Monthly Analysis: Under The Skin Of Ant
July 1, 2019
Growth Story of Ant Financial
When Jack Ma started in 1999 to create a Yellow Pages website to find and sell Chinese products, he couldn’t possibly have known what shape his business will take in 15 years. In 2014, Alibaba became the world’s center of attention with its IPO offering, which happens to be the biggest IPO ever. Now, with more than 480 billion in market cap and over 636 million customers (online shopping properties), Alibaba is an exceptional business story and one of the most valuable Chinese companies in the world.
In August 2017, Alibaba (NYSE: BABA) became the first Asian company to cross $400 billion in market capitalization, and within the next five months, its market cap crossed the $500-billion mark. Alibaba achieved this only three and a half years after its listing – it took 20 years for Amazon.
In FY '18, Alibaba generated RMB 250.3 billion ($39.9 billion) in revenues and registered a 58% YoY growth. Alibaba has diversified into other business lines, but core commerce is still the largest piece of the pie. Core commerce contributes 86% to the total revenues of Alibaba in FY '18 with Cloud, Digital Media & Entertainment, and Innovation Initiatives, each contributing 5%, 8%, and ~1% respectively.
Alibaba’s core business relies on Ant Financials to fulfill its payment and financial service needs. Ant Financial was formalized in 2014 during Alibaba’s IPO as a spin-off affiliate business owned by Jack Ma and has grown into the world’s most valued FinTech company. Until FY ‘18, Alibaba was entitled to 37.5% of Ant Financial’s pre-tax earnings, based on a deal that was struck during the 2014 IPO. In FY ‘18, Ant Financial paid about RMB 3.4 billion ($510 million) in royalty and technology fees to Alibaba. It is interesting to note that this amount is ~1% of Alibaba’s total revenues, so what makes Ant Financial so important to Alibaba? The answer is its role as an enabler to the core commerce business – Ant Financial is indispensable to Alibaba’s business lines.
Centacorn Ant Financial’s commercial relationship with the publicly listed Alibaba is a curious case for many and had attracted a bit of controversy on reasons of Alipay’s carve-out. The following timeline of this business can help in understanding this puzzle:
Ownership Structure of Ant Financial
After the divestment and subsequent equity holding restructuring related to Ant Financial in 2010-11, Jack Ma became a major shareholder of Ant Financial. Accordingly, Jack Ma has an economic interest in Ant Financial and exercises the voting power of the equity interest in Ant Financial. In FY 2018, Alibaba decided to reunite and acquired a 33% stake in Ant Financial by performing a switch from collecting 37.5% of Ant’s pre-tax profits to holding a direct stake. This move is aimed to benefit Alibaba and its shareholders when Ant goes public. The commercial relationship between Alibaba and Ant Financial does not restrict Ant Financial to serve other industry players, including its competitors, which opens the doors for scale and innovations for larger markets.
The major shareholder ‘Alibaba Partnership’ was formed in 2010, which comprises 36 senior management leaders of various Alibaba businesses, including Jack Ma. Indirectly, Jack Ma still steers Ant Financial.
Ant Financial has created a spectrum of financial service offerings in a very short span, and Ant’s pre-tax earnings have continued to surge. However, in three reported quarters (Q1 to Q3) of the current financial year (FY ‘19), Ant’s earnings declined due to its aggressive investments, particularly in marketing and promotion for user acquisition. In the first three-quarters of FY ‘19, Ant Financial has effectively paid $0 fees to Alibaba due to incurred losses.
Currently valued around $150 billion, Ant Financial defines itself as a technology company that focuses on inclusive financial services at a global scale. Ant Financial’s key service offerings include payments, wealth management, lending, and if someone does not have a credit score to get loans, it facilitates alternative credit scores too.
View of Ant Financial’s Full Spectrum of Services
Its other offerings include insurance services and consumer loans:
- Ant Insurance Services: Its health insurance mutual aid platform (formerly Xiang Hu Bao) was launched in October 2018. Ant Insurance Services gained over 75 million subscribers within nine months of the launch and aims to reach 300 million in the next two years. Moreover, over 80 insurance companies are selling more ~2,000 products via Ant Financial’s open platform. In FY ‘16, it had 380 million cumulative users, and these numbers grew to 392 million by the end of FY’17.
- Consumer Loans: Ant offers consumer loans through Huabei and Jiebei. Huabei (Ant credit pay) is a virtual credit card type product that can be used by Alipay customers for online and offline purchases. Jiebei (Ant Cash Now) is a consumer loan service. Ant Financials' consumer lending business reached 600 billion yuan ($95 billion) in March 2018 by registering 100% YoY growth.
- Zhao Cai Bao: Zhao Cai Bao is Ant Financial’s third-party investment marketplace that offers wealth management products such as property insurance policies, mutual funds, fixed-term deposit products, and bonds through mobile phones to China’s growing middle and upper-class customers. This platform earns revenues by charging businesses commission fees.
