Amazon Discovers the High Cost of Being Poor

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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.

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85 comments

  1. Larry

    I’m truly surprised that Amazon thinks it needs the business. My assumption is that retail for them is not the biggest profit driver and they would focus more on Web services and other high margin technology driven activity. What’s the point of chasing low value customers, other than the ego of a bunny boiler saying they have to?

    1. Clive

      I wondered about that, too. The conclusion I came to was that for a tech company / unicorn like Amazon, running out of growth is enemy #1. They have to show they are still growing until they can verifiably be seen as a monopoly and have monopolistic pricing power. If they’re neither a growth-to-infinity-and-beyond company nor a too-big-to-fail-alike winner that has taken all, they’re just another conventional business which will need a conventional valuation.

      Another factor is simple ego and not wanting to kowtow to another embedded player — like the card schemes. It isn’t the first Godzilla vs. Mothra type battle between two monsters we’ve seen and while they’re great spectator sports, they do illustrate that, when we think of our awful elites, they are just that, elites (plural). Only occasionally and even then only by accident do their respective exploitational agendas happen to align. The rest of the time they are just mutual threats.

      1. Jim A

        YES. High P/E ratios are really only justified by future earnings growth. That way you’re dividing today’s price by tomorrow’s earnings. Once the possibilities for growth are exhausted, there’s no reason to pay a stratospheric price.

      2. Karl Kolchak

        Amazon is essentially a financial cancer. It needs to keep growing or it will die, but sooner or later it is going to kill the host.

        1. wilroncanada

          Isn’t the reason they want, not necessarily need, the business the same as for all major corps? Monopoly. They don’t want just most of the business; they want it all. To do that financially, could they become or create their own credit card company, or buy one. Then they could issue credit/debit cards to all those living from paycheck to paycheck, driving the payday loan companies out of business. Then they could offer jobs, as and when available, to those whose debt exceeds a certain threshold, taking most of their earnings to pay themselves, forcing them to buy at the company store.

          Eventually they would be a company country, leaving the heretofore company towns in their dust. Between Mexico and Canada, meet Amazonia!

      3. craazyboy

        I smell fear of a 5X collapse in PE ratio. They have Walmart, Ebay and AliExpress coming after their biz model. Walmart has been clunky so far, but AliExpress is the only place that has cheaper workers and no MBAs guarding the Holy Price Level.

        1. Tom

          I like that philosophy!
          If it’s OK for Big Box stores to kill Main Street, then it’s OK for Walmart to kill big box stores, then it’s OK for Amazon to kill Walmart and thus it’s OK for Alibaba to kill Amazon.

          We often buy things at Best Buy, use them for a job, then return them. BB, as an example, has no loyalty to our communities, no local ties, other than exploited workers, so there’s no way the Ten Commandments apply to them, or any other corporation.

          Steal, cheat, lie, return, exploit and screw them over. It’s psychically refreshing to rip them off.

          Lambert, re Amazon drones, below, I think there’s going to be a new sport in America,
          “Skeet Shooting for merchandise…” :-)

    2. Quanka

      From a friend and former colleague at Amazon: “Bezos just wants to dip his fingers into every single industry in our economy. They don’t care if they lose money at first, the goal is to gain 5-15% market share in every industry and let the website earn fortunes for Bezos.”

      As Yves noted near the top – although I think this was sarcastic, it actually rings true: “one third of the customers is just too many to leave to the competition”

    3. Jeff Fisher

      Maybe its that low value customers turn into high value customers?

      Something like 50% of children are on medicaid. Kids in the US are poor. If you want to get in with the kids you get in with the poor.

      Amazon is a volume/efficiency business. They may just figure they can make money from anyone, so they may as well make money from everyone, even if it is only a little bit.

      Also might be useful experience for the other 5 billion people on earth.

      1. Lambert Strether

        Slice an ear off some suburbanite with your delivery drone and you face a huge lawsuit (and lots of weepy stories in the Lifestyle sections of major newspapers).

        But if your drone pops out a poor person’s eyeball, a quick settlement makes the problem go away.

        Not that I’m cynical…

        1. Eric377

          I don’t think that poor people would uniformly take a quick settlement and I think when they do, there would be nothing particularly cynical about it. Poor people are poor but they are not infantile. If their purposes are best served by a rapid settlement for less than they might get after a couple of years they are well-positioned to make that choice.

          1. ChrisPacific

            True, but I don’t think it invalidates Lambert’s point. When you have an economy with high inequality and desperation at the lower end, it becomes very easy for the powerful to take advantage. That’s where the cynicism is found in this scenario.

      2. Vatch

        the other 5 billion people on earth

        The world’s population is approximately 7.4 billion people.

        1. Jeff Fisher

          Yea, and most of those people don’t have and won’t have debit or credit cards.

        2. zer0

          To you, the world has 7.4 billion.

          To Amazon, the world has 1 billion, since the other 6 cant afford anything on their $5/month wage.

