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Amazon partnership with big bank could challenge smaller competitors

If Amazon.com Inc. ends up teaming with a large bank to develop a "hybrid-type checking account," community and regional banks may need to brace for tough competition.

The tech giant has fielded proposals from the likes of JPMorgan Chase & Co. and Capital One Financial Corp., The Wall Street Journal reported March 5. The service would likely target millennials, a demographic banks are eager to win, analysts say.

According to the report, Amazon does not have plans to become a bank. But it could significantly disrupt the industry, Jason Henrichs, managing director of Chicago-based advisory firm FinTech Forge, said.

"Getting the account open is the easy part," Henrichs said in an interview. "Getting that account active is the hard part. This is where Amazon has a leg up on the incumbent bank. They have more active accounts than any financial institution out there, including JPMorgan Chase."

Henrichs warned community banks will need to think outside of the branch to compete with Amazon. The arrangement could give Amazon access to key marketing data — including how much money customers have, and how they choose to spend it. As an added benefit, Amazon could save significantly on interchange fees, he said.

"Think about when Amazon begins to change what your payment experience is in fundamental ways," Henrichs said. "That is groundbreaking in terms of the delivery of financial services."

Viveca Ware, executive vice president of regulatory policy at the Independent Community Bankers of America, said community and regional banks are equally nervous the arrangement could mark Amazon's first step into the broader financial arena. She said it is too early to know if the partnership warrants a call to action, and that the ICBA's level of concern will vary, based on how the arrangement is structured.

The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency declined to comment on how the partnership would be regulated. If the product is marketed as FDIC insured, Ware said it would "certainly have to comply with all of the applicable rules that govern deposit insurance."

"We just don't know what they're planning," Ware said in an interview. "Maybe regulatory approval is not necessary. Maybe this is just a situation where two entities come together to share something."

Nessa Feddis, American Bankers Association's SVP and deputy chief counsel for consumer protection and payments, said Amazon clearly "thinks it needs a bank" to step into the space. In 2006, banks and their lobbyists rallied to stop Walmart from receiving a bank charter. The FDIC responded by instituting a six-month moratorium on industrial loan company applications. ILCs are companies that lend money, but may be owned by non-financial institutions and can be regulated differently than banks at the federal level.

It's a very competitive industry," Feddis said in an interview, "and any arrangement will be entering a very competitive market. Ultimately, as with any other idea, time and consumer response will tell."

Analysts said the arrangement would provide the partnering bank with access to millions of new customers, amassing low-cost deposits and ties to potential borrowers.

Amazon already offers a co-branded credit card with JPMorgan. In January, the two companies disclosed a partnership with Berkshire Hathaway Inc. aimed at reducing healthcare costs for their respective employees.