This article has been written by Pramod Nair for FinMedium Research Desk.
Ant Financial has been in the news recently for its record $34.5 bn IPO which was suspended by Chinese regulators. Here we talk about Ant Financial, tracing its roots from 1999 with its parent Alibaba group to the present day and the challenges it faces.
Ant Financial’s Parent – Alibaba
Ant Group (formerly Ant Financial) is the world largest fin-tech and unicorn company based in China. Ant is an affiliate of the Alibaba group.
Alibaba.com was founded by Jack Ma in 1999. It started as a B2B marketplace around the time the Chinese economy was growing and coincidentally at the time of the emergence of the Internet business model.
Ma’s vision was for Alibaba.com to improve the domestic e-commerce market and provide an e-commerce platform for Chinese enterprises, especially small and medium-sized enterprises (SMEs), to help export Chinese products to the global market.
Alibaba’s Growth and the Birth of Alipay
As Alibaba was growing its business, it realised that the e-commerce business can be successful and scale only if there is a cheaper and reliable way for its customers to make and receive the payments.
The existing banking system with its lack of digitisation, unavailability of digital finance products created a trust deficit in the settlement of business transactions in the e-commerce business for Alibaba.
This void was what Alibaba capitalized on and led to the establishment of Alipay, an online payment platform.
Learning from PayPal, who was a leader of eCommerce payments at that point in time, Alipay enabled its customers to link their bank accounts which could be used to make payments for online transactions.
Alipay would store the payment received in its escrow account thereby acting as a custodian and would payout to sellers only after the product was confirmed to be delivered to the buyer. This ensured the certainty of settlement for the online transactions and an incredible customer experience.
This was a game-changer as parties to transactions in the eCommerce platform, who did not know each other, could still engage to perform the transactions with the assurance of knowing that they would not lose money.
This facilitated the growth of the Alibaba eCommerce platform and the synergy with Alipay resulted in growing volumes for the eCommerce business as well as in digital payments for Alipay.
As the Chinese economy was growing rapidly, it was also dominated by traditional banks who were unable to keep pace with the demands of the growing economy.
The majority of the banks were state-owned enterprises that could channelize the capital to large enterprises and thereby creating a void of capital for the growing small and medium enterprises in the Chinese economy.
The traditional banks also had a brick and mortar channel delivery which had high overhead costs and thereby to protect their margins they would only service large enterprises.
This resulted in a lack of access to cheaper credit for small and medium enterprises which eventually would impact their growth and ability to scale.
Alibaba realised that now with Alipay, they had a mine of data about consumer buying patterns and payments which if intelligently used, could aid in solving the problem of credit to the small and medium merchants. This led to the birth of Ant Financial.
In 2010 Alibaba spun off Alipay to a separate entity – Ant Financial. The name – Ant, comes from the idea that small things can be powerful agents of change when working together.
The Journey of Ant Financial
Ant Financial, being a separate entity, led it to assess the market independently and fill the void created by the traditional banking infrastructure. It had the freedom to negotiate and stitch strategic partnerships internationally to satiate its international ambitions and get access to capital and technology. Ant used its newfound independence to augment its capabilities, expand its product offerings to consumers and small and micro-enterprises.
Ant did not compete directly with the traditional banks but instead, focussed on the huge market segments for small and micro-enterprises. Backed by excellent technology and execution, Ant Financial grew phenomenally to become a flagship unit for the parent company.
Ant expanded further by offering financial services through its ecosystems for insurance, credit, loans, credit scoring, and wealth management to the same user base as Alipay.
Ant has managed to mine insights from its Alipay customer base and use that data to create an interlocking platform business in financial services powered with Internet and technology at its core.
It combines this platform approach in everything from payments and lending to insurance. This hybrid approach combines complementary platforms and linear services to create a financial services ecosystem of unparalleled breadth.
As a middleman, Ant passes on most of the underwriting risk to financial vendors. Instead, it makes money by charging those partners for crunching vast amounts of customer spending data to help assess the risks.
