Sometimes financial services industry mouthpieces inadvertently give the game away. When this happens – and a tame bank-friendly publication runs a story which aims to fulfil their role as boosters and palliatives for what outside their bubbles is an industry which is beyond redemption – the results are often amusing. If they try to brush the problems big finance causes to media darlings like Amazon under the rug, they look even more ridiculous when their attempts at finessing them away draws even more attention back to the underlying issue.
Once such example comes from big finance’s Mrs. Malaprop, the American Banker. To save weary readers from having to parse the whole article, in this piece American Banker made even by their standards a risible effort to re-tread Amazon’s press release in which Amazon announced to an eager public how it was going to “help” customers give founder Jeff Bezos (who in my mind is living proof of what happens when you cross breed a unicorn and a bunny boiler) even more money.
To cut American Banker’s long story short — by which I am sure I am performing a community service — Amazon now offers customers a means of crediting their Amazon account with funds which they deposit at a range of partner bricks-and-mortar retail outlets. There are some shenanigans with a smartphone app, bar codes, optional Apple Pay or Android Pay snooping, trips to the store to pay in cash and so forth which you can read about in American Banker’s explanation but — to cut to the chase — the new service means that if you have cash, you can get that cash into your Amazon account without needing to have access to a credit or debit card.
The unintentionally amusing aspect of this rah-rah’ing from Amazon and American Banker is that it accidentally highlights a significant issue for so-called New Economy players such as Amazon. The problem for non-traditional retailers and service providers who lack physical premises is that it is very difficult for them to be able to handle customers who either don’t want to pay by credit or debit card or, more intractably, don’t have a debit or credit card in the first place.
Despite what conventional wisdom holds, financial inclusion — which measures how widespread access to financial services is in the general population — in the U.S. is not that wonderful. According to the most recent data available (all data from the World Bank and current as at 2014) only 57.1% of Americans have used a credit card in the past 12 months and 67.1% have used a debit card. This means that around a third of the population either cannot or will not routinely conduct a financial transaction in anything other than cash or check.
Unsurprisingly to anyone who’s been paying attention, the problem gets worse the lower down the class structures you go. Drilling down into the World Bank data a little further, 64.1% have a debit card in their own name in the poorest 40% income bracket. That increases to 80.9% for the richest 60%. Unfortunately the World Bank data does not show us what happens when you fall out of the lowest echelons of the middle class entirely, but it is not unreasonable to suppose that, for the poorest 20% of society, access to at least a debit card may well be less than 50%.
For the Amazons and Ubers of our New Economy the obvious limitation is that by requiring access to a credit or debit card to sign up to their services they are by necessity limiting their customer base to the middle classes who are eligible for this kind of financial product in the first place. Hollowing out the middle class means a limited proportion of the population is willing or even able to be potential Amazon customers because they need a credit or debit card to do so. For a business that aims to achieve a monopoly position which it can then exploit (such as Amazon) it is untenable to limit the maximum possible size of your customer base to less than two-thirds of the population.
Even for Amazon, a third of the population kicked into the ditch is too high a percentage to simply leave to the competition — a competition which can differentiate itself by accepting cash or check at the point of sale. You also don’t need a crystal ball to tell that the problem is going to get worse, not better, as mainstream financial institutions pull up the drawbridge in an effort to dissuade unprofitable (for which you and I would read as “poor”) customers from maintaining a bank account with them and offering them costly add-ons like a debit card.
As the American Banker piece notes, existing alternatives are limited, such as pre-paid credit cards. But pre-paid credit cards are riddled with hidden fees (different pre-paid card product designs vary in their junk fee schedules but usage fees are $1 to $2 per transaction, cards either incur a $5 to $10 monthly account fee, $2 to $3 low monthly low usage fees are typical and I’ve even seen $20 to $30 card renewal fees — amongst many others). You’d have to be pretty desperate to even consider using one of these. Sadly many people are.
The pre-paid card issuers deserve no sympathy for their price gouging and exploiting the people who aren’t eligible for mainstream products due to poor credit histories. But in fairness, the US card payment market leads the world — and not in a good way — in its cost base. The card schemes (VISA, MasterCard, American Express and so on) impose amongst the highest interchange fees in the world. These are the fees which the merchant — where you use your card — has to pay to the card scheme to process the transaction. In the EU, the Commission got tough and did some good old-fashioned trust-busting on the card schemes and capped interchange fees to 0.2% for debit and 0.3% for credit card payments.
In the US, however, the risible, derisory interventions by congress result in credit card fees being completely uncapped and debit card fees are still 21 cents per transaction plus 0.05% — which will obviously discourage merchants from allowing low ticket value debit card transactions being accepted or else skew the cost base for debit card payments towards larger average transaction values. This jeopardises attempts to make Amazon the go-to retailer for “everyday” — smaller, less discretionary — purchases. I can’t leave this subject by adding that you can also drive a truck through the exemptions in the Dodd-Frank debit card fee regulations.
At the risk of doing a disservice to readers by mentioning too a big subject which is nevertheless pivotal here, the cost bases of US banks are not only completely crazypants, but the US banks are no different than retail banks the world over — they have little (or no) understanding of customer profitability. This means that the banks’ offers and pricing strategies to retail customers end up extorting fees for services which should be relatively inexpensive to provide — such as debit cards — because customers like the features these products bring and are willing to pay for them. So the banks charge what the market will stand. Conversely, products which have higher costs, especially where they entail credit risk such as credit cards are, if anything, under-priced for typical customer usage patterns. The banks rely on, for a small proportion of customers, snaring a credit card borrower who gets into difficulties with penalty interest rates and more junk fees. These unlucky customers end up subsidising the bulk of credit card holders and also pushing up the overall credit card product costs for both cardholders and merchants.
This is a big but important topic, one which I will return to in a future post.
But the cost consequences of it are real and these costs, which are passed onto credit or debit card holders and merchants alike, are an obvious disincentive to use services like Amazon where a credit or debit card is mandatory or else alternative means of managing your account require a lot of forward planning. And the cost of providing your own access to a credit or debit card — especially if you have to fall back on pre-paid cards because you’re not eligible for a bank account — undermines the lower pricing which Amazon say they offer.
I’m not sure if Jeff Bezos has much of a sense of irony, but even he would have to laugh if his warehouse employees could not order goods on Amazon because they didn’t earn enough to qualify for a credit or debit card. Amazon can’t be certain whether or not the clever wheeze of collaborating with conventional retailers to act as cash handling operations for this group of credit or debit card-less customers is sufficient to overcome an inherent regulatory failure in promoting financial inclusion.
The snags are obvious — if you have to go to a real, physical store to charge up your Amazon account, you might as well shop at either the store you’ve just had to visit or another store you could have gone to instead. And paying Amazon in advance with the inevitable consequence of having a credit balance sitting on your Amazon account does your personal financial management no good at all. If you are poor and living from pay check to pay check, you simply cannot afford to have money sat in your Amazon account when you might need it not for luxuries which you might buy from Amazon but to pay the rent that month.
Amazon — of all companies — must realise that it cannot expect the banks to subsidise unprofitable customers. But customers who cannot access even basic financial services like credit and debit cards because they are too poor to use these products in a way which makes them profitable are precisely what Amazon’s business model is creating.