          We are in the age of mass-picking the low hanging fruit. Wont last long. Maybe another century or two. Then it will be heads on a pike, and future humans will wonder what the fuck was going on during, what I’m sure will be called, the Crack and Blow Era.

  2. vlade

    “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.”

    If you substitute “credit card” for “banking services”, you have the zero-fee-current-account banking model, where the poorest (well, the poorest who can have an account) subsidise the rest + bank profits.

    1. Susan the other

      When the poorest subsidize the richest it is clearly immoral. Makes me ponder what Amazon’s motives might be if they were pure – Amazon might be experimenting with a cashless society wherein all of its cardholders have the same advantage – simply that of making a purchase. Money should not be made processing money. But that is where the schmeagle banks find themselves. So what’s a money exchange professional to do? Use department stores to create a cash deposit for each customer at their request, like should we add 5$ to this transaction so you can order your drugs/groceries/etc from Amazon? Yes, please. This reads like a preliminary description of a cashless society and how it might work. I’ll just toss out this warning for the motley fools at Amazon: beware public libraries. And also, when I read “bunny boilers” I thought of my old pressure cooker, when I blew soybeans all over the ceiling… so what is the provenance of this “bunny-boiler” thing? Very interesting take on the banks and credit. Thanks Clive.

  3. jhallc

    I believe that the SNAP EBT cards (the old food stamps) will soon be authorized for use of online grocery purchases at Amazon and other online retailers. This is a big chunk of Walmart’s grocery business.

    1. Peter Pan

      What is the basis of this belief? Do you have a link to an article or government initiative?

      I’d suspect that the Trump administration would be cutting funding to the USDA and it’s funding in turn to states for SNAP EBT. An increase in setting high level marks to qualify for SNAP benefits would fall in line with moralizing against the lower class. Consequently, I have doubts that EBT will be allowed for online food purchases.

      1. bob

        Trump is an RE guy. No way he ever shorts EBT/food stamps. The valuations of those properties are dependent on food stamps/EBT. No food stamps? Take 30-50% of the revenue away.

        I do think this is a good way to watch the ‘old economy’ bricks and mortar Burgers vs the ‘new economy’ lobby. I don’t see the old economy giving this subsidy up.

        1. Peter Pan

          That’s before Trump. Keeping in mind that Amazon knows I live in Washington state:

          Amazon policy: “We don’t accept EBT, food stamps, or any other payment method not listed for grocery purchases.”

          I live in Washington state, one of the states listed in the article, and confirmed with DSHS that EBT transactions cannot be performed online for grocery purchases.

    2. bob

      It’s a giant chunk of ANY grocery business. Food stamps keep retail REIT’s and PE portfolios happy.

      The idea that people are paying for food with SNAP is one that won’t die. It’s always been a way to subsidize commercial RE.

  4. HBE

    They (amazon) seem to have some slight notion that much of the population (and growing) cannot be a standard customer, but still don’t seem to get they and most other corps are eating themselves alive to exploit Labor (consumers) in the short term.

    The lack of forecasting is astounding. So amazon achieves it’s goal of gaining monopoly status, and replaces all its workers with robots as the consumer base continues to dwindle to nothing because of labor exploitation.

    There is no other country to go to, no other consumers to exploit at that time. They’ll be a monopoly of nothing.

    Cut costs, grow grow grow, exploit, and automate in the short term. Only to find soon thereafter you’ve grown wider but shorter after eating your own legs.

    All I have to say is, good luck. /S

  5. notabanker

    Always enjoy your write-ups Clive. Having worked at a couple of TBTF’s, they are always doused in the reality of the absurdity that ultimately prevails.

    My take (which could be completely wrong) is that this boils down to the FSI’s desperately trying to figure out how to utilize AWS to offset or eliminate DC costs. It always comes down to data privacy, security and regulatory issues that Amazon cannot / will not sign up for. In the “spirit of partnership”, they lock away some well paid hipsters in non-cubed office space to “innovate” and stuff like this comes out. It works, it’s interesting, adds little new value and likely won’t be used much if at all.

    But the CEO’s and CIO’s can meet with Bezo’s people and say “see, here’s what we can do for you”. They’ll hype it up in an industry rag, everyone involved in the project will high five and feel good about it. And Bezo’s people will say “thank you very much, appreciate it” while their lawyers will continue to very politely flip them the bird when it comes to taking on any regulatory liability whatsoever.

  6. Frank Shannon

    There should be a term for business models like this and Wal-Mart. Slash and Burn retail? Blood Drinkers (the next step up from blood sucker)? Blood Guzzler? I dunno but I think we’ll see more of this.

