Understanding Amazon's Fintech And Buy Now, Pay Later Ambitions (NASDAQ:AMZN) (2024)

Investment Thesis:

The objective of this article seeks to analyze some of the benefits that would arise from the Amazon and Affirm Buy Now, Pay Later (BNPL) Partnership.

This was the official news release from Affirm: "It will be the first buy now-pay later purchasing option for Amazon (AMZN) customers and is seen as helping shoppers with buying larger-ticket items. A flexible payment solution will soon be available to Amazon.com customers at checkout."

This BNPL partnership could be the key to unlocking Amazon's fintech ambitions to the world. As Amazon gains better understanding and access to the consumer through embedded payments processes, this could ultimately lead towards an Amazon Financial Services or an Amazon banking institution. Due to a large amount of consumer data, financial resources, and how embedded Amazon has become to the average individual/consumer, this is no longer a crazy idea. After studying the BNPL market for the last couple of months, I plan to discuss the Amazon BNPL impact. I will explain how I think BNPL could unlock or create future opportunities for Amazon to expand its fintech services.

The article is broken down into three sections: First, understanding Amazon's fintech, and payment business lines. Secondly, we evaluate the benefits that Amazon will gain from a BNPL solution, and lastly, I tie together all the different aspects into giving us an insight into the future direction of Amazon's financial ambitions. Ultimately, we conclude with valuation and discuss why there is a compelling reason to own Amazon's stock at this price.

History of Amazon's Fintech, Payments, and Financial Services:

One of the biggest aspects of Amazon's business that does not get much attention is all the incredible sophistication of Amazon's fintech and financial services. Amazon has business-lines in Amazon Pay for merchants, Amazon Payment Organization, Amazon Cash, Amazon's Lending, Amazon Card services, Amazon Financial Services outside the US, and more on Amazon's Fintech Lab. More can be seen below:

[Source: CB Insights-Amazon Financial Services]

Amazon has a strong fintech team. For example, they have a payments organization that spans 8-teams across their payment infrastructure and consumer checkout experience employees. .

Amazon Pay:

[Source: Amazon payments]

Let's explore Amazon Pay briefly since this business might be popular with third-party sellers or merchants on Amazon. Some people might not be fully aware that this is a service that ensures effortless payments on all Amazon platforms.

Amazon Pay is their online payments processing service. This Payments team focuses on Amazon's consumer base allowing them to pay with their Amazon accounts on external merchant websites. They support business-to-business lenders and support the 3rd party PSP. Further, they manage the payments flow of Amazon's website, Alexa, Gift cards, and the core payment acceptance infrastructure. Amazon Pay Express is another aspect that helps merchants with selling their products online. Amazon partners very closely with Chase, a leading provider in CNP payments. A survey report estimates that Amazon Pay has grown into a major online payment provider with a 22% user share in the US as a result of the breadth of the network that the service reaches.

Amazon Go:

[Source: Amazon Go]

This is a Cashier-less Just Walk Out technology being rolled out at Whole Foods Grocery and gradually in other stores. According to a recent SA news, "The technology uses a combination of computer vision, sensor fusion and deep learning. Customers at the participating Whole Foods who wish to use the cashierless checkout can either scan a QR code in their app, use palm recognition through Amazon One or quickly insert a linked debit or credit card. The customer shops like normal, uses their authentication method again on the way out and Amazon charges the linked payment account for the groceries." This is another area that many investors remember is an avenue that amazon is building to test out cashier-less payments. There was recent news on Seeking Alpha showing that Amazon is making further advancements on this technology ever since their initial announcement in 2019. For more on the release, see his piece, Amazon brings cashierless checkout technology to two Whole Foods stores (NASDAQ:AMZN). If Amazon Go payments successfully roll out this unique and innovative product at scale, they could try to sell the software to other merchants or smaller grocery stores which could serve as a revenue driver for them similar to how they started AWS in-house and extended it outwards.

Amazon POS for Sellers:

This is still highly speculative but Seeking Alpha had a recent release that described Amazon's push to take on point-of-sale providers, like PayPal (PYPL) and Shopify (SHOP) in the POS ecosystem is growing. According to Forbes, "it is nicknamed "Project Santos" no doubt named after the dog from The Simpsons Santos L Halper. This is another push to make their ecosystem more comprehensive and indispensable. The POS system will have inventory tracking and other features from which users can benefit. It will also provide merchants another option and likely other Amazon-related perks further driving sellers towards the Amazon ecosystem."

Amazon Cash:

[Source: Amazon Cash Website]

Amazon Cash is a form of depository service allowing customers to deposit cash without an account at one of their merchant stores. This cash program bridges the gap between eCommerce and offline commerce. Many customers are also familiar with the process of how cash translates into gift cards and vice-versa for the purposes of shopping. As this business continues to gain traction, it will play a key role in servicing the underbanked without banking services and could play a future role in the BNPL/Debit Card ecosystem.

