Could it be the most famous financial institution that has never existed? For years, the mythical 'Bank of Amazon' has haunted traditional banking with the spectre of instant customer satisfaction via digital device as regulators worldwide mandate the Open Banking infrastructure that gives Silicon Valley the APIs on which it feeds. But Amazon it seems is content to parlay its vast customer base into a succession of partnerships with incumbents, the latest being with Synchrony Financial. Now American consumers who cannot get a credit card elsewhere will find a warm reception at Amazon, thanks to a new tie-up announced this week that will allow Amazon Prime members to apply for a new secured credit card, with the risk for the issuer taken out of the transaction courtesy of a deposit that can range from $100 to $1000. A line of credit is then afforded the cardholder that is limited to the same amount. Alongside the card comes a suite of tools to help consumers budget and build their credit score. If there is a single online firm well placed to break into the cohort of underbanked Americans, it is Amazon, rapidly gaining on Walmart and Kroger as the country's mass retailer of choice.
The Financial Conduct Authority (FCA) in London has been busy this month, tightening standards not only on P2P platforms, as we discussed in last week's issue, but now turning to both overdrafts and BNPL) arrangements at the point of sale. Concerns over overdraft practices have been a long time brewing in the UK, with one revealing statistic reported last summer suggesting that half of profits from current accounts in fact came from one tenth of customers, a sign that mismanagement by personal finances might be the driver. According to the BBC, banks took in over £2.4bn ($3bn) from overdrafts, with almost a third of this income down to unarranged overdrafts. Now high overdraft fees are to be banned. When it comes to BNPL, the regulator is banning companies from charging retrospective interest if the consumer has retained an outstanding balance after an offer period that is typically of a year's duration.
BNPL has been particularly popular with shoppers in Australia and New Zealand, but new statistics from the central bank in Canberra show that traditional cards are still a bastion of purchase payments. Not only did the number of purchases made by Australians rise by four percent on credit cards (and an impressive 13 percent on debit cards), but the value of those purchases also increased by 2.1 percent and 8.7 percent for credit and debit cards respectively. "Australian consumers have decided not to throw the baby out with the bathwater," commented Lorna Baek of Verisk Financial Research: "These figures, together with a decrease in the value of credit card balances and historic lows in credit card cash advances, indicate that consumers are becoming savvier, rather than abandoning plastic for alternative payment methods".
Citibank Australia meanwhile has decided that the best form of defence is attack, by partnering with loyalty schemes offering new types of unsecured loans. This move comes at a time when trust in the Big Four banks that have long dominated the country's retail banking scene has been falling. As its competitors focus on transforming their cultures, Citi is positioned to focus on growth. As for digital challengers, Citi's head of consumer banking is sanguine, seeing room for traditional credit card issuers to extend into complementary digital services.
Issuers of all kinds will want to keep an eye on a court case that has bubbled up in Germany, after a Lufthansa passenger sued the airline because his air miles, it is argued, are in fact a form of e-currency that should be withdrawable as cash. The airline naturally maintains that its programme, Mile & More, is not e-money because it is a closed system which can only be used in relation to a particular selection of services from partner companies. However, until the court case arose, there were in fact indirect ways one could buy Lufthansa miles, by first buying points at partner hotels and then converting into Lufthansa miles, a cash-to-points loophole that has now been firmly shut by the carrier. The big question is, if Lufthansa is indeed deemed to be an e-money issuer or transmitter (and thus subject to the full rigours of the EU's revised Payments Services Directive, or PSD2), then will PSD2 regulations apply to all miles programmes in Europe, not to mention loyalty points and even gift voucher schemes? As the Financial Times puts it, "in the age of ICOs and cryptocurrency issuance, these details matter a lot in terms of regulatory implications. The long and short of it is, if you're issuing cash-like liabilities you have to be regulated as a bank or e-money issuer/transmitter. And that adds a whole lot of complexity to your business model."
To end, links to some other stories of interest this week...