Amazon Launches Credit Card For Deadbeats

Submitted by Nick Colas of DataTrek Research

Amazon launched a new credit card offering today for individuals with bad/no credit. If disruptive innovation always starts with addressing the low end of a market (and it does…) then this move merits attention. If anyone has the technological horsepower to crack the low end of the financial services marketplace, it’s Amazon.

Most of what passes for “disruptive innovation” doesn’t actually fit that description too well. We haven’t talked about this idea for a while, so as a reminder:

  • Harvard Business School professor Clayton Christensen’s original disruption paradigm describes a business that starts life addressing the low end of a market.

  • To be profitable competing in this segment, the company has a unique edge. Think Japanese “lean manufacturing” in the auto industry or Amazon’s original business of selling books on the Internet. Both were novel for their time and gave a definable competitive/financial advantage.

  • Since these new entrants are only attacking the low end of a market, established competitors cede ground since they don’t make much money here anyway.

  • Over time, the new company moves upscale using the same competitive advantage. Again, established companies retreat since they still have the high end to keep them profitable.

  • Eventually, the upstarts become the status quo as the old guard dies and the whole cycle begins anew.

We bring all this up because Amazon’s news today that it is launching a secured credit card for individuals with bad/no credit history fits this pattern better than a lot of things that pass for “disruption” these days. A few details:

  • The underbanked/unbanked/low credit score cohort clearly fits the definition of the “low end” of the market for financial services. While community banking laws mean the bad-old-days of redlining are largely past, there is still a sizable community of Americans with little access to the financial products most of us take for granted.

  • Amazon Credit Builder is the name of the company’s new secured credit card offering. A customer deposits $100 - $1,000 with Amazon’s affiliated bank (mailing a check/money order is an option) and receives a credit card with a line of credit of equal amount.

  • Repayment is fixed at 6, 12, or 24 months, customers can track their credit score online and also see how timely repayment is improving their FICO score on a monthly basis.

  • Clients of Amazon Credit Builder can upgrade to the company’s standard credit card offerings in as little as 7 months provided they make timely payments. At that point their security deposit is refunded in full.

  • The only downside (but it’s a lulu)…. An annual percentage rate of 28.24%.

Our thought: Amazon is famous for only addressing large markets but often starting small and this product seems to fit both characteristics. If anyone has the technology (and lack of branch infrastructure) to make a profitable go of it at the low end of consumer banking, it is Amazon.