A Payments River Runs Through It
Amazon.com long ago expanded beyond its online bookselling franchise, and
now it’s moving beyond retailing into the world of payments. It’s after transaction
revenues and lower acceptance costs. But, with Flexible Payments, it’s chasing
what could be a much bigger payoff.
With the notable exception of Target Corp., most brick-and-mortar retailers have gotten out of
the payments business in the past decade by selling their credit card portfolios. And in the virtual
world, e-commerce retailers have been largely content to let bank-owned merchant acquirers,
other processors, and a new crop of prepaid card providers and other specialist vendors handle all
of their payment needs.
But then there’s Amazon.com Inc., the No. 1 online retailer. Through a series of recent moves,
the Seattle company that started out peddling books on the Web in 1995 now offers merchants
and consumers a long list of payment services. In fact, Amazon today does practically everything
payment-related except fund actual loans—but don’t worry, it’s got that base covered too.
“It’s really the quintessential example of a retailer saying ‘I don’t need banks and I don’t need
their payment products,’” says Steve Mott, a former MasterCard executive who heads Stamford,
Conn.-based payments consultancy BetterBuyDesign.
Well, not quite. With Amazon reporting sales of $14.8 billion in 2007, up 39% from $10.7
billion in 2006, and big-ticket items accounting for a growing share of revenues (chart), the
acceptance of credit and debit cards remains critical. But Amazon clearly is not content to have a
traditional merchant account and quietly pay discount rates in exchange for giving its online
customers a familiar way to pay. Consider some of Amazon’s more notable recent moves:
• In December, Amazon took an undisclosed minority interest in fast-growing online loan
provider Bill Me Later Inc. Once the back-office programming work is done, Bill Me
Later will be the only branded alternative payment option besides Amazon Payments
accepted on Amazon.com.
• In August, Amazon unveiled the Amazon Flexible Payments Service, or FPS, a
component of its Amazon Web Services package of tools for software developers. Using
FPS, online merchants can design their own payment systems in which transactions are
processed on the Amazon Payments platform.
• In 2006, Amazon bought a small person-to-person payment company called TextPayMe,
which enabled its customers to pay each other by using text messages on their cell
phones. While that purchase didn’t make headlines, it indicated Amazon wanted to plant
a flag on the far reaches of the payments frontier. TextPayMe now runs on the Amazon
Why do all this, especially when a foray into online payments can mean bumping into powerful
competitors such as eBay Inc.’s PayPal service, the leading alternative in cyberspace, and
Google Checkout, the payment service of search-engine leader Google Inc.?
Amazon, ever guarded about its strategy, would not make an executive available for this story.
Regarding Bill Me Later, an Amazon spokesperson had this to say via e-mail: “We felt it was a
good investment considering that both Amazon and Bill Me Later are committed to making
online shopping even easier and more convenient. We think our customers will appreciate the
option of paying with Bill Me Later along with our other payment methods.”
And regarding FPS, the spokesperson notes that as part of Amazon Web Services, FPS will tap
into a client base of software developers and businesses “that want to use different pieces of
Amazon’s Web-scale infrastructure to build virtually any type of business they want.” Amazon
Web Services customers range from The New York Times Co. to startups such as Ooyla, an
interactive video service, to search engine Powerset Inc., a potential Google rival.
“The point of Amazon FPS, from a business perspective, just like our other services from
Amazon Web Services, is to build a meaningful software developer business for Amazon by
charging developers to use these services,” the spokesperson says.
But there’s likely more involved than revenues from application developers. Merchant-acquiring
analyst Adil Moussa of Boston-based Aite Group LLC believes Amazon is offering its broad
FPS payments menu “as a way to move more merchandise.”
“I don’t know if their intent is to make money on payments or to have payments as an integral
part of something that is bigger,” he says. “I’m leaning toward the second one.”
The Bill Me Later investment gives Amazon a way to provide loans to its customers. The
investment also enables Amazon to share in the growth of a hot property with about 3 million
consumer users that’s attracting a host of new merchant clients, including airlines (“Alternative
Payments Head for the Skies,” January).
“Given Bill Me Later’s very strong growth rates, they’re obviously attracting attention from the
heaviest of the heavyweights,” says Jim Okamura, senior partner at Chicago-based retail
consultancy J.C. Williams Group Ltd.
There’s a third advantage in the Bill Me Later buy: lower acceptance costs for Amazon. Aite’s
Moussa estimates Amazon’s credit card interchange costs as a percent of the sale are in the
1.75% to 1.85% range, while a Bill Me Later transaction will cost probably 1% to 1.5%.
Mark Lavelle, vice president of corporate development at Timonium, Md.-based Bill Me Later,
won’t say exactly how much a Bill Me Later transaction will cost Amazon, but says the typical
transaction cost is 30% to 40% lower than a merchant’s blended credit card rates. Nor would he
say how much Amazon’s investment was, though one source who asked not to be identified puts
it in the neighborhood of less than 10%. Amazon does not have a seat on Bill Me Later’s board
Lavelle calls Amazon’s endorsement of Bill Me Later to its customers “a huge plus. This is all
part of growing what is becoming the largest merchant-centric network ever created. We view
our role here as to help merchants take back the point of sale.”
Bill Me Later offers financing options for more than 700 brands sold online, according to
Lavelle. The company had Amazon on its list of prospective clients for some time, not
surprisingly, but the investment came as an outgrowth of talks about acceptance. Lavelle
wouldn’t say exactly who came up with that idea. “We weren’t actively seeking investment,” he
says, adding, “We certainly viewed it as a reasonable thing to do.”
