- Amazon's new credit card dongle is an extension of an existing business model.
- Amazon is not becoming a bank.
- Amazon is not becoming a merchant processor. In fact it's helping its own processor.
A lot of people are misunderstanding Amazon.com's (NASDAQ:AMZN) move to offer credit card readers and services as Amazon Local Register.
They're wrong. That's not what Amazon is doing at all. What it's doing, in fact, is not really that big a deal.
It's true that Amazon is now a threat to Square, the Starbucks (NASDAQ:SBUX) backed start-up. Maybe. A little bit. If your store uses Amazon for its online operation - and thousands do - you might want to use the Amazon card reader in your shop, or when you go to the local farmers' market or neighborhood festival with apples or paintings, or paintings of apples, to sell.
But if you see Amazon as a threat to your retail business - and thousands do - you're not going to be looking at this new device. You're going to go with Square, or something else. Maybe something recommended by your current bank, or the Independent Service Organization (ISO) who handles its merchant processing relationships with a company like First Data.
If Amazon is a threat to anyone with this announcement, it's that ISO. Because Amazon isn't acting as a processor in transactions done with the device. It's acting as a "merchant aggregator," as the payments publication Digital Transactions explained in April.
What's an aggregator? Basically it's a merchant or other organization that acts as a "stand-in" for a smaller merchant before the processors. Square is a merchant aggregator. A merchant who uses Amazon to aggregate transactions is running their business through the same systems Amazon uses - but those are not Amazon systems. Except on the back-end, where Amazon is holding your money and paying it out to you. Everything else is done through existing transaction processing systems.
How might this change? Well, if Amazon.Com became a bank, that bank could join Visa and/or MasterCard, but Amazon isn't a bank. Yet. If Amazon became a direct processor, that might threaten Visa or MasterCard. If it were offering its own mark for transactions and processing them, that might become a threat to American Express (NYSE:AXP) or Discover Card Services (NYSE:DFS). But it's not doing that, either.
In fact, the latest announcement is fairly modest because Amazon already is a merchant aggregator for stores who use Amazon for their fulfillment. All this means is that, for those stores, Amazon is offering them a device that can start in-store transactions processed through a contract they already have with Amazon.
It's all about "on-boarding," the process of setting up a merchant to take credit cards. It can be easier than going through an ISO, having your banking relationship examined and your credit evaluated, having a specialized terminal with your terms and conditions installed and having your people trained to use it. Instead you get the same deal as everyone else, and you get a terminal mailed to you that you can start using immediately. It means you won't get a special deal if your chargebacks are low, but it's simple, it's quick, and for small merchants that's more important. Aggregators are reaching merchants ISOs haven't, and increasing the use of credit and debit cards, meaning more business for the processors, not less.
Now it's possible that Amazon.com might apply for a license to become a bank at some point in the future. That could be a real threat to other banks. It's possible that Amazon will then announce it will do its own transaction processing, connected to other processing networks. That would make it a real threat to transaction processors like Heartland Payment Systems (NYSE:HPY).
This one, not so much.