  7. ambrit

    Good read. I’ve wondered why the “Internet Merchants” haven’t gotten into the Remittances game. I regularly see literal lines of “braseros” on a Friday evening patronizing the Western Union and other wire transfer services in order to send some money to wherever “home” is for them. The fees charged by these “service providers” boggle the mind. Legalized crookery about sums it up. Could this be one of the reasons that the Feds are cracking down on the Islam based “transfer services” that Muslims use, which seem to operate outside the Western financial scheme?
    As always; Follow the Money. (And when the Marks run out of that, follow someone else.)
    PS: I have a low paying job now where the company, a small to mid sized outfit, pays everyone through a national Card service, based on I believe the Master Card platform. What’s funny is that my employer sends out weekly paper pay stubs, whether required by law or not, I don’t know, so they could as easily hand out cheques along with them. I do know that the supposedly “foolproof” automated wages algorithm messes up regularly. When the power goes out for a short while, another increasing occurrence around here, the “time card” portals need re-aligning. I see little or no labour savings for the employer, and pity the former accounts people let go in the interests of “efficiency.” Oh my; All Hail the Gods of Technology!
    Time to go to work. Cheers.

    1. lyman alpha blob

      Everybody and their mother seems to be trying to make a new electronic payment system these days – I see it all the time. The main purpose seems to be to insert yet one more middleman into payment transfer process so they can take a cut too although they claim it increases efficiency or some such nonsense. I spend a good portion of my day fighting with this ‘efficient’ technology that is supposed to make my job easier. Most of it is complete crap. I think it’s designed by decrepit blind old monkeys smashing away on a keyboard hoping they come with Shakespeare sometime before the end of the universe. So far no luck.

      1. Art Eclectic

        Everybody and their mother recognizes that electronic payments are a target rich sector. Enormous amounts of money are flowing through just a few major portals. There is a large market out there interested in lower fees, anonymity, and ease of use. Amazon is just joining Apple, PayPal, and a host of other players looking for a way to skirt the current system and collect their skim.

        Amazon already offers a “store card” that you pay directly out of your checking account, so this isn’t their first foray into this territory, it’s the logical next step to look at the market that doesn’t even have a checking account but has cash to spend. Walmart should be very, very nervous.

    2. Lambert Strether

      > When the power goes out for a short while, another increasing occurrence around here, the “time card” portals need re-aligning.

      Well, I’m sure the workers only lose a few minutes at the most, the very most…

      But can you say where these power outages are? That’s an interesting data point.

      1. ambrit

        About point one; when the electronic time card goes out, the store management has to step in and do manual work-arounds. This is on top of their company mandated fifty to sixty hour “salaried” work week. The company “indoctrination” pamphlet states in print that management is required to work fifty to fiftyfive hours per week. For the top manager at this outlet, that salary is $900 per week. He regularly works sixty hours and up each week. So, one’s soul is worth about $15 per hour in the Deep South. Personally, I “lost” six hours of pay two weeks ago when the managers lost my manual hours sheet for one day. No malign purpose is required for this to happen. Papers get lost in the shuffle of trying to keep track of roughly fifteen people’s input. The problem has become so common that the company now prints up a stack of paper replacement “daily time reports” for the workers to use when the electronic system falters. For a dispersed retail establishment like the one I toil for now, a power outage in either the central office or a satellite store will mess things up. In one case, the former, the entire chain goes goofy. The second case affects a single store. Either way, supposed “superior efficiency” costs the chain money due to the diversion of managerial effort for the times that “superior efficiency” becomes a chimera.
        The second point is curious because I do not have data on what a regular schedule of power outages would look like. Up North we have snow and ice storms to bring tree limbs down on power lines or ice accumulations to snap the power lines from excess weight. Down South we have bad weather bringing down tree limbs as well. Another obscure problem is power transformer failures. Much of the electricity infrastructure is ageing. How long is an electrical power transformer, those little barrels sitting on top of the electric pole next to the street or alley, designed to last? This is old style technology, still working away for years and years. Let us not wander off into the weeds of IT infrastructure “improvements.”

  8. Jack

    Perhaps Amazon and Bezos should get behind the guaranteed minimum income movement. Just like SNAP, which now requires the use of a “debit card” to access food stamp benefits (in my state SC, it is administered by Chase), the monthly income allotment could of course be accessed by a debit card. Alternatively, Amazon could just co-op the post office a little more and allow deposits to an Amazon account to be received there. Amazon has already had the USPS create a second tier of low wage delivery personnel, so why not cash collection services?

  9. jfleni

    “Amazoom” does a lot of dumb stuff; when I first tried to pay from a bank account, the screaming and rejections never stopped, even though “Amazoom” directly allowed and encouraged it.

    It pays to assume that these clowns really don’t always know what they are doing.

  10. Timmy

    Opening a bank account when rich…

    I work on Wall Street and am a licensed “registered representative” of a securities firm. The implication of this status is that my employer wants my personal brokerage/IRA accounts to be held at the firm where I work, allowing them to monitor my account activity and make sure I am not trading on inside info or committing other crimes. But I changed firms and now work for a smaller broker that doesn’t offer banking services. Because I now can’t use the balances in my brokerage accounts as justification to receive a free checking account, I am finding out how difficult and expensive it is to have a simple checking account.

