Amazon's Huge Win From Going Into Physical Stores

(I don't know if this needs saying, but the following post has absolutely no information contained therein that I learned while working at Amazon. Also, I have a position in and am long on AMZN).

You know what sucks? Margins in retail. 

With margins of 2-8%, you're working with basically no leeway for any failures, and pricing pressure is extreme. Yet, Amazon wants to expand even more deeply into the market with things like a credit card reader and an in-store POS. ( Why would you do that? Three reasons come to mind:
  1. Amazon makes the vast majority of its goods selling online today. But, 85-90% of total purchases occur in the physical world. Amazon wants a piece of that.
  2. Amazon is all about selection. They're "Earth's Biggest Selection". Can't have selection without every single product in the world - online and off.
  3. Most importantly, Amazon has the opportunity to close the loop - to keep money flowing through its system, and never let it out. 

The third point would be absolutely transformative. Think about it this way - today, I go to Target and buy some sheets. Target goes and buys some floor cleaner. The floor cleaner company pays their employees. The employee goes and buys a Nintendo DS at Best Buy. 

Everyone of those transactions require a percent off the top for credit card, debit and ACH fees (on average about 2%, similar to low end retail margins). 

Now imagine that Amazon is the player at each step - they sell the sheets, floor cleaner, gift cards (or creates a "store your money with Amazon"-style bank), and Nintendo DS. Without doing a single thing they don't do already today, Amazon has participated in 4 transactions with zero processing fees. Instantly they've doubled their margin.

Amazon could drop their prices and demolish retail, or keep their prices the same and vastly improve their cash flow. Regardless of their choice, it's such a huge strategic win, I'm not sure why everyone is focused on all the other points. Keep the money and you win by default.