5 of Amazon's innovations in card payments

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Amazon is working aggressively to change the way people shop — especially in the grocery space — but not all of its activities focus on products and store design. The e-commerce giant has also influenced a lot about how people use their payment cards.

An employee seals a delivery box with tape with Amazon Prime and Amazon Premium branding at an Amazon.com Inc. fulfillment center in Peterborough, U.K., on Tuesday, Nov. 15, 2016. The online retail giant needs smart engineers to help expand its cloud computing division, automate warehouses and develop new gadgets like the voice activated Echo speaker. Photographer: Simon Dawson/Bloomberg

Simon Dawson/Bloomberg

Debit rewards

In a move that will certainly cause friction across the card payments industry, Amazon recently announced a service called Amazon Prime Reload, which incentivizes newcomers to the program to load funds using a debit card or bank account with a 2% cash back on purchases.

It’s designed to increase enrollment in Amazon Prime, the $99 per year membership program that provides discounts and access to a range of goods and services, including video streaming and two-day shipping. Prime Reload focuses on treating an Amazon account as a stored value account to decrease purchase friction and to reduce transaction costs.

After enrolling a debit card and bank account (Amazon chooses which to use when processing reloads), the next step in the process is to load value to the shopper's Amazon Balance with a $100 load set as the default and emphasised in bold. The 2% cash back is not provided at the time of purchase, but at the time of reload.

Amazon is subtly guiding the end user to load at least $100 to the account for and to burn through this to earn rewards. Psychologically, it is also abstracting the funds from traditional payment media, presumably to make the value stored by Amazon “fun money”, rather than a value that is coming directly from the weekly budget. Its use of the phrase “Gift Card Balance” is somewhat telling - this money is a gift, it just happens to come from yourself.

The launch of Amazon Prime Reload will not be welcome news to card networks, issuers and traditional retailers.

The banks and card networks fought relentlessly with PayPal over the years against its use of a similar practice of using linked bank accounts to cut its own payment costs. Visa and its peers finally convinced PayPal to change its ways, but it seems now that this battle was fought on the wrong front.

If Amazon succeeds in convincing shoppers to use their Amazon Balance instead of a payment card, issuer revenues from Amazon will dip dramatically as the retailer shifts more reload volume to ACH.

Prime card rewards

In January, Amazon revamped its cobranded rewards card, adding a higher tier of rewards for people who pay a $99 annual fee — as 65 million people already do — for Amazon Prime membership.

The strategy is at odds with that of most credit card issuers, which market the perks of using their credit cards and use the lavishness to justify an annual fee. In Amazon's example, the company has sold its customers on paying the fee for a growing range of services including expedited shipping, video streaming and early access to deals; the credit card would just be one more benefit for a cost consumers already pay.

The Amazon-branded Visa card, issued by JPMorgan Chase, has no annual fee but its rewards are less generous for non-Prime subscribers, who get a mere 3% back for money spent on Amazon compared to Prime members' 5% reward.

The reward structure allows Amazon to offer a premium reward card while bundling the premium fee as part of a service that the majority of its customers already purchase. It also makes Amazon's credit card more enticing at a time when the e-commerce giant is experimenting with new services that could ramp up its customers' spending.

A virtual card in Apple's wallet

Amazon is lending its considerable brand and heft to a cash payment model that borrows a vital piece of real estate from Apple Pay.

Called Amazon Cash, the feature allows cash-carrying consumers to add funds to their Amazon.com balance by presenting a bar code to a cashier at a network of partner retailers. 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.

Systems like this are not new, and earlier models relied on consumers setting up a cash load online and then presenting a printed receipt, as was the case when Walmart introduced a similar service in 2012. Amazon's twist is keeping the experience decidedly digital, allowing consumers to store a reusable Amazon Cash bar code in Apple's wallet app or on the home screen of Android devices.

Amazon can also pair the program with its strategy to build a brick and mortar footprint by tying some elements of traditional retail with its e-commerce brand. Amazon is building Go, an experimental store that doesn't require a checkout, instead using in-store sensors to charge a user's Amazon account for in-store shopping. Amazon is also opening a chain of bookstores, and is expanding its distribution and fulfillment network in the U.S.

Reward points integration

Many card issuers are still struggling with getting consumers to value their rewards points like cash, but Amazon solved that problem over half a decade ago.

In 2011, Amazon replaced the voucher-based redemption process for its cobranded JPMorgan Chase credit card with a digital system that lets consumers spend points directly on Amazon's site.

The same year, other issuers flocked to join the system, with American Express and Discover joining by October. Amazon displays a points balance on the checkout page, giving shoppers the option to use that balance toward part or all of a purchase.

This system may be more commonplace today, but it was no small feat to put in place. Discover said it took up to a year to set up.

Rethinking retail

Perhaps Amazon's most aggressive move with card payments is eliminating the need to pull out a card even in a physical store setting.

While most retailers are focused on digitizing cards into mobile wallets to use at checkout, Amazon is focused on removing the checkout process almost entirely.

The Amazon Go concept senses customers and the products they pick up, charging them for their purchases upon leaving the store. Its new AmazonFresh Pickup store is somewhat similar, in that it lets people pick up groceries without leaving their cars, as long as they order ahead.

Amazon's $13.7 billion deal to buy Whole Foods now gives it a playground of 465 store across the U.S. and U.K. to experiment with, potentially bringing all of these concepts to shoppers across the world a lot sooner than many anticipated.