Financial firms should fear, but also admire, Amazon’s rewards program

Amazon Prime might have seemed like a gimmick to some at first. Discounts on shipping and free video content are tempting to consumers, who would have to pay an annual membership fee. But it was hard to fathom the payoff for Amazon, especially with binge-watching customers who rack up a lot of discounted shipments.

But years later, the success of the strategy has positioned Amazon to compete in more areas — including in payments — and greatly expand scale. The large-scale outcomes of what seemed like a small-scale strategy offer valuable lessons for the financial services industry. For the payments industry, the success of Prime also poses a serious competitive threat.

Amazon’s latest splash is a Prime rewards program that gives cash back to shoppers without their having to pay with credit cards to reap the reward. The new program, called Amazon Reload, offers Amazon Prime users 2% cash back each time they reload their Amazon gift card balance with funds from a debit card or bank account.

Susana Gonzalez/Bloomberg

By incentivizing customers to continually maintain a positive balance in their gift card accounts, Amazon increases the odds of customers making more impulse purchases. It also simultaneously reduces the company’s payment acceptance costs by driving spend volume from credit to debit. That last part should concern any credit card issuer that sees large recurring transaction volumes coming from Amazon (translation: pretty much all issuers).

However, there is a larger lesson that all financial institutions should learn from Amazon Prime Reload.

Amazon is by no means the first retailer to try and steer their customers’ payment behaviors in order to drive down their costs. Indeed, Amazon’s largest competitor, Walmart, has been working for years to move their customers away from Visa and Mastercard.

In 2012, Walmart joined with other retailers to form the Merchant Customer Exchange, a retailer-owned mobile payments venture. Its main platform was a smartphone app and digital wallet known as CurrentC, which was finally shut down last year after repeated delays. That failure story offers an interesting contrast with Amazon Prime Reload.

The underlying mechanics of both services are fairly similar — a digital payment interface hooked to a debit card and/or checking account. The critical difference is the way in which the companies built the services into the consumer-facing products. CurrentC was a clunky mobile payments app that wasn’t easier to use than a physical payment card. The only daylight it ever saw was in a small pilot in Columbus, Ohio. By contrast, Amazon Prime is a multifaceted entertainment and shopping service featuring video and music streaming, unlimited photo storage, free e-books and magazines, and, of course, two-day free shipping. According to a recent estimate, the service has approximately 80 million members across the U.S.

Put simply, Amazon Prime was built for customers. CurrentC was built for merchants.

The difference isn’t trivial. The intended audience and the intended outcome sought from product design matters. There is a reason Silicon Valley companies focus (sometimes to their detriment) on growing their user bases and achieving scale over generating revenue. Companies focused on growth must continually work to strengthen the engagement customers have with their products. And as Amazon can surely attest, steering behavior (in payments and elsewhere) is much easier with an active and engaged customer base.

We are starting to see financial services firms incorporate this lesson. Forward-thinking financial institutions are starting to invest in value-add products and services that will strengthen engagement with customers and noncustomers alike in the areas of savings, financial health and even estate planning. We’ll see if these institutions can muster the same patience and discipline that Amazon has shown with Prime.