Amazon Lending:

[Source: Amazon Lending Website]

Amazon lending offers services to both the consumer and business-to-business sector. The offering primarily caters and manages the bulk of the credit for merchants and small medium-sized businesses. On the consumer lending aspect, amazon has tried out Amazon prime store card, prime rewards visa card, and prime cards with Chase bank. There is also Amazon Reload and Amazon Credit Builder. Also, many of the prime cards offer unlimited 5% cash back on Amazon purchases. To further delve into what Amazon is doing in financial services, this article breaks it down.

In general, we see that Amazon has different businesses across Payments, Cash, and Lending. Some of these business lines are more visible internationally or in certain countries than others. There are even much more areas that are being developed secretly within their Fintech Lab launched in June 2021 in Dubai.

Buy Now, Pay Later:

BNPL is simply a service that allows customers to make purchases on eCommerce or instore and pay for it later with four equal repayments. The repayments are interest-free.

For anyone new to the BNPL business model, below is a general breakdown of how the BNPL ecosystem flows. The diagram does a good job of explaining it. Amazon would serve as the Merchant in this example:

[Source: The Generalist Affirm]

Affirm x Amazon BNPL Services:

[Source: Affirm/Press]

Now gradually exploring the official release from Affirm (AFRM) mentioned that the solution will be "helping shoppers with buying larger-ticket items. Select Amazon customers now have the option to split the total cost of purchases of $50 or more into simple monthly payments by using Affirm. Approved customers are shown the total cost of their purchase upfront and will never pay more than what they agree to at the checkout. As always, when choosing Affirm, consumers will not be charged any late or hidden fees." purchases, including those from Whole Foods Market, Amazon Fresh, and certain digital purchases like movies and books, will not be eligible, according to Affirm." More here: Amazon Partners with Affirm to Deliver Pay-Over-Time Option at Checkout | Affirm Holdings, Inc.

Amazon and Affirm are testing with select customers now, and in the coming months, Amazon plans to make Affirm more broadly available to its customers. As at last Affirm's earnings call, Affirm said they are currently testing the feature with a select number of Amazon customers. It is likely the full solution will be rolled out late into Q4 2021 or the first half of 2021.

Split Payments and Smaller Amazon BNPL Services:

Amazon has been offering split payments for consumers. As some consumers are aware, Amazon has offered different forms of BNPL solutions for consumers in smaller versions. However, Buy Now Pay Later at full scale is a different domain and a complete ecosystem entirely from the normal fintech services because most of BNPL bypass the major financial institutions during the transaction. The BNPL loophole is primarily between the merchants, consumers, and the BNPL solution provider. More on this loophole and flywheel effect here. This link breaks down how BNPL avoids the banking networks.

As discussed, below are examples of Amazon's BNPL efforts. Amazon offers paying back in 5 installments if you have good credit. If you have an Amazon Prime Rewards Card, some of these services might be available. However, it may not be widely available.

[Source: TV Wall Mounting Options & Power Bicycle on Amazon's Website/Credit B@lueToothDDS]

BNPL At Scale: Why now for Amazon?

Amazon is known for prioritizing customer experience and driving more eCommerce sales. Amazon is constantly working to increase its eCommerce market share and driving more cart size. Affirm's mission and value proposition aligns very closely in helping Amazon drive towards that goal.

One of the best ways to achieve this objective was to add an extra BNPL feature. With a BNPL solution, the goal is to improve and offer more flexibility at payment selections for customers, improve the customer experience, attract more customers, drive more cart conversions and increase cart sizes for consumers which ultimately will drive GMV sales for Amazon.

It is quite possible that Amazon wanted to fully roll out a BNPL at scale for all consumers across the entire US, but they couldn't easily do it in-house. This would have involved massive capital risks if they didn't have the right underwriting data which ultimately could ruin consumer trust.

Five strategic benefits for Amazon from this partnership:

