Will Amazon.com take over U.S. banking, too?

Not content to replace Borders, your local mall, your computer data center, and, soon, the U.S. Postal Service, Amazon.com is planning to take over the banking business.

"Amazon is in the early stages of rolling out a program called Amazon Lending, which is a service to help its third-party merchants in a relationship with a banking partner," like eBay-PayPal's BillMeLater (which uses WebBank), writes Shawn Milne, analyst at Janney Capital Markets in Philadelphia. 

"Amazon Capital Servcies is applying for state-by-state licenses," Milne adds, citing American Banker,and is charging merchants 13% and up, comparable to the low end of the range of what Visa and MasterCard banks charge their small-business credit card customers, Milne adds. If loans go bad, Amazon can seize a merchant's inventory.

So Amazon is now able to offer everything from storage and shipping (Fulfilllment by Amazon) through payment scheduling (Amazon Payment).  Milne says Amazon's rising service level is finally paying off with higher profits, after years of sacrificing earnings for market share and products like Kindle. Amazon gross margins topped 26% in the second quarter, the highest since mid-2002, Milne noted.

eBay-PayPal seems to be managing its lending all right and Amazon should be able to also, Milne adds.

Or maybe not. There's a long list of American retailers that made big money from financing purchases, only to write off major losses a few years later as debts ballooned and customers defaulted.

In fact, during the late consumer boom, Citigroup, formerly the largest U.S. bank, bought card portfolios from Federated Department Stores, Home Depot, Sears, and Sunoco, only to be "stunned by the poor quality of these portfolios and the losses that they generated," notes bank analyst Richard X. Bove in a report to clients of Rochdale Research. JCPenney had its own card boom-and-bust a few years previous. And Bove says Google also is getting into the retail-credit-card business.

Can Amazon and Google make this work? Retailers' underwriting has "historically been very poor because the (retail) idea is to make the customer happy, not tetermine creditworthiness," Bove noted. "This is not a simple business."

Merchants are historically not that good at collections. And the newly organized federal Consumer Finance Protection Bureau will in time "begin regulating these companies" as if they were banks. The Federal Reserve might step in, too.