Amazon is circling a business that most big banks have left for dead: cheap checking accounts.
The online retail giant is reportedly looking to partner with either JPMorgan Chase, Capital One or another bank to provide checking accounts to younger and lower-income customers—presumably for a low or no fee. The move comes soon after Bank of America got rid of its only checking account that was essentially free, which appeals to that same demographic and is scarce among the big banks.
While there no details on what Amazon’s checking accounts would look like, the company’s recent moves offer some clue about who it wants to attract. Last year, it began offering a discount on Prime memberships to Americans who relied on government-funded food assistance. This month, it expanded the discount to recipients of Medicaid.
The result? The percentage of households with income of less than $50,000 that use Prime has increased to 56% from 51% in just six months, according to a note from Justin Post, an analyst at Bank of America Merrill Lynch. As with its Prime discounts for lower-income customers, “Amazon may want to offer checking incentives to drive customer lock in and higher long-term retail sales,” he wrote.
What Amazon’s checking account could look like
Amazon checking could be similarly successful, and not just with lower-income Americans. Almost half of younger consumers between 18 and 34 would consider a checking account from the e-retailer, according to a recent survey from Phoenix Synergistics, a market research firm. Amazon could amass 70 million checking accounts in just five years, a recent report from Bain & Company estimated; such a customer base would rival that of the largest banks in the U.S.
Amazon’s advantage is that, unlike big banks, it doesn’t need to sell other financial products such as mortgages, auto loans or brokerage accounts that younger and lower-income customer may not need or want, to be able to provide free checking. But it could bundle the checking account with other services it provides and that these customers want.
“For Amazon, the checking account doesn’t need to be a moneymaker because the company is already making money off of you,” says Bill McCracken, CEO of Phoenix Synergistics. Indeed, the company might even restrict access to cheap checking to those who are loyal, and lucrative, Amazon customers. “If you’re a Prime or regular customer,” McCracken says, you might have the option to add checking for, say, “$2 a month as long as you buy X amount of groceries a month from Amazon. Suddenly that makes sense to people.”
The state of free checking
While there’s plenty of startup money going to personal loan companies serving underbanked populations, only a sprinkling—less than 1%—in the last decade has been earmarked for fintech companies providing prepaid cards and other basic bank services, according to a ValuePenguin study of investment dollars in fintech companies focused on underserved Americans.
When Bank of America shut down its eBanking checking account, customers lost the opportunity to have the $8.95 monthly fee waived by meeting the relatively low hurdles of opting for online statements and avoiding in-person teller visits. Now, former eBanking customers must pay $12 a month if they don’t keep their balances above $1,500 or have direct deposits of $250 or more a month.
“Because most brick-and-mortar banks will only waive their monthly checking account fees for customers who use direct deposit, it's harder for lower-income account holders to obtain truly free checking services at traditional institutions,” says Chris Moon, ValuePenguin’s banking analyst.
How to get free or low-cost checking now
The most active players still offering free checking are online banks, such as fintech startups; major financial institutions that aren’t banks—such as Discover and Charles Schwab—and online-only subsidiaries of small regional banks, Moon says. These providers typically have done away with physical branch locations and use that overhead savings to fund free or low-cost checking accounts accessible online or by mobile app, he says.
Still, many require you to jump through certain hoops before bestowing free checking. Among the most common requirements are:
- Minimum monthly direct deposit, often up to $500 from payroll or the government,
- Minimum daily balance,
- Minimum number of monthly debit card purchases,
- And minimum amount to open an account.
The Walmart example
There’s also Walmart’s GoBank checking accounts, that charge $8.95 a month, which is waived if you have a $500 monthly direct deposit from your employer or the government, such as Social Security. GoBank also offers an exemplary tale of a retailer successfully getting into the banking business, says Michael Moebs, economist and CEO of Moebs Services. But unlike Amazon, which is merely looking to partner with a bank, Walmart actually bought a bank to offer these services to its customers. That could be a key difference.
“On one hand, I would love to see Amazon get into this, for price transparency,” Moebs says. “On the other hand, I question if Amazon fully understands what they will be facing.”
Time will tell. If Amazon succeeds on the checking front, it might not be long before it will offer mortgages, insurance and other financial products, too.