1. A partnership reduces cost and accelerates time to market: A non-exclusive partnership rather than an acquisition or M&A with Affirm or a different BNPL solution makes it less capital/resource-intensive. Additionally, the data that Amazon gets from Affirm to help with underwriting consumers accelerate Amazon's time to market. If Amazon wanted to build this solution in-house, they would have had to delay a release until 2 or 3-years because they would need to gather lots and massive amounts of underwriting data on consumers' credit purchase patterns before going fully on. Affirm has all this information at its fingertips.
2. Leverage Affirm's BNPL Data Infrastructure: In continuation of the earlier point. Affirm has built a strong AI credit underwriting model over the last decade that has withstood massive shocks and has proven to be efficient, this makes it an extremely easy win for Amazon. In my recent piece, I discuss that Affirm's models have proven to have lower loss ratios while allowing higher rates of credit acceptance than many other lenders. Affirm also has customer clients that are of higher credit quality with better repayment capability because generally, most of Affirm's clients have higher Average Order Volumes consumers. Recently, Affirm has shown to have lower AoV transactions meaning that they are reaching more lower-end consumers which is beneficial to Amazon. To read about this data moat and advantage, visit: Affirm Holdings Moat: Why World's Largest Retailers Want AFRM (NASDAQ:AFRM). This is an infrastructure and risk model that Affirm has iterated over and over in the last decade which gives them validity.
3. Further Drive and Increase Amazon's repeat purchases: One of Affirm's competitive advantages has been its ability to increase AoV transactions and drive improved sales conversion for merchant businesses. Affirm has a lot of data and analytics on the consumer and their purchase patterns especially at checkout. 64% transactions driven by high repeat users in 2020 and a 20% repeat at same retailer within 12-months. At scale, this could have massive and drive almost 5-10% of additional GMV for Amazon at scale if successful. In a recent product announcement, Affirm released Adaptive Checkout, which builds upon their existing product suite and dynamically provides optimized biweekly and monthly payment options for each transaction side-by-side in a single integrated checkout solution. Merchants using Adaptive Checkout in early access have seen, on average, a 26% increase in cart conversion, a 22% lift in approvals, and a 20% increase in sales, compared to offering monthly payments through Affirm alone. This is massive for Amazon's future GMV.
4. Penetrate the payment flow and Loop-in more merchants and consumers into the Amazon Ecosystem:

   Amazon has built a strong Payments value chain and flow stack for successful eCommerce. The payments flow is still one area in that Amazon continues to buffer its strength. Most of the efforts above explain their objectives in this regard. Before going deep, I will use this opportunity to provide readers that Amazon has a cash business and a lending business.

   

   This is an opportunity for Amazon to loop in over 29,000 merchants from Affirm/Shopify and 7.1 million Active consumers that interact on Affirms network into the Amazon ecosystem and payment stack. This will further increase Amazon's market share in eCommerce and enable Amazon to begin gaining more data leverage to further build their Fintech ambitions (depending on their agreement with Affirm).
5. Consumer delight, Data, and Access to Gen-Z: One of the biggest promises from BNPL is that providers like Afterpay (AFTPF) (AFTPY) and Affirm have access to the millennial and Gen-Z consumers. These BNPL Platforms have decades of insights and data on consumer financial decisions and behavior at checkout. Amazon only has one platform data for consumers, but it is not as In-depth on the young consumers and not specialized at capture the little details of millennial behavior at checkout or cart conversion rates. These are areas that Affirm has built as their core specialty and technical aptitude in order to lure in merchants. In addition, based on their partnership with Affirm, Amazon can bolster their offering with even lower (0% APR loans) purchasing plans on a per-product basis which is appealing for younger consumers than credit cards. There is the additional benefit of transparency in the process. Hence, this level of low rates and low prices cannot be easily matched with merchants at this scale today. The reason is that merchants generally have to pay fees to credit card companies like Visa on every transaction, but with BNPL, all that middle-man fees are cut out. Affirm receives a smaller share and the merchant passes it over to the consumer, but overall, the consumer is able to better flexible pricing for their product.

• This is the type of convenience that millennials and Gen-Z and frankly anybody would prefer if you don't have full payment for a major expense. Lastly, Affirm has a consumer loyalty brand and NPS of 78 which is better than Amazon, the banks and companies like Visa - further helping to juice Amazon's brand amongst this important group of consumers. There will be further opportunities for lead generation that Amazon will gain from this deal.

To wrap up this last point, when you combine the key data/insights of millennials, Amazon having more access to these consumers increased cart checkout conversions of almost 50%, and a strong millennial NPS score, Amazon has a lot to benefit from this partnership which will drive bottom-line.

Valuation:

It is important to note that for all the following five strategic benefits discussed above to click together, Affirm and Amazon BNPL will have to be launched at scale. It will likely take another 3-6 months before we can begin measuring its impact.

In the meantime, we can try to estimate the potential of BNPL on GMV. Based on some analysis conducted by Shopify Shop Pay Installments across the U.S, they found that consumers saw 50% higher average order volume when using Affirm's BNPL solution rather than other providers. Amazon already generates almost $58Billion in retail quarterly and almost 200B+ on an annualized run-rate from a combination of their online and physical stores. If we assume that the partnership with Affirm is launched at scale, this could increase GMV by 7-10% annualized, this could almost add almost $8-$10 Billion annually for Amazon. The logic here is that large expensive products where consumers decided to avoid if they have good credit scores - they can easily buy those products and Amazon reduces the need for discounting prices down.

