You might have heard some rumors about Amazon working on the Mobile merchant acceptance (Square-like solution). This may a big opportunity for Amazon to enter the retail payment market and shake the current place including Square, Paypal and others.
A great strategy and a superb execution (both possible from the Amazon folks) can make it a real threat to Square. Here’s how:
1. Any new solution in the payments arena need to greatly benefit the consumers AND the merchants. That means the company should deeply understand the consumers, merchants and the consumer-merchant dynamics (Assets)
2. Obviously, the benefits should be much more than those of the current solutions. (Carrots)
3. There must be a high barrier to entry to stop anybody else from offering the solution. (Extremely difficult for others)
4. There must be ubiquity of point-of-presence/terminals/apps/devices controlled by the company. (Ecosystem control)
5. Not to mention, there must be a will-power to sustain the bleeding till everybody else lose. (Loss from this service, but extreme benefits to its main business)
Let us look at Amazon from all these angles:
1. Assets
In my view, there is no other company that better understands the consumers and merchants than Amazon. Amazon’s revenue in 2011 was close to $50b out of an estimate $1 trillion global e-commerce volumes. (and they are operational less than 10 countries) Estimates are that they have around 130m customers. Having done and facilitated hundreds of billions of dollars worth of business over the years, they know what ticks and what doesn’t between the consumer and the merchant.
2. Carrots
Oh, boy. Doesn’t Amazon know how to show carrots and influence the consumers? Amazon Prime? The low-cost smartphone? Price-checker apps, lightening deals to name a few on the consumer side.
Amazon Capital services (merchant financing), Subscription-deals to get repeat business, The low-cost hassle-free Amazon Fulfillment services to entice the merchants
3. Barrier to entry
The secret to Apple, Amazon, Google’s success. They have created their ecosystem with several products/services/arrangements that a product/service in isolation CANNOT be easily replicated by others at the same price-point. Do you think anyone can duplicate iOS or Android and give away free? Ask Microsoft! Can anyone replicate Amazon Prime at that cost? They must be nuts! Can anyone compete with Fire at that price point? Well, Google but not many others.
The point is that each of these products/services fuels the main business – more searches (Google), more sales (Amazon), stronger and bigger ecosystem (Apple) even though they lose money. Amazon knows the art!
If Amazon can subsidize the card payment fee (say, to < 1%), they can still benefit from the additional retail merchants that they can garner. Expanding their ecosystem at a 1-2% cost (the average card fee that they could potentially subsidize) immensely benefits Amazon.
Can Square subsidize the credit card fee? Can PayPal do it ? (not at least without re-strategizing with eBay) Can CyberSource do it? Can the incumbent acquirers, ISOs do it? Can Groupon continue to subsidize it for long? Can startups like Levelup sustain their 0% fee model for long? Nope!
4. Ubiquity
The key to thriving in this industry is ubiquity – quickly. Both on the consumer side (wallet) and on the merchant side (acceptance)
Square is increasing its merchant point-of-presence by distributing its dongle free. They are yet to increase their consumer point-of-presence.
Paypal has a good 120m presence with the consumer side but yet to catch up on the merchant-side.
Google has a great advantage with its Android ubiquity but its NFC strategy is killing them. Until they come up with a non-NFC strategy, they will not stop suffering from the low usage. On the merchant side, well, they are strategizing with Verifone, First Data.. it is so.. yesterday!!
Amazon has a good chance. With a 130m consumer base – a great start on the wallet side! With a decent merchant acceptance solution deployed on Fire, iPad, Android tablets and smartphones, it can quickly rake up the market share – provided if it uses the assets and carrots right. With its own Appstore, it has better control than Paypal, Square and other smaller players.
5. Long loss-sustenance will-power and capability
Subsidizing the cc fee is not a must to an Amazon payment strategy. Even competing with Square, PayPal-fee levels will also work if its other strategies are right. But any subsidy here will blow off its opponents – yes, including Square.
Square cannot subsidize the cc fee. It is under pressure to grow and perform at sky-high valuation. It needs to survive and it cannot afford to lose money on this.
PayPal cannot subsidize if its strategy doesn’t involve eBay heavily. Google doesn’t have its strategy right, even if it subsidizes.
If at all any company can subsidize, it is Amazon and it can for longer periods of time. Amazon Prime is the best example. It may have gotten the emotional connect with its loyal users and it may have gotten more loyal users, but it is bleeding.. and heavily. Last year (2011), Amazon spent almost $4b on shipping fees while it got paid less than $1.5b from Prime and other shipping revenues.
This will-power to sustain loss for long periods seems to be in the DNA of Amazon. Isn’t it how it grew up and survived in the first place?
The retail enemies
Oh, yes - I haven’t forgotten to talk about the retail enemies of Amazon. The Amazon-beaten retailers! Walmart, Target, Best Buy – some of the best known haters of Amazon. And even some of the mom-and-pop stores and boutique stores hate Amazon to the core.
But if you look at the retail spending, there is plenty of businesses that won’t mind Amazon doing the payments for them and getting more customers. The food services industry, gas stations, vending, direct selling, instant-gratification merchants, etc.. totaling more than $1 trillion! Don’t forget some smaller stores in other industries who wouldn’t mind selling their stuff through Amazon, albeit at lower margins.
A quick look at the overall retail market in the US and a potential addressable segment for Amazon is as follows. One could argue with me on a different opinion on some of the segments, but remember – there are always exceptions 
These are some of the segments where Square is making in-roads and roaring along. A lower-cost payment option with better new-customer tactics from Amazon can throw Square out of the room.
But Amazon needs to act fast. Merchants don’t like changing their systems too often. Before Square can go round, Amazon must act! Here are some quick products they can develop in the retail payment space.
