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Can Amazon Take on American Express, Visa in Payments Space?

Stocks in this article: AMZN AAPL GOOG EBAY V AXP MA

NEW YORK (TheStreet) -- Amazon (AMZN) has plenty of initiatives on its plate, but one that may be too tough to tackle is the issue of payments, despite how dominant the company is in e-commerce.

In an interview with Re/Code, Amazon payments head Tom Taylor said if the company felt it could offer something different or better than current payment network providers, America Express (AXP) and Visa (V), they would offer it. Further in the piece, Re/Code cites industry sources "familiar with Amazon's business" as believing that Amazon will get into this business, and that it's a matter of when, not if.

Here's Taylor's quote from the Re/Code interview:

"If we felt like we could do a better job than Amex and Visa, and feel like it helps the customer experience, that's something we would do," he said. "But it would really have to be something much better than [what they do]."

Taylor's statement about competing with American Express and Visa is worth paying attention to, for a multitude of reasons. American Express, like a traditional bank, a la JPMorgan (JPM) or Bank of America (BAC), has credit risk. If a customer defaults or does not pay the outstanding debt on their credit card, American Express must charge this debt off, although not before trying to collect on it, similar to a bad mortgage or other loan from a financial institution. The company also has its own payment processing network.

Visa and Mastercard (MA) do not have credit risk, they are merely an interchange system, providing networks allowing businesses to receive payments from customers, in exchange for an interchange fee. Discover Financial (DFS), is both a lender and a payment processor, so it competes with traditional banks and American Express, as well as Visa and Mastercard.

If Amazon were to take on these types of companies, it would have to choose whether it wants to operate its own payment network, similar to what eBay's (EBAY) PayPal does, take credit risk like a traditional bank, American Express or Discover does, or both. This is vastly different than the plethora of business lines Amazon is currently in, entering, or about to enter.

Even though Amazon has over 200 million credit card accounts on file, having scale hasn't really pushed the digital wallet/mobile payments industry as fast as many would like.

Apple (AAPL) CEO Timothy D. Cook talked about the mobile payments industry on Apple's latest earnings call, noting it was one of the reasons behind the inclusion of TouchID on the iPhone 5. "The mobile payments area in general is one that we've been intrigued with, and that was one of the thoughts behind Touch ID," Cook said on Apple's earnings call.

Other companies, such as Google (GOOG) with its Google Wallet initiative, San Francisco-based Square, as well as potentially Apple, with its 600+ million iTunes accounts and credit cards on file, have tried to disrupt the payments industry, with varied success. If Amazon is serious about changing the payment network industry for real, it's going to have to decide whether taking roughly 3% of every transaction is worth the enormous capital investment it would need to lay out over time, as well as the credit risk it would face, should it decide to compete head-to-head with American Express.

Amazon CEO Jeff Bezos is certainly ambitious, but even this may be a task too tall for Amazon. -- Written by Chris Ciaccia in New York

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