Brief:

• Amazon has offered to pass along to retailers the discounts it gets on credit card fees to incentivize their use of the e-commerce giant's online payments service, unnamed sources told Bloomberg. Amazon Pay, which has grown to more than 30 million users since being revived in 2013, lets online shoppers log into their Amazon accounts from other websites for easier checkouts.
• Typically, online merchants using Amazon's service have paid approximately 2.9% of each credit card transaction plus 30 cents. Those fees are split among Amazon, card issuers and payment networks. While it's unclear which retailers received Amazon's offer for discounts, the company usually tests new programs among a small group before a broader rollout, per Bloomberg.
• Amazon offered to negotiate lower fees with merchants that make long-term commitments to use Amazon Pay, one source told Bloomberg. Amazon can export the rates it's negotiated with banks and payment networks because it aggregates smaller merchants to help them reduce the cost of accepting electronic payments.

Insight:

While Amazon hasn't confirmed that it's testing a program to incentivize retailers' use of Amazon Pay, the initiative is a threat to companies like PayPal and Square that collect fees for the transactions they process on their payment platforms. The move appears to be part of a longer-term strategy that demonstrates Amazon's willingness to sacrifice some profits in the near term to encourage adoption of Amazon Pay. The company has used similar discounting tactics to promote other platforms, like its Alexa digital assistant. The company can afford to sell the devices at a break-even price or even a loss if it means gaining more customers for its Amazon Prime subscription service or e-commerce platform.

This move likely aims to get the attention of smaller merchants, who benefit from using Amazon Pay because of the trust shoppers place in the e-commerce giant. At the same time, many merchants might not want to share much information with Amazon, which could compete with them by selling similar products for lower prices on its e-commerce site. Amazon dominates U.S. digital commerce with 43.5% of all sales for the channel in 2017, according to eMarketer. PayPal, on the other hand, tries to differentiate itself by emphasizing its role as a neutral payment processor that doesn't compete with retailers.

Amazon's potential move is part of growing competition between traditional financial institutions and tech giants to develop a dominant digital payments system in the U.S. similar to what Alipay and Tencent's WeChat Pay have pioneered in China, where mobile transactions are more popular. Visa and Mastercard last month teamed up on a combined online checkout button, abandoning their separate Visa Checkout and Masterpass programs. Visa CEO Al Kelly last month said there's too much clutter in e-commerce checkout, and the future lies in single-button checkout that streamlines the customers' process and simplifies transactions for retailers.

Swipe fees are a $90 billion-a-year business for banks like JPMorgan Chase and Bank of America, payment networks such as Visa and payment processors including First Data and Stripe. Each of these companies charges a commission on every sale when shoppers swipe cards or click "buy now." Amazon's willingness to forgo its fee may compel these rivals to lower their commissions or be supplanted by Amazon Pay.