Reports of talks between the two moaty firms illustrates the growing roles of technology and scale in the financial services industry.
03:52 PM | Email Article
Reports that narrow-moat JPMorgan Chase
is in talks with wide-moat Amazon to deepen their existing partnership illustrate the growing roles of technology and scale in the financial services industry.
Jim Sinegal is a senior equity analyst for Morningstar.
We believe technology giants are interested in financial services for three main reasons. Obviously, the profits generated by the industry are the first of these reasons. U.S. banks generated $165 billion in reported net income during 2017, with payments firms accounting for tens of billions more. Second, the financial services industry represents the “last mile” of commerce. Tech companies control much of the search and advertising phase of commerce, while financial services companies dominate payments, rewards, and loyalty. Third, financial data is arguably the most valuable type of customer data and will only grow in value as analytics become more sophisticated.
However, the financial services industry is heavily regulated, making direct entry difficult. The U.S. has long had policies separating banking and commerce. Walmart abandoned its efforts to build its own bank more than a decade ago. Amazon is already making small-business loans, but a partnership with JPMorgan would allow the retailer to meet a much wider range of its customers’ financial needs, gather additional data, and provide an additional revenue source while avoiding the heavy regulatory costs of a traditional banking financial institution.
For JPMorgan, access to Amazon customers would represent a powerful new source of distribution. According to real estate firm Jones Lang LaSalle, more than 7,000 U.S. bank branches were closed over the past decade, while Amazon customers have grown exponentially over the same time frame. Such a relationship could conceivably allow JPMorgan access to a wide range of Amazon’s cutting-edge technology and give it a huge lead over competitors in the online banking space.
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