Here’s Why Amazon Launched A New Credit Card For Its Prime Users

Recently Amazon (NASDAQ:AMZN) launched a new Prime Rewards Visa Card which will give its Prime customers a 5% discount on all their purchases on Amazon.  Additionally, customers will also get rewards at other places where they shop using this card including restaurants, gas stations and drugstores. With no annual fee and other benefits such as no foreign transaction fees and travel protection, this card is likely to delight Amazon’s existing Prime customers and attract more Prime members.  While Amazon Prime members can already earn a 5% discount through its store card issued by Synchrony, the new card is a Visa card which can be used anywhere.  According to a note published by Consumer Intelligence Research Partners (CIRP), customers owning Amazon credit cards spend the highest on its platform. Their average annual expenditure exceeds that of Amazon Prime members by 16%. We believe this new card is Amazon’s attempt to entice its Prime members to spend more on its platform and, with the lucrative rewards it offers, it could prove effective in meeting this goal.

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Attracting More Users To Its Credit Card Base

Given that Amazon credit card holders spend the highest on its platform, the company is looking at ways to expand its credit card consumer base. CIRP estimates that approximately 15% of Amazon’s U.S. customers have any one of Amazon’s credit cards, representing approximately 21 million customers. However, growth of its card base has not kept pace with its growing Prime membership. In June 2016, it was estimated that Amazon has around 63 million Prime members. Assuming that only Prime members have an Amazon credit card, it would mean that only a third of its Prime customers have one of its credit cards. According to a survey by Morgan Stanley, Amazon Prime members spend about 4.6 times more money on its platform than non-prime members.  Its credit card holders spend even greater amounts than what Prime members spend. By enticing its prime customers to own its credit cards, Amazon will be encouraging them to spend more on its platform. Its latest card is aimed at attracting Prime customers by offering deals not only on Amazon.com but on other shopping destinations as well. This can lead to higher spending by existing Prime customers and help convert the fence sitters into Prime memberships.

According to our estimates, Amazon’s share in the U.S.  e-commerce market for electronics and general merchandise will increase steadily and reach around 20% by the end of our forecast period. A faster pace of increase in this market share can lead to an upside to our price estimate.

Amazon is constantly looking at newer ways to make its existing customers spend more on its platform and attract new customers. While the company keeps adding perks for its Prime members, an attractive rewards based credit card should work as an incentive for its consumers, in our view. This measure is likely to have a positive impact on Amazon’s revenues in the long term.

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