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Understanding Amazon Bank—And PayPal’s Dream

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Amazon and PayPal supply loans to customers

If it’s true that Amazon.com (AMZN) is gearing up to launch a checking-account-like product, as has been reported recently, the company could be trying to tell PayPal (PYPL) to watch this space closely.

We already know that Amazon and PayPal compete in a number of areas, one of them being supplying loans to customers. Amazon and PayPal have each written roughly $3.0 billion in loans to their customers. Square (SQ), another company run by Twitter (TWTR), also supplies credit to its customers and has advanced more than $1.8 billion in loans.

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Loans help boost customer retention

For Amazon, PayPal, and Square, supplying credit to customers is one good way to get customers to spend more with them, and it’s also a way to deepen customer relationships and boost customer retention rates.

Perhaps Amazon’s move into banking could escalate its competition with PayPal in the credit market. PayPal’s revenues grew 26% YoY (year-over-year) in 4Q17, compared with the 38% YoY revenue growth at Amazon.

Becoming Amazon’s payment processor

Besides being competitors in the credit market, PayPal has shown an interest in forging a partnership with Amazon as its payment processor. But Amazon’s interest in rolling out a checking-account-type product seems to signal that the company doesn’t view a payment deal with PayPal as a priority. Amazon is reportedly in talks with big banks such as JPMorgan Chase (JPM) and Capital One Financial (COF) for its checking account product idea.

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