Ant Financial has also started to expand its B2B service offering that includes cloud, risk management, and fraud protection. Over 200 financial institutions are using Ant’s technology solutions.
Ant Financial’s services cover everything that a bank offers to retail customers.
Apart from targeting the needs of Chinese consumers and small and micro enterprises, Ant Financial continues to pursue its globalization strategy. Ant Financial collaborates with overseas strategic partners to launch local e-wallets in major developing countries using experience and innovative technology developed in China.
Deep-Dive into Business Lines
Payments Business: Alipay
Alipay facilitates digital payment and escrow services for transactions on Taobao Marketplace, Tmall, 1688.com, and Alibaba’s other platforms. During the fiscal year that ended on March 31, 2018, Alipay and its global JV partners served around 870 million annual active users globally; by December 2018, it crossed over 1 billion registered users. In Q4 2018, China’s third-party mobile payment market grew by 7.8% to $7 trillion, and Alipay held ~54% of the market share. In China, Alipay and Tencent hold over 92.6% of the market share. With such high penetration, it is impossible to miss Alipay on the streets of China.
Alipay’s Evolution from Digital Wallet to Lifestyle Enabler
Alibaba developed Alipay as the enabler of the expansion of its e-commerce platforms – Taobao and Tmall. It became synonymous to the Chinese online shopping and dominated the online payment landscape in China until the explosive rise of WeChat Pay.
Alipay started as a simple digital payments platform for e-commerce and now acts as a lifestyle enabler that facilitates taxi-hailing, hotel booking, booking movie tickets, utility bill payments, doctor’s appointments, and buying wealth management products directly from the app. Alipay & Tencent’s penetration in China and the affinity level among consumers is such that the People's Bank of China had to officially declare that it was illegal for a merchant to block acceptance of renminbi cash notes or coins.
Alipay Downplaying Outside China
We believe that Alipay has been downplaying its capabilities outside China. If we look at its strategic growth beyond China, it enters the market through partnerships and acquisitions that serve it well by not appearing as a threat to local payment systems. Alipay has a presence in 54 markets and is a partner with the likes of India’s leading payment system, Paytm. Alipay works with over 250 overseas financial institutions and payment solution providers to enable cross-border payments for Chinese people traveling overseas and overseas customers who purchase products from Chinese e-commerce sites. To enable these transactions and provide good coverage, Alipay supports 27 currencies. Interestingly, Alipay has preferred to focus on Chinese tourists abroad where Alipay can play a direct role in payments rather than local spenders in respective markets.
Going West with Tourists
With increasing income levels and better living standards, traveling abroad has picked up momentum in China. China Tourism Academy’s stats suggest over 140 million outbound trips were made by Chinese people in 2018, registering a 13.5% YoY increase. Chinese tourists form a vast market; they spent $258 billion in 2017, almost double the amount spent by US holiday-goers. Alipay is expanding rapidly outside of its home market, mainly to serve big-spending Chinese tourists already familiar with its platform. According to a study by Nielsen, “Chinese tourists use mobile payment overseas far more frequently than their non-Chinese counterparts, and over 90% (of) Chinese tourists would use mobile payment overseas given the option.” It is easy to infer that Alipay is well placed to benefit from the increasing number of travelers, their preferred payment modes, and Alipay’s share in their minds/mobiles – all it needs to do is establish its presence where these tourists prefer to go.
In the US, Alipay established a partnership with payment processing company First Data that enabled it to reach over 35,000 merchants by March 2018. By February 2019, Alipay was handling transactions at 3,000 Walgreens stores and was aiming to reach 7,000 stores by April. Alipay faced a setback on the MoneyGram deal, and US-China bitter relations are likely to make its expansion difficult in the US. As a result, Alipay now focuses on a relatively closer market – Europe.
Alipay’s Europe plans included establishing its presence in 20 countries in 2018. It was said to have signed deals with over 100 banks and 40 digital wallet companies in Europe. In Russia, it has established itself with retailer and supermarket partners.
- Alipay’s most recent deal outside of its home market is with Barclaycard, which processes almost half of Britain’s debit and credit card transactions. The agreement lets UK merchants accept Alipay smartphone transactions without having to replace their payment equipment.
- Its acquisition of London-based remittance services firm WorldFirst also aligns with its expansion plans in Europe. The tie-up will add WorldFirst’s international online payments and virtual account products to Alipay’s range of technology solutions.
Alipay and Tencent’ WeChat Pay are similar payment methods, but there is one big difference between the two – their social messaging integration, which serves as a binder of users. WeChat Pay is a newer platform than Alipay, but it has gained significant mindshare of users because it sits on the highly popular instant messaging app WeChat. It is difficult to replicate what WeChat in China or WhatsApp in the rest of the world have achieved. Alibaba missed a great opportunity – it should have bought WhatsApp before Facebook did.