    For example, I’ve discovered that the “compensating balance” necessary to have no fee checking and an ATM card at this national bank is $20k along with an active direct deposit arrangement for my paycheck. This balance level rebates any ATM fees I pay to use other bank ATM’s. Below $20k I pay those ATM fees and start having other fees. Below $10k and I pay $16 a month for the privileged of keeping my money with this national bank.

    When I told the bank that I had both a jumbo mortgage and a HELOC with the bank where I have the checking account, they told me that those borrowing arrangements no longer count as compensating services that offset free checking.

    I’m unclear how anyone outside of the 10% can afford to have a checking account.

    1. Clive

      Yes, so-called cross selling is fine in theory (you cross sell enough to compensate for low, zero or even negative profits on a customer which only holds one product such as a checking account) but it doesn’t help when the aggregate margins across your entire product range are thin.

      In other circumstances, the industry would move to more transparent fee-based pricing — but because cost bases are high (due to many factors, but which I’ll summarise here as too much finance / too many inefficient players being propped up because TBTF plus complexity of trying to work out what is profitable — all hampered by creaky back-end systems which don’t give the data needed to do the analysis required) customers would get sticker shock and pare down their product holdings. So you end up with this bizarre inter-product holding subsidy, cross-subsidy and loss making customers being covered by others who are being price-gouged. The entire retail banking industry is starting to resemble a shell game scam. I will write this up longform in another article.

    2. David Carl Grimes

      Why don’t people switch to Credit Unions? The compensating balance is minimal. Sometimes they have no fees. The only drawback is that it can be hard to physically make a deposit because they have very few outlets.

      1. Clive

        The rather dispiriting truth is that Credit Unions lack an advertising budget. Word-of-mouth and the occasional media piece is as much publicity as they can raise unfortunately. Plus their capital positions don’t allow risky (e.g. payday) type lending so they don’t reach the people who need them most.

      2. jrs

        Inconvenience – if you do all your banking in person and have never gotten a fondness for ATMS then it doesn’t work very well (big banks have MANY branches, credit unions at best may have many ATMS.). And banking in person allows things like getting quarters for laundry.

        Interest rates on savings: low everywhere but usually much lower at credit unions. Blame the Fed I guess.

      3. Yves Smith

        Credit unions can’t take all comers. You have to be a member of a group they target by charter. And some readers who’ve joined ones said they were disappointed at the level of service, like huge hassles doing things that ought to be simple (I forgot the details) and wound up going back to a big bank. So even if you can get into one, it may not be so hot.

        1. Marina Bart

          Back when I worked in the financial services sector, credit unions’ little secret was that in many cases, executive positions were functional sinecures. You got paid less and had lower status than a “banker,” but you didn’t have to think or work as hard. It was easy to get weekday golfing in.

          That meant in practice that while CUs were less likely to find ways to steal from you, they were also less likely to provide really good service.

          I was under the impression that the progressive energy that had started gathering in the credit union movement again before I left the sector and before the Great Recession accelerated afterwards, and that it is a lot easier now to find a high quality credit union than it used to be, with up-to-date customer-assisting tech and services. But there’s no readily available credit union I can currently join, so I have no front line, up-to-date evidence to offer regarding this.

        2. Stephen Haust

          Several years ago, I opened an account at a local FCU (Federal Credit Union). No
          membership of any group required, just walk in and put your money on the counter.
          These seem to have taken the place of what used to be known as “Savings & Loans”,
          at least in flyover country, where I am. My initial deposit was, I think, about $200. For
          this, I got a debit card and free checking if I wanted it. My reasoning was that I wanted
          a card that I could use online, in an institution where I had no other assets or liabilities.
          That way no compensating balance could be attached for whatever error or hack
          might occur. I still use this account, by walking in and depositing a bit whenever I
          anticipate some use, such as an online transaction with a merchant operating out of
          China.

          On the other hand, the “regionally significant financial institution” or whatever it’s called,
          where we still keep some savings, either could not or would not handle certain classes
          of business. My wife’s mother receives SSI and because she is disabled and unable to
          manage her own affairs, Social Security wanted my wife to become a “representative
          payee”. We had to keep an appointment at the local SSA office and make certain
          declarations, after which we received a letter authorizing an account. The “bank”,
          maybe for some other reason, could not or would not open such an account and kept
          telling us that we had to get SSA to issue a different kind of letter. We finally took the
          letter over to the FCU where we were told, “of course, just a moment while we print out
          our instructions”. Short story – within one hour SSA had made a test transaction and
          a few days later the first monthly benefit was deposited.