Product and Services
|Alipay||Mobile eWallet and Payments Platform||Payments|
|MYBank||Digital Internet Bank||Digital Bank|
|Zhima Credit||Credit Scoring||Credit Reference|
|Ant Fortune||Personnel Investment and Money Management|
|Yu’ebao||Money Market Platform|
|Ant Credit Pay||Consumer Credit for short term credit||Financing|
|Alibaba Cloud||Cloud Technology Platform||Technology|
- Alipay: In addition to being a mobile wallet, it has evolved into a payments platform supporting lifestyle purchases like cabs services, movie tickets, QR code enabled payments, offline payments for daily household items etc.
- MY Bank – A private online bank which serves small and micro-enterprises.
- Zhima Credit – In China, most people do not have a credit history. They do not have credit cards either, which are generally a quick way of acquiring some history. Consequently, many Alipay users do not have a credit score. Ant Financial converted this gap into a business opportunity. Users sign up and allow their data to be collected, after which Ant tracks the consumption data through Alipay: how and when people pay, whether they pay on time, how often they are late and whether they pay by instalments. All of this information gives the user a score – a credit rating, which can then be used for purchasing other products.
- Ant Fortune – a wealth management app that includes Yu’eBao as well as access to numerous other products.
- Yu’eBao: The term means ‘leftover treasure’ and it came about because of a realisation that customers were parking money in Alipay. Not being a bank, the company could not pay interest. Ant Financial, instead, set up a money market fund to offer a return on that unused cash. This product manages funds in excess of $150 billion.
- Ant Credit Pay – a virtual credit card type of product that facilitates credit payments.
- Ant Financial Cloud – offers cloud computing services.
Ant Financial’s strategy is to penetrate into more consumption scenarios to increase the density and number of users, cross-sell products and gain more wallet share.
Also Watch: Ant Financial Group Corporate Video
The Numbers Behind Ant Financial
- Over a billion total users
- 700 million MAU (Monthly Active Users)
- 55 % share of China’s $29 trillion digital payments
- About 90% of Alipay’s 1 billion users now access the app for more than just payments. The share paying for at least five financial services on Alipay reached 40% in 2019, up from 10% in 2017.
For the first half of 2020
- Revenue: $10 bn
- Net Income: Over $3 bn
Ant’s digital financial technology platform accounted for 63.4% of its revenues for the six months through June, up from 44.3% for all of 2017, according to the company’s preliminary prospectus. Its net profit margin was 30.2% — twice the peak rate recorded in 2019 — on overall earnings of 21.92 billion yuan ($3.17 billion).
This strong revenue stream and profitability is what made them realise that the time was ripe for an IPO.
- Huge user base across all platform business with comprehensive product supply and engaging user experience, consumer growth and higher purchase frequency.
- Employing a Data-driven process to drive innovation and create complementary and differentiated product offerings for new customers and existing customers.
- A world-class financial technology platform employing a combination of AI, computing and blockchain.
- Of the 1.39 billion population in China, Internet penetration has only reached 800 million. There are still plenty of markets to grow considering factors like the increased urbanisation spread, growing middle class with disposable income, a population who is very comfortable with the smartphone, adoption of technology and internet in rural areas.
- As regulation increases, Ant is leaning more and more on its platform model, acting as a facilitator rather than a traditional lender. Ant is focusing on shifting away revenue from offering traditional financial services and more toward facilitating third party financial institutions.
- Expand International presence and capture markets with local acquisitions and creating a regional financial ecosystem which also helps Ant to make inroads to the trillion-dollar emerging cross border remittances market.