Overall, BNPL could add a slight increment of 7-10% GMV growth rate to Online, physical stores, and third-party seller services due to extra value-add now. Also, include the high margin effects from Amazon Advertising (which Amazon says is currently reaching an audience of 120 million monthly viewers across the U.S). Combine a growth rate of 25% YoY on retail GMV, 3-P sellers growth of 34%, AWS growing at 37%, and Other initiatives/bets (which includes Amazon Adds) growing at 83% YoY. Lastly, Advertising and AWS should increase margins for them.

Hence, as the valuation implies below, Amazon is trading at a discount of 16x FY 2023 EBITDA and an EV/S of 2.7x for FY 2023 Revenues. If those growth rates apply, Amazon will provide tremendous future internal rate of returns for shareholders.

Future BNPL Growth catalyst:

Without going into much detail. Depending on the data that Amazon gets through this deal, it could provide them with insights to begin another partnership with Affirm to gain access to new verticals and new markets such as Travel to manage big travel ticketing & vacation expenses, Cars, Luxury, build-upon their existing Amazon Fashion, and Apparel, etc.

There are also fintech opportunities to integrate BNPL into areas such as Mobile payments and the in-store retail experiences, Athletics, renovation and construction projects, B2B for Amazon Business Prime Payments, Introducing points/ rewards systems in addition to Amazon prime membership. For example, I would not be surprised if Amazon and Affirm launch a travel BNPL rewards program in the future. There are many ways for Amazon to incorporate Prime with BNPL to increase the value proposition for consumers which will further drive more merchants on the platform. This could be a powerful flywheel effect.

Risks/Catalyst:

1. BNPL Capital Concerns: As we get more details over the upcoming quarters, it will be interesting to understand how Amazon and Affirm manage the intense capital requirements to manage BNPL at scale for 150+ million consumers especially if default rates rise. However, Affirm has predictive models that have worked through economic shocks of the last decade, and Affirm recently announced a major $500 securitization debt, for their point-of-sale installment loans, which represented their most successful and efficient issuance to date with attractive terms.
2. Fintech Anti-trust Concerns: Amazon has been keeping its fintech ambitions low-key to remove any potential anti-trust issues towards them primarily because Fintech and Financial Services are such large dominant parts of the economy. Hence, Amazon might continue to slow down any future rollout of products within their BNPL and Fintech aspects which might hinder growth or they may not leverage certain assets to build upon a fully fledge financial solution.
3. New CEO Execution: I believe a primary reason why Amazon's stock continues to underperform the broader market is that the market wants to see how Andy Jassy executes over the upcoming quarters after Jeff Bezos stepped down. Once he begins to beat estimates and exceed expectations, the market would begin pricing in future impacts from Fintech, Payments, and BNPL's impact on Retail GMV which should drive the stock higher.

Summary:

To summarize this article. I first discussed all the major areas that Amazon is currently playing along within Fintech, Banking and Financial Services. Amazon has a robust Amazon Pay business, Amazon Cash, Lending, Amazon Card services, and more on Amazon's Fintech Lab.

Gradually, embedded finance will become a major part of Amazon. Embedded finance is a term for when companies decide to offer financial services to their clients with their proprietary software rather than have to rely on a financial institution or bank to serve that purpose for them. We are beginning to see the evolution of Amazon's BNPL for consumers. This BNPL will further allow Amazon to tap access into the eCommerce and offline markets horizontally and efficiently with this solution.

The major benefits when BNPL is implemented at full scale, 1) Amazon could see increased growth to GMV as a result of Affirm's effect of driving 50% more customer Average order value, 2) Leveraging Affirm's data and credit risk infrastructure which will save Amazon significant costs and increases time to market, 3) Amazon can access a 'friendly' brand to activate their Gen-Z and Millennials consumers, and 4) ultimately looping in over 29,000 merchants and 7.1 million into the Amazon payment ecosystem and 5) Bringing more transactions into the Amazon ecosystem. This BNPL comprehensive solution could strengthen Amazon Pay and increase Data Synergies. This creates a big win-win and value-add for Amazon consumers and merchants.

To better understand the value proposition that Affirm brings to the deal, you read my full Affirm BNPL solution.

Secondly, if you want to further understand more synergies that Affirm will bring, read my parallel piece on Square where I discussed the synergies that Afterpay offers to Square Cash-App Sellers and consumers.

This BNPL partnership will drive a deeper understanding of consumers' credit and checkout behavior. This could be the key to creating and unlocking a future Amazon Credit Card Solution or a banking account feature. The future potential for Amazon in Buy Now, Pay Later and the larger Financial Services/Fintech ecosystem is exponential. As a result, Amazon's valuation currently offers a decent risk-reward.

[Let me know your thoughts on Amazon getting into BNPL: Is it a good or idea?]

Investi Analyst