          So, go figure! Maybe they can’t take all comers but they took us and that’s all we
          needed, whereas the “regionally significant” bank either couldn’t or wouldn’t. And
          that’s for two pretty much non-standard accounts which cannot possibly net the
          FCU much revenue. No $20k compensating balance required either. We have taken
          several tens of thousands in savings out of the “regionally significant” bank and
          used it to buy a series of laddered CDs from the Citizens Bank of a small town in
          Tennessee. We’re happy; they’re happy and nobody could have been more
          cordial or helpful than the staffs of these two very minor financial institutions.

    3. Sutter Cane

      I have a free (genuinely free) checking account at a local credit union. They also offer online banking, debit/credit cards, and everything the bigger and evil-er banks offer. The few times I’ve been charged a fee or fine, a phone call to an actual person (who lives here, in my own city) cleared it up quickly and pleasantly. The only small downside is that I might be charged a fee to use an atm when traveling, because there aren’t branches in every city. Otherwise I can’t imagine why anyone would still bank with the likes of BofA or Wells Fargo.

      1. Jim Haygood

        My credit union claims a network of 55,000 surcharge-free ATMs.

        Even in big bad New York where poster Timmy is based, credit unions exist. Affinity requirements tend to be more narrowly defined there than in Flyover Country, where it suffices simply to live in the state.

        Nevertheless, even in big cities, small banks and credit unions can be found. “Just say no” to Chase, B of A, Citibank and Wells Fargo. They suck, and nothing is ever going to unsuck them.

    4. Spring Texan

      Try credit unions. At my credit union you need to keep a minimum balance of $500 in the account for free checking.

      Not all credit unions are good, but some are, and banks suck.

    5. jrs

      Sounds like a rip off to me. But what do I know, I actually am someone who has never used an ATM in my life, so if they fee for them I wouldn’t know. The ONLY fee I have is for replenishing physical checks. I’m ok with that, I only use them for basic bills. And that minimum balance is way high. I know it never breaks out well if you are poor but the minimum balance should be like 1k-2k OR direct deposit (one of the two, not both). And that’s at a big bank (yes likely would be considered TBTF).

  11. RunaroundSue

    You can buy for years already Amazon prepaid cards at many drugstores and supermarkets — they are pretty anonymous and can be purchased for any amount up to $500, and you can purchase multiple cards (probably wise to do it at different outlets) for an Amazon basket more than that amount. So not sure what’s new here about Amazon linking to brick-&-mortar for payment.

    I’ve vowed to boycott Amazon as much as possible, but often I’ve wanted to buy things a little anonymously rather than have the purchase of X or Y added to my permanent NSA dossier. This article cites the possibility of using prepaid credit cards as a way to do so.

    In the US, those prepaid credit cards are of two types: those that are linked to you with a SS# (which are totally unanonymous) such as “Green Dot”, and those that are not linked to any person (relatively anonymous); “Vanilla” is one such issuer of the latter that is generally reliable, and with no fees after the initial cost for the card.

    I like those more anonymous prepaid credit cards a lot. Granted you lose about 1.2% right off the bat if you buy one for the ~ $6 price and load it to the $500 max allowed by Our Totalitarian Masters in their war on cash. And granted, maybe 20% of the time in my experience the clerk at Walgreens or CVS will demand ID to purchase the card — I just don’t buy it if they do.

    But here’s the thing: Amazon often gives you no end of trouble if you try to use one of those anonymous prepaid cards (sometimes you need to register a zipcode to use for online purchases). In the past, I’ve successfully used these anonymous. But in the past year or so I find that Amazon accepts the order, says it’s still good a day or two out, but then cancels the order for reasons they refuse to give. And you can spend hours trying to reach somebody to deal with the problem and it never gets resolved — the frontline people you deal with in India claim to be clueless. Weeks and weeks later, the funds for the order that gets mysteriously cancelled are credited back, in my experience.

    Why Amazon is so distrustful of anonymous prepaid credit cards is a bit mysterious to me. But the anonymous-ish bought-for-cash Amazon ‘gift’ cards you can buy at the same places that sell prepaid cards work fine in my experience (though sometimes you have to specify your payment method before you know all the taxes … so it can be hard to buy the card for just the right amount).

    Ebay has similar prepaid cards you can buy. Again these are ways you can potentially buy things relatively more anonymously if you have to use either of these evil companies.

    1. Clive

      I suspect — and suspicion is all it is, I’ve no proof (yet!) that Amazon are starting to be plagued by what is in effect a money laundering scheme. You get funds into Amazon’s system (as you found, you can do this reasonably anonymously) and these funds may come from dubious sources. You can then buy goods — and these can be high-value and easily fenced (sold on to someone you’re in cahoots with or even completely innocent about what’s going on) — in exchange for the funds you’ve got into your account. You can then get money by reselling these what you’ve just bought and, hey-presto, you’ve got clean-looking funds.

