Why e-commerce companies are turning themselves into banks

But Walmart is far from alone in the fintech space. Although few retail companies offer financial services in the U.S., e-commerce companies in Asia — including Alibaba, Rakuten, Shopee and others — have made themselves into hubs not only for goods but also for everyday banking needs. These companies give out loans to customers, take bank deposits and facilitate transactions that are not directly related to e-commerce — like paying for utility bills — and they offer one possible path forward for U.S. retailers looking to add a financial services arm.

And the trend may soon spread beyond Asia. “I would imagine that all e-commerce consumers would increasingly want to get into financial services around the world,” said Sampath Sharma Nariyanuri, a fintech analyst at S&P Global Market Intelligence. He added that the actual extent of that shift “will depend on how far and to what extent regulators will allow them to operate” — but e-commerce companies in China, Japan, Singapore and India appear to be ahead of the curve. U.S. companies seem likely to follow, although that would require a regulatory change: the U.S. currently restricts the ability of commercial companies to operate banks, and has rejected e-commerce companies like Rakuten from receiving banking licenses.

A few examples showcase the power of e-commerce fintech overseas. Alibaba’s spinoff Ant Financial has an all-virtual bank called MYbank, which accepts customer deposits and issues loans up to about $805,000 to small businesses and customers alike. Japanese e-commerce giant Rakuten, meanwhile, runs a separate Rakuten Bank that takes deposits and offers loans and insurance. It also has its own virtual currency card called Edy, which is accepted by many physical retailers. In Singapore, two major e-commerce players — Shopee and Lazada — are vying for official banking licenses, which would build on the insurance and digital wallets that both companies already offer.

According to Nariyanuri, financial services, should they attract enough customers, build customer loyalty. Customers need to make deposits, withdrawals and payments regularly, and if e-commerce companies or retailers can facilitate those transactions, the same customers are also more likely to buy something while they’re in the app or the store.

But there are other benefits of financial services, too. For one, a significant number of global customers don’t have easy access to credit or to traditional banks, which is a problem for e-commerce companies built around digital payments. According to Nariyanuri, e-commerce companies in Asia have worked hard to facilitate cash payments, whether by partnering with ATMs to allow direct deposits or by creating cash-on-delivery pickups. In some countries, like India, even U.S.-based companies like Amazon have turned themselves into full-fledged payment apps. “In India, Amazon isn’t just an e-commerce company,” said Nariyanuri. “You can use the Amazon app to send money to your friends. You can use it to pay your utility bills. You can use it as a general payments app.”

The precedent of supermarket banks
The idea that a predominantly brick-and-mortar chain like Walmart would step into banking services isn’t as new as it might sound. In the UK, the grocery giant Tesco has operated its own bank — Tesco Bank — since 1997. There, customers can make deposits and get Tesco credit cards, or they can apply for loans, mortgages and insurance through Tesco (which are run by outside companies but rolled into the Tesco brand). Currently, Tesco Bank claims to have over 6 million customers. No retailer in the U.S. has such a comprehensive financial services system, but some retailers, like Macy’s and JCPenney, have used retail credit cards as a significant revenue stream.

Shortly after Tesco launched its bank, a number of other retailers joined, including its two major grocery competitors: Asda and Sainsbury’s, which rolled out Asda Money and Sainsbury’s Finance. But these efforts have largely failed. According to Clive Black, the head of research at the UK-based Shore Capital, these companies “underestimated the power of incumbency of the major retail banks in the UK.” Plus, operating a bank requires keeping significant amounts of cash on hand. In November, Sainsbury’s officially shuttered its Sainsbury’s Finance division due to lack of customers — and it could be the first of many more.

For e-commerce companies operating in regions with little access to credit, fintech might be the future. But in places like the UK, where the legacy banking system has a tight grip, customers have proven to be leery about making a switch.

Slow movement in the U.S.
In the U.S., Amazon made fintech inroads in 2017 with the launch of Amazon Cash, a way for customers to add cash to their accounts at a series of participating stores, including CVS. (Walmart offers a similar program.) Though the percentage of U.S. consumers without bank access is small — about 5.4 percent — that’s still a significant market for Amazon to try to reach. But its offerings stateside represent only a fraction of its banking might in other markets — and that includes a lack of features, like loans, that a large swath of Americans would likely take advantage of.

Another American companies that’s dabbled in fintech is Overstock.com. It operates a financial services arm called FinanceHub, which essentially exists to make it easier for customers to buy goods. But it’s more of a marketplace than a bank or a payments platform: FinanceHub connects customers with outside lenders and companies offering a lease-to-own service.

Capturing customers who don’t have access to credit is one reason why the banking sector has remained so attractive to e-commerce companies. The other major benefit, said Nariyanuri, is that retailers that operate their own banks are able to avoid the transaction costs that come with withdrawing money out of a person’s account. When Alibaba or Amazon run their own payment services, it’s cheaper for them to complete an order.

“Each market is different and the U.S. retail banking market is less consolidated,” said Black, adding that “Walmart would do well to consider and learn from the challenges that the UK supermarkets have faced.” After the initial 1990s hype for supermarket banks, he said, “prior dreams of challenger status are long gone.”

For U.S.-based retailers, the lessons are that the financial services sector is an incredibly complicated market to enter. And while the upside — for example, people using their Walmart to pay their bills — is tantalizing, convincing both regulators and consumers alike to rely on a retailer instead of a traditional bank is not such a simple pitch.