Growing International Presence
Ant Financial isn’t just content to capture the Chinese market. It’s also exporting its model abroad. It’s made substantial investments in Southeast Asia and India as evident by its acquisitions and partnerships as listed below.
|Thailand||True Money Wallet|
The Mega IPO Plan and the Surprise at the 11th hour
The IPO Plan
In June 2020, Ant Financial filed for its mega IPO of $35 billion to be listed in Shanghai and at the HongKong Stock Exchange. Ant Financial is pursuing a dual-listing in Hong Kong and Shanghai’s STAR market.
The latter was to attract domestic investors. The company had hoped to raise up to $35 billion from the market, in an IPO that would have been the world’s largest, beating last year’s $29.4 billion listings of Saudi Aramco.
The IPO excited the capital markets as Ant Financial is one of China’s most influential tech companies. The sale was to put another stamp on China’s importance as a digital powerhouse. Post the IPO, the company could be worth more than many global banks after its share sale.
The Surprise Before the IPO
Days before the IPO, the Chinese regulators met with Jack Ma and later announced that the IPO is being suspended.
The IPO was first suspended by Shanghai stock exchange, called the STAR market, which prompted the group to suspend the Hong Kong leg of the listing.
The suspension, seen as a measure to rein in Ma, was done after a meeting between the regulators and Ant Group’s top executives.
One would have wondered why even after giving the go-ahead for the IPO the regulators decide to change their decision. The reason could be multiple but one key element stands out.
Regulators globally are getting increasingly circumspect about powerful financial conglomerates who operate under the fin-tech umbrella without coming under direct regulatory oversight.
In China, lending is a very tightly regulated state subject, with the government and regulators being very uncomfortable with the idea of third-party technology-driven apps such as Alipay venturing into the consumer lending business.
The Challenges Confronting Ant Financial
- At the top are Shenzhen-based entertainment heavyweight Tencent Holdings, Chinese insurance conglomerate Ping An, and the country’s second-largest e-commerce operator JD.com, as well as high-flying fin-tech startups like Yeepay.
- Competition is fierce in China’s digital payments market, which logged more than 53.4 trillion yuan ($7.64 trillion) in transactions in the first quarter of this year.
- While Ant remains the market leader it has been steadily losing ground, primarily to Tencent, whose market share has gone from 23% to 38.9% in recent years.
- In other areas, Ant is very comfortably ahead. In wealth management, loans and insurance, Ant is at least twice as big as Tencent.
- Financial regulators are keeping a close watch. Ant’s growing size could prompt a crackdown on the fees the company can charge.
- Regulations targeting the payment and financial services areas in different countries are getting stricter as both the magnitude of fin-tech disruption and the likes of Ant Group become larger. China’s new regulations will force the company to act more like a traditional lender and less like an asset-light provider of technology services to the financial industry. The regulatory tightening will slow down the linear services the company can offer.
- Ant’s size has made it a systemically important entity in the Chinese financial industry, and yet Ant is not licensed as a bank. In a country where most large financial institutions are owned or controlled by the government, Ant’s success is unusual. Thus it’s not surprising that the Chinese government plans to implement new financial regulations to oversee large fin-tech companies which is very evident from its IPO suspension.
- The expected introduction of China’ central bank digital currency is also expected to erode Ant Financial’s dominance in payments in China. This could have implications for the company’s other business like the credit platform which utilises huge payments data to assess the financial performance of borrowers who often don’t have formal credit histories.
- Ant Financial is also facing challenges from Beijing-Washington tensions. After the Trump administration moved to curtail transactions with Chinese tech companies, including Huawei Technologies, ByteDance, and Tencent Holdings.
- Ant Financial warned in its prospectus that it, too, could become a target and lose access to technologies or the U.S. market like seen with it’s failed acquisition of Moneygram International.
The way ahead
The growing size of Ant may force it and some of its peers to obtain licenses from China’s central bank and meet minimum capital requirements for the first time. This shift will force Ant and its peers to better align and work with the government’s strategy in the financial sector while enabling it to innovate and grow at what it does best – building platforms.
This article has been written by Pramod Nair for FinMedium Research Desk.
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Cover Image: Bloomberg