      If you can get the goods you’ve ordered to a different address than your own, even better. I think my mother in law was a victim of this kind of variation on the scheme. For several weeks she got deliveries from Amazon of really marketable goods (high-end smartphones, designer clothing, jewellery and such like). She had to then return the packages as she knew they weren’t for her (they had a different name on the packaging but her address). Eventually it got to be such a nuisance she had to advise the postal service to block all incoming deliveries from Amazon. Putting two and two together, someone in the postal service or even working Amazon themselves was in on the fraud and was intercepting the returns. Either that, or someone was monitoring her property to try and get the deliveries when they were made, not figuring that my mother in law, who doesn’t work, is in all day and there’s not much opportunity to get a package that’s been left out for re-collection.

      I don’t believe this is the only variation on money laundering scams that can be done via Amazon. Your experience with pre-paid Amazon cards is a useful clue. This is more our Richard Smith’s territory than mine, but thanks for the information.

        1. RunaroundSue

          Prepaid anonymous credit cards bought in the US (fundable up to US$500) are not usable outside the US. The Canadian variants on this (which appeared only much more recently) are good (last time I checked, some 2 years ago) only up to C$300 are work in Canada & the US. But there are prepaid credit cards you can buy in other places — I saw them available in Spain recently, for instance — that can be used internationally. The ban on international use for such cards seems to be a US / Canadian thing.

    2. PKMKII

      The problem with the prepaid cards, and I suspect this is both why Amazon is moving into this B&M business crediting with physical cash and why they give you flack for using the prepaid cards, is that they’re the prime targets in those IRS back taxes scams. The ones when someone calls you claiming that you owe money to the IRS and that if you don’t pay up immediately they’ll send the cops. When they snare a target, they instruct them to go to a local store, buy Amazon or iTunes or eBay, etc., gift cards equivalent to what the scammers are telling them they “owe.” Scammers then tell them to read them off the gift card numbers and dollar amounts, then say their taxes are paid off. Meanwhile, the scammers sell the card numbers at a discount on online markets (why not sell a $100 gift card for $90 if you paid nothing for it in the first place).

      Which makes Amazon weary of being accused of and sued for facilitating criminal enterprises. So the account crediting with real cash gets around this, as the credit is tied to an Amazon account right at the POS. There’s no intermediate step like with the gift cards. Even if scammers tried to get people to credit the scammers’ account, it would raise red flags immediately if an account out of Calcutta is suddenly getting credits from retail locations across America.

  12. Chauncey Gardiner

    Re: … “I’m unclear how anyone outside of the 10% can afford to have a checking account.”

    Expanding that percentage out to perhaps the top 40 percent, ditto broadband internet service and smart phones with their subscription fees and related apps. Perhaps the marketing strategy described in this article is intended to also address that constraint, which would also presumably encompass younger non affluent segments of the population in the acquisition stages of household formation.

    1. Ivy

      Try a credit union. They offer many products at lower cost than banks, and have a big cooperative network of ATMs and branches where you may transact. Many credit unions are community-based, so you don’t need to be a county employee or work at the local manufacturing plant or whatever, just show up and fog up a mirror, then deposit.

    2. Jeff Fisher

      My impression is that the bottom 50% mostly use pre-paid mvno phone plans which are actually significantly cheaper than the premium branded monthly plans that the top 50% use.

  13. Antoine LeBear

    Isn’t Amazon aiming for the criminal/black economy with this move? As RunaroundSue said, it’s mighty difficult to use Amazon prepaid cards, no retailer on Amazon wants them, and even Amazon makes it hard to use them.
    So this completely anonymous tenchique (I will suggest wearing shades and a hat, going to a part of town you never visit and most importantly leaving any electronics at home while putting cash in your account – which you would have opened using the same precautions at an internet cafe) may be a whole lot better to use to recycle grey money. Or purchase goods anonymously (of course you need to have a foreclosed home nearby you can deliver the goods to, but that’s becoming easiest by the day, ain’t it?).

    1. RunaroundSue

      Just to be clear, my experience using Amazon prepaid cards is that they work flawlessly, and Amazon gives you no flak for using them, and there’s no penalty charge (unlike the minimum 1.2% you lose with prepaid credit cards). (I don’t know if indie sellers on Amazon don’t like these paid-with-cash Amazon cards or not, but my limited experience suggests again, no problem.)

      Hey — let’s not immediately ascribe (like War on Cashers do) desire to not have every purchase put into your permanent NSA dossier as equal to criminal/black market activity!

      You don’t necessarily need a local foreclosed home to get the delivery — Amazon is setting up boxes where deliveries can be picked up at convenience stores and the like at least in rich urban areas.

  14. nonsense factory

    How long before Amazon, Ebay et al. try to follow in India’s footsteps and attempt to ban cash entirely in the United States (at least everything larger than a $5 bill?)
    http://norberthaering.de/en/home/27-german/news/745-washington-s-role-in-india
    Who was behind that?

