holders to pay for merchandise from other vendors using the account and payment information from their Amazon accounts. While Amazon executives have remained mum on the subject in this year's conference calls, in a press release earlier this year the behemoth online retailer lifted the curtain a bit and let investors in on some fairly impressive growth numbers related to its payment platform. The most remarkable statistic was that 33 million customers had now used the platform to complete a transaction -- more than 50% of whom were Amazon Prime members. Although the company did not reveal its payment volume numbers, Amazon did say that the payment volume had doubled and merchant coverage had grown 120% in 2016.
It is easy to imagine why this platform would be popular with consumers. For Prime members, there are few things easier in life than shopping on Amazon's website, clicking what you want, and having it appear on your doorstep two days later. To have that convenience extended to other shopping experiences is a no-brainer. But the problem with Amazon Payments was never what the consumer would think of the platform, but the merchants who would be accepting it.
Merchants might never entrust Amazon with their valuable transaction data from customers. Image source: Amazon.com Inc.
It's a matter of trust
Amazon founder and CEO Jeff Bezos has famously said, "Your margin is my opportunity," and has practically used the statement as his company's modus operandi. Amazon has left few stones unturned as it has entered industry after industry looking to disrupt incumbents by ruthlessly cutting prices and innovating away former points of friction and pain in the shopping experience. Even though the company has been exceptionally successful, making long-term shareholders and Jeff Bezos fantastically rich in the process, it has not made too many friends with other businesses along the way.
Given Amazon's competitive nature, it seems unlikely that too many other companies would be willing to share invaluable purchase data from customers with Amazon. This has always been the problem facing the platform -- and dispelling these doubts was one of the primary reasons why Amazon Payments Vice President Patrick Gauthier recently gave a CNBC interview. "The reality is ... we definitely segregate the data and the data that we use about payments is only for processing payments," Gauthier explained. "But, more importantly, Amazon as a company has built its success, indeed, on trust. And you can't be trustworthy with one type of customer and not with the other."
Despite Gauthier's assurances, one could forgive potential merchant customers for raising a skeptical eyebrow in response. But, even if potential business clients moved beyond their trust issues, they would still probably be reluctant to subscribe to a service that fed profits to their biggest and most ruthless rival.
All is fair in love and war... and business
This past summer, after Amazon announced its plans to acquire Whole Foods Market, Wal-Mart Stores (NYSE: WMT) instructed its tech vendors to not run any applications through Amazon's cloud-computing service, Amazon Web Services (AWS). Wal-Mart justified the move by citing privacy concerns and wanting to keep valuable data out of Amazon's hands, but most believed the move was designed to starve Amazon of profits.
Rival companies have already told suppliers to not use Amazon Web Services. Image source: Amazon.com Inc.
In the same way, I believe most retailers will eventually pass on incorporating Amazon Payments into their checkout process. Even if most retailers can get past the trust issues, giving a competitor data that is likely actively exploring ways it can put you out of business will ultimately be too hard a pill for many merchants to swallow.
PayPal Holdings Inc (NASDAQ: PYPL) discovered the benefits of having a payment platform without ties to an e-commerce platform after it split from its former corporate parent, eBay. In May, PayPal CEO Dan Schulman talked about what a difference being a neutral third-party had made for PayPal at the 2017 Bernstein's Annual Strategic Decisions Conference:
...[T]he real difference is we're a neutral third party now. So ... being associated with eBay, you have merchants who just naturally thought of eBay as a potential competitor, and therefore, were reluctant to put a payment schema in that takes data and information that might somehow be shared back with eBay. And so being a neutral third party, tremendously valuable.
Still plenty of market share to win
This is not to say Amazon Payments is doomed to fail or does not have plenty of business to go after. For instance, this past summer, Amazon released a new feature for its mobile app, Amazon Pay Places, which allows customers to order ahead at participating retailers. The program was first tested by restaurant chain T.G.I. Friday's. Since restaurants do not directly compete with Amazon -- yet! -- this is a natural direction for the platform to go. Other businesses where it might see significant headway include hospitality and tourist companies. Of course, nobody should be surprised to see it rolled out at Whole Foods locations after the acquisition.
That being said, there is likely a limit on how many retailers will be willing to accept Amazon Payments. In some ways, therefore, the platform is a victim of the company's own success.
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John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew Cochrane owns shares of Amazon and PayPal Holdings. The Motley Fool owns shares of and recommends Amazon, eBay, and PayPal Holdings. The Motley Fool has a disclosure policy.
