How Amazon's payments service could solve its biggest weakness against PayPal

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jeff bezos

Getty/Drew Angerer

Amazon CEO Jeff Bezos

Amazon has tried for years to grow Amazon Payments, but the results have been mixed so far.

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The service, which allows customers to make online purchases using the information stored in their Amazon accounts, saw 33 million users last year, up 43% year-over-year, while doubling its total payment volume.

But despite its growth, Amazon Payments is still not available at some of the largest online retailers, including Walmart or Target, giving up a huge chunk of the market to other payment vendors, like PayPal (which now has roughly 200 million users).

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Amazon's biggest weakness against other standalone payment providers is that big online retailers see Amazon as a competitor and fear they might be sharing important sales data by adopting its payments service. It's why a lot of merchants are still hesitant about Amazon Payments, despite the roughly 300 million accounts stored in Amazon.com.

So what can Amazon do to expand its payments service?

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According to Andreessen Horowitz's investor Alex Rampell, that fear of Amazon monitoring data is likely not going to go away anytime soon, even though Amazon denies those accusations. That means Amazon will have to become more creative with its approach.

"Amazon Payments has tremendous amount of potential. But it has to be a little more innovative to make it more attractive and more compelling to consumers," Rampell told Business Insider.

Rampell, who's also cofounded payment service startup Affirm with PayPal cofounder Max Levchin, gave the following suggestions for Amazon Payments to get to the next level:

  1. Go for the long-tail: Instead of targeting the top 100 online merchants, partner with the next million online retailers, who don't view Amazon as a foe but a friend. In most cases, they're likely already sellers on Amazon's marketplace, making it easier to partner up. He sees companies like Uber or Instacart as good possibilities too, because they're not direct competitors. "A lot of the top 100 merchants, I don't expect them to add amazon anytime soon. The next million is where Amazon should do well," Rampell said.
  2. Leverage Amazon's retail service: Create a distributed shopping cart by offering discounts if the customer pays through Amazon Payments and spends a certain amount on Amazon.com. For example, the Gogo in-flight wifi service could give a $5 discount to Amazon Payment users, only if they also spend $100 on Amazon.com. "This is a cool example of what they could do both as a retailer and effectively as a payment company," Rampell said.

Efficiently served market

Most investors seem to agree Amazon Payments has huge upside. The 300 million or so Amazon accounts is a huge market to tap in to.

In fact, RBC Capital's analyst Mark Mahaney previously called it an "underappreciated" part of Amazon, pointing out that it already owns a sizeable enough market share to potentially become the next big revenue driver for the company.

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But Mahaney is not convinced Amazon is ready to double down in Payments, and may decide instead to invest in other areas, like its grocery delivery or shipping logistics businesses. It's perhaps why we still haven't heard much about it, despite Amazon CEO Jeff Bezos having told the team to "move faster" nearly three years ago.

"The one challenge here to whether this really becomes the fourth pillar for Amazon is that it's already a reasonably efficiently served market," Mahaney said.

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RBC Capital

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