    …one can see that they are mostly IT- and payment service providers who want to make money from digital payments or from the associated data generation on users. Many are veterans of,what a high-ranking official of Deutsche Bundesbank called the “war of interested financial institutions on cash” (in German). They include the Better Than Cash Alliance, the Gates Foundation (Microsoft), Omidyar Network (eBay), the Dell Foundation Mastercard, Visa, Metlife Foundation…

    1. John Rose

      The article mentions in passing Aadhaar, a bio-identification system currently including more than 90% of adult indians. This is astonishing in a heavily rural country. The system uses both fingerprints and retinal scans to establish a link between the individual and the individual’s unique identification number. Anonymity is therefore destroyed.
      Fraud and corruption are problems in every developing country and this system could be used so permits and various other transactions could not be exploited. But, as the article shows, profit-seeking of a more sophisticated kind is enhanced. No more petty crooks, just big ones!

      1. oh

        The excuse for Aardhar was to allow use of discount cards for certain items by the poor. Of course there was nothing to safeguard these people (once purchased) from selling these items to others.

    2. Susan the other

      this could be interesting. whereas India has a much larger poor population and maybe thats why Modi could just scatter-shoot a start to a cashless society, here we have a slightly more prosperous bunch of “consumers.” And we seem to be following a recipe: first Walmart put mom and pop out of business, then Amazon put Walmart out of business and in so doing also put the expensive (poorest) end of the credit card business out of business (helping the banks just keep the rich customers) and we are seeing the beginning of “cash” transfers between plastic accounts (no doubt anticipating more government money, whether retirement for boomers or stipends for the general public)…I really do think there is method to the madness here. A two-tier society that is still fungible. ;-)

  15. Ivy

    Amazon, among others, seems dedicated to pursue the negative working capital concept to the bitter end. They are doing their part to investigate what happens when Consumer Surplus turns to Consumer Deficit.

    The people on the other end of that strategy pay and pay in any possible way, tap any remaining sources, and then get solicited to transfer more assets, flesh, soul, anything to dull the pain.

  16. PKMKII

    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.

    I’ll predict that Amazon ends up targeting check cashing establishments for these account crediting “services.” If their aim is to get people without debit or credit cards, and therefore most likely without bank accounts, to shop on Amazon, then they’re aiming at people who are dependent on check cashing business to move their paychecks into physical cash. So if they have to go there to get their cash, then Amazon has a captive audience. Maybe work out some discount on the check cashing business’ usual cut as to encourage the Amazon account crediting. Could also see them targeting payday loan businesses in a similar manner.

  17. Dead Dog

    Thank you Clive, informative and on point, as usual.

    As an author, if I want to sell my books and make them widely available, I must have a presence on Amazon and, reluctantly, social media too if I am to be taken seriously by those that read books.

    Is this a rational choice? No. The likes of Amazon and FB are just too big.

    And, too big it would seem for governments to tackle via monopoly enforcement or, just simply, you are in our country making money, how about you pay some tax?

  18. Jim Haygood

    Some pertinent thoughts from Jared Dillian of The 10th Man, just received in an email:

    When interest rates are low, businesses with cash flows very far out into the future can survive. Amazon really took off when the Fed lowered interest rates to zero and began quantitative easing in 2008 (almost to the day).

    Long periods of time with negative real interest rates cause, well, bubbles. Amazon and Tesla are part of those distortions. Think about how harmful those distortions are—think of the capital that has been diverted away from traditional retailers to Amazon.

    In this world, you can only trade TSLA and AMZN from the long side. You can wait forever for profits when interest rates are zero. Not when they’re 6%.

    You know when to short AMZN or TSLA? Maybe if the next Fed chairman’s last name begins with W and ends with “arsh.”

  19. wellstone's ghost

    The Mafia/Chicago Outfit came to power in America with the money they made from loansharking, bookmaking and policy gambling(and to some extent drugs, although it was frowned upon by the old guard). These three scams are now called Payday lending, off track betting parlors and state lotteries. Nice to know these scams have finally been “normalized”. Amazon is just part of the problem.

  20. flora

    Great post about big-picture issues with this scheme. Thanks. I went to the American Banker link and read the article.

    “Users tell the clerk how much cash to add, between $15 and $500 at once, and the funds arrive instantly in an Amazon.com stored-value account.” -American Banker

    A couple little-picture things :

    1. This scheme sounds like asking customers to give Amazon/Bezos an unsecured variable line of credit. In this schema, in theory, the customer is responsible for due diligence about the credit-worthiness of Amazon. (Are customers sure they can withdraw the money if need be? )

    2. Unsecured loans (if I can put it this way without being too off-base) from a large pool of customers to Amazon could in aggregate amount to something large and enable some interesting financials on Amazon’s side. Not that they wouldn’t scrupulously segregate data in one column from another column in their SEC filings. for instance.

