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Amazon.com Inc.'s latest push into the payments industry put some fintech investors on edge, but analysts disagree on how much of a threat the e-commerce behemoth poses to digital payments companies and card networks.
Amazon is reportedly offering discounts to smaller merchants to accelerate adoption of Amazon Pay, the retailer's latest attempt to rival PayPal Holdings Inc. PayPal's shares traded down immediately following the news, but several analysts said the overhang should dissipate.
The share decline was "an overreaction," Wedbush analyst Moshe Katri said in an interview.
As soon as Amazon's name is mentioned in connection with payments, the market panics because Amazon has a "cannibalizing impact on every industry it touches," Katri said. "This is a market where you will see your typical investor selling before thinking about whether they want to sell or not."
Investors appeared to shake off the concerns. PayPal shares rose more than 7% from May 4 to May 10. The SNL U.S. Financial Technology Index jumped 3.15% over the same period.
Bernstein analyst Harshita Rawat said the announcement is not "new news," as Amazon has spent the past year doubling down on its efforts in the payments industry: It rebranded Amazon Pay, launched Prime Reload and Amazon Cash and is reportedly considering adding peer-to-peer payment capabilities to its virtual assistant product Alexa.
Both PayPal and AliPay, built on e-commerce giants eBay Inc. and Alibaba Group Holding Ltd., have valuations above $80 billion. "Why wouldn't Amazon want to build one of those?" Rawat wrote in a May 3 note.
In order to gain significant share in the already-crowded merchant processing space — major competitors include PayPal, Square Inc., Global Payments Inc., First Data Corp. and Worldpay Inc. — Katri said Amazon needs to integrate payments capabilities and gain merchants' confidence.
"In the past three to four years, it's been less about just processing transactions. It's been more about providing merchants with value-added solutions and products," the analyst said, highlighting Square's fleet of software capabilities. "Amazon doesn't have that yet."
Amazon poses a long-term threat to PayPal, while card networks like Visa Inc. and Mastercard Inc. face "brand obfuscation, pricing pressure and yet another formidable payment wallet to contend with," Rawat said.
But Katri believes Amazon will only pose a "real detrimental challenge to the ecosystem" if it builds or acquires a bank that can underwrite cards. That move would impact digital merchant processors as well as card networks like Visa, Mastercard and American Express Co., he said.
* Elsewhere in fintech, Goldman Sachs Group Inc. and Apple Inc. teamed up to launch a credit card that will carry the Apple Pay brand.
The announcement came just days after Goldman said its board green-lighted launching a bitcoin trading desk. The move is the bank's latest "in a series of step-out strategies to expand its consumer lending activities while utilizing its growing deposit base and in-house technology resources," rating agency Fitch wrote.
* Also this week, Cameron and Tyler Winklevoss, twin brothers of Facebook fame and founders of virtual currency exchange Gemini, secured a patent for technology to settle exchange-traded products holding cryptocurrencies. In March 2017, the SEC denied a request by Winklevoss Bitcoin Trust to list a bitcoin ETF for trading on a Bats Global Markets Holdings Inc.-operated exchange.
Following the December 2017 launches of bitcoin futures on CME Group Inc. and Cboe Global Markets Inc., many industry experts thought bitcoin ETFs were on the horizon. But the U.S. SEC dashed those hopes in January when it again expressed concerns that the funds could harm mom-and-pop investors.
Another exchange, Intercontinental Exchange Inc., is reportedly working on an online trading platform to allow large investors to trade bitcoin. ICE, which owns the New York Stock Exchange, first entered the cryptocurrency economy in January with its launch of a crypto-focused data feed.
* On the digital banking front, Brazil's Neon Pagamentos SA formed a strategic partnership with Banco Votorantim SA to handle Neon's payments accounts. Days earlier, Banco Central do Brasil ordered the liquidation of Neon Pagamentos' former partner, Banco Neon S.A., a digital financial services firm launched in 2016, citing regulatory breaches.
A recent report from S&P Global Market Intelligence explores how banks and insurers are embracing fintech innovation. The report looks at recent trends and provides outlooks for the insurtech, digital lending, digital investment management, digital banking, payments and distributed ledger technology sectors. Click here to read the report.