By offering customers financing options—a typical one is no interest for six months—and a fast
checkout process, Bill Me Later boosts online merchants’ ability to convert lookers into buyers,
Lavelle claims. Bill Me Later cites 2007 studies by Mercator Advisory Group and Forrester
Research that say the Bill Me Later option can lift average tickets by 75% to 150%, with
anywhere from a third to nearly half of the resulting transactions coming from new customers to
the retailer. “The Web is about buying, it’s about impulsivity,” he says. “The extent to which you
remove barriers between what the customer wants and how you get it, the higher the conversion
Meanwhile, Amazon is positioning the Flexible Payments Service as a highly programmable
payment service that adds new features to those already available to developers for the past five
years through Amazon Web Services, including on-demand storage and computing power.
FPS allows merchants and buyers to set rules determining such factors as minimum and
maximum allowable transaction amounts and whether payments are one-time or recurring. These
rules, or preferences, can also determine which payment methods buyers may use—credit cards,
electronic checks, and Amazon Payments balance transfers are allowed—and who pays
Amazon’s transaction fees.
The FPS platform supports a variety of services e-retailers might like, including micropayments
and the ability to integrate payments with Web-based social networks such as Facebook, notes
Mitch Muroff, who leads the e-commerce practice at San Francisco-based consultancy Edgar,
Dunn and Co. Such a system gives FPS users “access to those services without having to develop
them internally,” he says.
Pricing is 1.5% plus a penny for Amazon Payments transfers, 2% plus a nickel for automated
clearing house debits, and 2.9% plus 30 cents for payments backed by credit cards. This pricing
compares favorably with that of PayPal, which enables card, ACH, and prepaid transactions, and
Google Checkout, whose e-wallet feature for now allows only credit card charges.
For transactions under $10, though, Amazon’s credit card fee rises to 5% plus a nickel, and for
Amazon Payments balance transfers of less than a nickel, the company levies a fee of 20%, with
a minimum fee of a quarter of a cent.
Qualified developers can get volume discounts on credit card transactions if they submit at least
$3,000 in transactions monthly. The lowest-cost tier, for monthly volumes of $100,000-plus,
assesses 1.9% plus 5 cents.
Amazon Web Services has 330,000 developers, but the spokesperson would not say how many
developers or merchants use FPS. The company identified four merchants when it announced the
service back in August, including Jungle Disk Inc., a Dacula, Ga.-based online-storage and back-
up service. Dacula’s storage system is based on the Amazon S3 platform. In fact, chief executive
Dave Wright says his firm is “probably one of the biggest active users [of FPS] right now. To
date, it’s been pretty good.”
Wright declines to say exactly how many customers Jungle Disk has, but he says it’s in the “tens
of thousands.” He says getting his customers to use Amazon Payments was no problem because
Amazon provides the operational foundation of his company. “Essentially our customers already
have Amazon accounts or have a relationship with Amazon,” he says.
That’s often not the case with another FPS pioneer, Buxfer, a Sunnyvale, Calif.-based online
personal-financial-management service aimed at young adults. Buxfer facilitates payment
transactions for individuals who, for example, may be splitting a tab from the local pizza joint
(Buxfer’s Web site says to think of bucks and transfer).
Shashank Pandit, 25, who took a leave from his doctoral studies in computer science at Carnegie
Mellon University to co-found Buxfer in late 2006, expresses satisfaction with the technical
capabilities of Amazon’s FPS platform. But a drawback is that both sender and recipient must be
registered on Amazon Payments, he says. Buxfer has initiated “300 to 400” transactions since
launching its payments component in September, says Pandit, who is building the business with
Ashwin Bharambe, 28, also a Carnegie Mellon computer-sciences graduate student.
“It’s a bit low, and one of the reasons is both of the guys need to have an account,” he says.
“There’s a big inertia for people to get on a new system.” Pandit says “the process should be
streamlined” to make it more like PayPal’s, enabling senders to send payments to recipients’ e-
Pricing is another drawback, he says. Buxfer currently is absorbing Amazon’s payment fees.
“For bank transfers, they charge over 1.5% of the transaction amount. Given our user base of
roommates and young people who are usually stingy, these surcharges are also a big deterrent for
people to start using Amazon,” he says.
Most customers of yet another initial FPS user, Seattle-based Beet Inc., which launched its
Necodo online-music service in September, already have an Amazon Payments account because
they have bought from Amazon’s book, music, or other e-commerce sections, according to Vasili
Zolotov, Beet’s chief technology officer. Like his cohorts at Jungle Disk and Buxfer, Zolotov has
mostly praise for FPS’s technical capabilities. But he too has some issues over Amazon
Payments pricing, particularly fees charged against stored-value amounts held by Amazon.
Some online merchants believe Amazon is engaging in “double-dipping” because they already
have paid an acceptance fee when Amazon first charged the customer’s credit card for the
stored-value balance, according to Zolotov. “The rumor is they’re going to change it because
there’s been a bit of an uproar,” he says. Amazon won’t comment about its pricing.
While pricing frequently is controversial in payment systems, Amazon in another respect is in a
position to capitalize on consumer concerns about the security of their personal financial
information because of data breaches in recent years, according to Muroff of Edgar, Dunn. FPS
users don’t see their customers’ personal financial information, including payment card numbers;
Amazon holds it. “They [Amazon] have not really made a point of that,” Muroff says, but he
adds: “that’s more of a reason why consumers might be comfortable with the [Amazon] payment
Amazon’s challenge now will be to take whatever bugs it finds out of FPS, and make any pricing
adjustments and other changes that will keep its online retailers and their customers happy.
“Give consumers choice in payment systems and it will pay back in better conversion rates and
new customer acquisition,” says consultant Okamura.
And if that happens, it means more transactions on the Amazon Payments platform—which
undoubtedly means Amazon will get its own payback.