Last fall I wrote about what was taking place in FinTech and the role that organizations like Amazon.com, Inc. (NASDAQ: AMZN) was now playing in the evolution of the financial services area. I spoke of movements taken by the company, like its venture into the payments space with Amazon Pay, that were creating a tipping point for banking in the United States.
Moving into the banking arena is not easy, especially with all the rules and regulations that financial institutions face. Add to that the fact that Amazon is not a bank, or any other kind of financial services firm, and you raise even more questions about the impact that it will have on FinTech.
And, yet, to have such doubts is a result of us missing a bigger picture.
The reflections on Amazon's current acquisition of Whole Foods Market (WFM) is giving us another vantage point to assess what Amazon is doing - and what other major tech companies are doing.
Christopher Mims, in Saturday's Wall Street Journal, gives us a boarder picture of how tech companies are spreading out their wings, further and further away from their narrow "techy" beginnings.
Mr. Mims uses Amazon as his example and begins by arguing:
"What distinguishes Amazon (from other tech companies) is that it's the company most willing to work on everyday problems."
"One way (Amazon chief Jeff Bezos) does this is by moving not just laterally-from books to consumer packaged goods-but vertically, through the supply chains that create and deliver goods. Thus, Amazon used its experience running its own websites to create Amazon Web Services, a $14 billion-a-year business. And it's working on its own network of trucks and planes to disrupt UPS. Physical retail-still nearly 90 percent of consumer purchases as of 2016, not including car and gasoline sales-is just the latest frontier."
Mr. Mims adds, "This trajectory wasn't obvious 15 years ago." I would add that this trajectory was not obvious to most people even a little while ago.
The secret is that to Amazon:
"the fundamental technologies of the microchip, the internet, wireless connectivity, just-in-time manufacturing. Robotics, big data, etc., have made this possible."
And, Mr. Mims emphasizes:
"Those with expertise in these areas can create businesses that solve existing problems in entirely new ways, or at least more efficiently and profitably."
In other words, Mr. Bezos, and other tech leaders, think about problems in a way that is different from those in other industries. This makes all the difference. And note, by the way, a recent article in the Financial Times about how Facebook (NASDAQ:FB) is looking at the video space in a different way.
But, the technology groups bring other advantages to the table that ordinary brick-and-mortar organizations don't possess. First of all, these technology groups tend to have zero- or low-marginal costs. This has been a highlight of the computer industry from the start, exploited to the highest degree by Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL).
Even if the marginal cost is not zero, it tends to be much lower than the marginal costs of brick-and-mortar companies or manufacturing companies. Furthermore, these latter companies generally exhibit marginal costs that rise relatively rapidly with scale, therefore, constraining larger companies cost-wise as they grow in size.
This extends especially to supply chain situations; a point that Mr. Mims argues Amazon is particularly adept at exploiting.
One of the things that this tech cost structure provides is almost immediate help to the cash flow situation of a company. Mark Vandevelde and Leslie Hook comment on this in another Financial Times article emphasize the role that the different company cost structures play in the successes of Amazon versus the difficulties being experienced by company like Whole Foods Market.
I have been particularly interested in the advancement of information technology into the financial services area. Like the many brick-and-mortar companies discussed above, bankers just don't seem to understand the changes that are taking place.
MIT recently held a conference on FinTech and the basic theme that ran through the conference was the "Financial Institutions Are Way Behind FinTech." Where, therefore, is the change going to come from?
I wrote some time ago:
"Brad Peterson, CTO at NASDAQ, used the Varian Rule, named after the economist Hal Varian, as an example of how innovators should look at building FinTech for the future. The Varian Rule goes something like this: observe what wealthy people are doing today, in this case, what are they doing with their money, how do they transfer money, how do they invest, and so forth.
The Varian Rule is that in ten years from today, middle-income people will be using the same tools. And, then in another ten years everybody else will be using those tools.
Part of the point of this is that the wealthy have advisors and access to things that middle income people and others do not have. A lot of what the wealthy do avoids avenues that are heavily, if at all, subject to oversight of the regulators or the examiners."
The point is that Jeff Bezos is looking at what wealthy people are doing today. Whole Foods Market is a "high-end" organization. The first Financial Times article cited above states, "Whole Foods, nicknamed 'whole check' for selling mouth-watering food at eye-watering prices..."
Mr. Bezos and Amazon plan to combine their current vehicle Amazon Fresh, a grocery delivery service that is not doing that well, with the Whole Foods chain to gain the scale it needs to gain margin and to gain scale. As Mr. Varian suggests, it plans to play off of what wealthy people want to do today. It will be building a base to spread to what "middle-income people" will want to do in the future.
But, this is not the only area that others are moving into the banking area. As I have recently suggested "Watch Hedge Funds." They are looking for cutting edge ideas and they are not as heavily regulated as most other financial institutions are. A specific example here is that of WorldQuant. Another place to look for banking services that are quite extensive and quite fluid, look to TDAmeritrade, an affiliate of TD Bank, which is coming from Canada.
Two points to close out: first, evidence is building that tech organizations like Amazon are driving innovation and one means of this is through acquisition, something that was not imagined very long ago; and second, the non-tech companies are going to have to pivot and change their business models, or, they are going to become "legacy" - even those that are highly regulated.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.