The Amazonization of retail payments

The phenomenon of “Amazonization” refers to the wholesale disruption occurring across retail and eCommerce thanks to the leviathan-like presence of Amazon.com. Considering the platform shift happening in the retail payment space, I believe the same phenomenon of ‘Amazonization’ that happened to eCommerce will eventually happen to the retail Payments space. 

In this post you will find an analysis of the trend and its main consequences.

The dominant payment interface

Paying for things is a universal need and human beings adopted different technologies throughout history to satisfy this need (I won’t elaborate more on this here but if you want to dig deeper you can refer to these two amazing titles on the history of money: The Ascent of money by Prof. Niall Ferguson, Money changes everything by Prof. William N Goetzmann).

During the 20th century, cash payments remained the dominant interface to pay for things. 

The general financial habit of the average western citizen was the following: open up a bank account, eventually get a card linked to that but use the bank account as your payment hub. Bank accounts were essentially the acquisition channel for the payment service and cash transactions were still the most common form of retail transactions.

With the new millennium, mainly due to the Internet taking off, things started to change and the % of cash transactions started to fall.

A new interface has clearly taken over the retail payment space from cash: card. Similarly, the bank account lost its acquisition channel nature for the payment services. It’s not a coincidence that the most important consumer fintech unicorns around today (Monzo, Revolut, N26) started as a debit card services (there are also regulatory and operational implications to them starting up as cards and not full bank accounts, but I believe the main rationale was commercial – today it is much easier to attract users with a card than with a bank account).

More recently, another payment platform has been launched: Operative System Wallets.

Wallets are not that new, but they struggled to take off due to complexities in distribution and then adoption problems. Making the wallet a native feature of your smartphone, a key component of your OS experience, is solving these distribution and adoption problems. 

Considering the symbiotic relation that each individual has with their smartphone, I believe there are the conditions for a new paradigm shift in the payment behaviour of users: in 10 years the main entry points for payment services will be your OS wallet – Apple pay, Google pay or a proxy – not your bank’s card.

The first signals of this theory are emerging: the adoption of OS payments wallets is growing more than 50% y/y and the trend will relentlessly be reinforced as more people upgrade their smartphones to newer versions that support wallets.

Amazonization of retail payments

As the entry point for retail payment services will be the OS wallet and there are currently only two OSs in the market, the logical consequence is that aggregation theory will be applied to the retail payment space as well.

Source: Aggregation theory by Ben Thompson

Apple pay and Google pay will do to payment what Amazon did to ecommerce and Facebook did to news/content: they will be the only acquisition channels for payment services and all the ‘technical’ service providers will be battling on these platforms to get the users’ attention.

Aggregation theory in the Payment space

When such a strong gatekeeper emerges, it is very unlikely that it will not try to capture some of the market itself, exactly as Amazon did for e-commerce. My expectation is that many basic payment needs will be sorted out through one of these providers (Google or Apple) and it will be essentially impossible to compete with them, especially for basic needs very close to the platform level, as these (Apple and Google) will have operational efficiencies exponentially bigger than any other payment provider.

These basic payment needs will comprise a set of basic payment products and probably including also the identity of the user – I won’t be surprised if Apple will start KYC-ing users and then allow seamless switching between payment providers (similar to Apple SIM model).

PAAS (Payment-as-a-status) and the new payment scenes

There will be a second level competition, similar to the Amazon Marketplace model, where a group of brands, old and new, will be offering premium payment products and compete on top of the main wallet platforms for user attention. This is where neobanks will battle with incumbent banks, but also non-financial brands, to get their market share.

I expect that payment methods will converge towards being a status symbol of your social position, becoming a differentiator of your personality. The main value that they will provide to users will be social positioning, not very differently from brands like Rolex or Ferrari.

Users will be acquired through Apple pay or Google pay by Brand X, and then Brand X will upsell a better service, convenience or status (eventually through a physical card). 

In this context, Payment products will essentially be very similar to fashion products, they will appeal to different socio-economic demographics, focusing on specific niches and use cases, and their ultimate differentiator will be their brand.

In the past, this is something that only Amex was essentially doing, using its brand as a socio-economic status symbol, making it very appealing to corporate westerns. The differentiation, that was before an Amex monopoly, has been replicated for different target audiences, mainly millennials, by a plethora of new neobanks that are building differentiated consumer payment services for specific niches. 

Examples include: metal card by N26, Wooden card by Treecard, Wooden card by Tomorrow, Crypto-backed card by Bitwala, Gold-backed card by Glint. Even though their main product today is still a physical card, they are selling something else: a status-symbol (Metal card by N26), a financial service (Gold-backed card by Glint), a political statement (Wooden card by Treecard or Tomorrow).

Their proposition, that today is embodied by the card, goes obviously beyond a pure payment one.

In this model, leveraging the wealth of financial infrastructure businesses emerging, many non-financial payment providers will join the bandwagon and will successfully compete against old payment providers: if people are willing to pay thousands of $ for a Louis Vuitton bag, why won’t they activate a LV card on Apple pay and then upsell to a luxury Louis Vuitton diamond card to exhibit every time they pay? 

Traditional banks will suffer: as hybrid organizations, that are not tech companies and are not marketing-driven companies, they won’t necessarily have the flexibility and the user understanding to become fashion brands, and they won’t have the technological capabilities and the strategic positioning to build competing wallet platforms. Traditional banks will share the fate of  newspapers in the Facebook era – they will compete against so many providers that only a handful of them will manage to profitably stay in business.

Conclusions

I believe that OS wallets have the potential to fundamentally change the Payments landscape over the next decade. I’m convinced that general purpose payment services belong to the past and they will entirely be captured by a handful of global tech platforms. 

Leveraging the huge wave of financial infrastructure services, payments will probably become a business of branding and it will be crucial for anyone willing to stay in the retail payment space to fully understand the type of user they are catering to and focus on serving them much better than anybody else. 


Resources

  • McKinsey Payment report 2020 – LINK
  • The Ascent of Money by Prof. Niall Ferguson – LINK
  • The History of Money by Jack Weatherford – LINK
  • Money changes everything by Prof. William Goetzmann – LINK
  • Statista Digital Wallet penetration – LINK
  • Ben Thompson’s aggregation theory – LINK