    1. Clive

      That is a very good point — funds in your Amazon “account” (it really isn’t one in the banking sense) are not FDIC protected. An Amazon BK is hugely unlikely (but not by any means impossible) then you’d be an unsecured creditor way, way down the pecking order (waterfall). More pressing a problem is the lack of any meaningful disputes resolution or consumer protection. Short of small claims court action (which isn’t hideously complex but neither is it a trivial matter) you’re reliant on Amazon behaving itself and being nice to you. I wouldn’t trust them with a single solitary penny.

      1. bob

        It’s the same ‘scam’ that paypal uses. ‘Deposits’ on account at amazon are actually Amazon equity. Bring it to BK. Who stands a better chance of recouping that money on deposit? Bezos, the monster owner of the equity, or an unsecured creditor (depositor)?

        Your ‘deposit’ = Bezos, et al equity

    2. oh

      Isn’t the same thing with “gift cards”? If people who get these cards don’t use ’em they’re a gift to the gift card issuer. In the meantime they use the money for free.

  21. Tim

    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.

    Clive, They aren’t idiots, they know that ultimately FIRE makes the US kleptocracy go around and to the FIRE industry cash is the enemy. They don’t care anything about you as long as they can get your money. And they have no reason to think they won’t get what they want ultimately in a cashless society where FIRE makes all the rules and the government has ultimate power to enforce them.

  22. Tom

    Screw Amazon, and big box retailers.

    I’ll continue to pay cash and patronize the great thrift shops we have around here.
    i.e. Brooks Brothers button down dress shirts for $4, pants for $3 etc.
    Yes, you have to go back more than once but if it’s a regular stop on your way elsewhere, so what?

    New underwear at Kohl’s is two for one after Christmas. Good shoes can be resoled and if properly cared for will last a lifetime.

    A used car properly cared for is a money saver.

    America is overflowing with used stuff, there little reason to buy new Chinacrap from Amazon or anyone else.

    Do yourself a favor, explore your area for thrift shops and make a point to donate what you no longer need to the good ones. Spend your money on high quality organic food, that’s a better investment in yourself than any stock or bond.

    1. oh

      Great suggestions. Plus tools from a garage sale or thrift store may be better if made in the USA.

  23. blert

    In my burg Debit Cards are issued with every retail account.

    If you’re getting paid electronically … there are no fees charged to maintain the account… as long as your balance is above $1.00. ( It’s a credit union — and it’s huge. )

    The only folks rejected would be those who can’t present enough ID.

    Amazon also spews out its own pre-paid cards — with no discounts impossed whatsoever.

    These can be found at in-store kiosks everywhere I shop. ( but not so at Walmart… Heh. )

    My beef with Amazon is that you can’t get anyone to pick up the phone… nor even respond to e-mails that are dead on target WRT $$$ and account issues.

    This indicates that their back-office must be in chaos — and is insanely under staffed.

    Massive scandals lie in Amazon’s future.

  24. Pat

    I think there is a simple explanation for this that is not so “evil”.

    Every year kids are born. Every year, kids move from middle school to high school. Those kids could ask their parents for use of the credit card. But how many parents want to authorize their child access to the credit card? (plus the kid would need the CVV number)

    However, a kid does end up with odd cash money – babysitting, odd jobs, allowance, xmas money. By accepting the cash, Amazon gets kids (future adults) in the habit of buying from Amazon rather than a brick and mortar. Eventually, the kid as an adult may end up with a credit card – carrying forward the same habit of buying from Amazon.

  25. robnume

    Thank you so much, Clive. I read about Jeff Bezos latest scheme to part me from my money late last night and the first thing I thought as I was reading was, “If I have to get off of the couch to go load up a bar code why not just buy the thing at the retailer from whom I was going to buy my way onto Amazon?” I chuckled when I read that same thought in your post.
    I always enjoy reading your comments. And I do so enjoy your posts. Thanks again.

  26. Stephen Haust

    There is one other prominent “personality” who deserves to be mentioned in this discourse whose name,
    for one reason or another, I can’t find here.

    Rogoff is an ass!

    He wrote a book called “The Curse of Cash” wherein he reputedly asserts (I didn’t read it. I’m proud to
    weigh in from a position of total ignorance!) that really everybody but everybody uses credit cards and
    cash, especially $100 bills, are used only by criminals. That’s why “nobody” ever uses them. He later
    backed off (he always does) with some wheeze such as, “I didn’t really mean us. I was only writing
    about poor countries.

    It doesn’t matter whether I am accurate in this or not. This entire discussion is a blindingly clear
    illustration of why “demonetisation” is a load of crap. And of why Rogoff is an ass.

  27. Gman

    Aside from the infinite growth model discussed above that Amazon is desperate to project to investors, if you’re in the business of trying to project yourself to the world as a benign monopoly, supposedly bent on keeping prices low, and you don’t want to attract to much negative press or regulatory attention while you slowly but surely destroy your competitors, it probably doesn’t pay to make it look like you’re actively engaging in the business of income based exclusion….for the time being anyway.

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