Alipay had a great run so far, but Ant Financial’s focus is now changing from financial services to B2B business with technology services. According to a Reuters report, online payments contributed 55% of Ant’s $8.9 billion revenue in the fiscal year of 2017-18, but it is expected to fall to ~33% by 2021 due to the company's strategic focus on encouraging its 600 million customers to use more of its other, higher-margin services.
Wealth Management: Ant Fortune
Started in 2015, Ant Fortune is a wealth management app by Ant Financial that allows users to manage their finances in one place. It will enable users to access wealth management products like Yu'ebao and funds. It also offers services like financial news feeds, updates on stock movements & the investor community, and personalized investment recommendations. As of April 2019, over 100 asset management companies in China were offering over 4,000 wealth management products to Ant Fortune customers.
Yu’ebao, Ant Financial’s money market fund, had to impose a ceiling on the investment size (up to $14,900) in 2017 due to a massive surge in the fund’s assets. In April 2019, the cap was announced to be removed after suffering outflows of funds towards its rivals.
MyBank: Focus on Underserved SME Market
MyBank is a private online bank launched by Ant Financial in June 2015 to serve small and micro-enterprises. Over 41.4% of the total MSMEs (over 73 million) in China fall under the category of businesses with financial constraints, presenting a vast, untapped market for FinTech players. Ant Financial’s MyBank focuses on this segment, which has designed the 3-1-0 model of digital lending.
The 3-1-0 lending enables the MSMEs to complete an online loan application in 3 minutes, obtain approval in 1 second with 0 human touch. It’s not hard to imagine what it could mean for SME financing statistics in China. As of June 2019, MyBank had worked with over 400 financial partners and provided loans of over $290 billion to approximately 15 million SMEs in China. The use of digital and mobile technologies enabled MyBank to reduce the operating cost, which translates into a competitive interest rate of 6–16% while brick-and-mortar lenders still charge 20–40%. One can suspect that MyBank’s loan approval rates must be low, but interestingly, MyBank’s approval rate was 60% in the last fiscal year, and it aims to increase this to 80%, according to Ms. Quan Yu, General Manager of Risk at MyBank. MyBank’s 3-1-0 model and its use of AI is something the FinTech community could learn from.
Poor availability of formal credit score for its populations has been a problem in China. To counter this problem and derive other “non-finance” benefits, in 2014, the Central Government of China launched a national-level task to construct a Social Credit System. In January 2015, the People’s Bank of China granted official licenses to eight private companies to conduct social credit pilot tests. Ant Financial was one of those eight companies, and it rolled out a pilot called Zhima Credit (Sesame Credit) within a few weeks. Zhima Credit has emerged as one of the most prominent social credit scores in China, but it isn’t part of an integrated system by state, yet.
Zhima Credit is a big-data-based alternative credit service under Ant Financial’s umbrella, which provides an assessment of individuals’ willingness and ability to fulfill a commercial contract thus bridge the “trust gap” between consumers and businesses. It serves under-banked individuals to help them secure lenders’ trust. The Zhima Credit score (350–900 points), used within the Alipay app, lists the five categories of metrics that become inputs for the credit score. It includes information like a user’s occupation, their fulfillment of contractual obligations (such as credit repayment history) and behavior. Zhima Credit works in conjunction with Ant Credit Pay, which is its credit payment offering that is used to purchase products and services from Alibaba channels such as Taobao. The Zhima Credit score improves if a consumer spends more through Ant Credit Pay. It is interesting to note how this score moves. According to Mapping China journal’s publication, "Taking cheap offers on Alibaba’s shopping platforms lowers a person’s score while buying sport and kitchen equipment or handicrafts raises the score. People buying diapers are more trustworthy than those playing computer games."
Zhima Credit also works in partnerships to facilitate users with higher scores to get access to services such as renting bikes/cars or houses without paying a deposit and easier visa applications for certain countries, such as Luxembourg, Japan, and Singapore. The acceptance rate of Zhima Credit shocked many in the conventional credit business. Within two years of its launch, Ant Credit Pay was being used by 80 million active users. Out of these 80 million, 47% were under 30 years old, and 60% had never used a credit card.
Zhima Credit is integrated with both Alipay and Alibaba’s e-commerce platform, which gives it a tremendous potential to reach over 700 million active users. By March 2018, Zhima Credit’s user base had crossed the 520-million mark.
In 2018, Ant Financial launched a health aid plan (Xiang Hu Bao). The mutual protection health aid plan gives participants basic medical coverage with the risks and expenses shared by all the members, without sign-up fees, premiums, or upfront payments. It has over 50 million subscribers, and rural and migrant workers are the largest customer base of this plan. Ant aimed to reach over 300 million customers using the healthcare plan within two years, which would be more than 20% of China’s population. Ant uses Alipay platform to sell this product. On objection about it being an ‘insurance’ product, Ant Financial maneuvered through the regulatory hurdles by saying that this plan is not a conventional insurance product, hence not subject to the same regulatory oversight. It dropped the ‘insurance’ part from the product name to clear its way to the market.
Source: Alibaba Investor Presentation
Ant Financials also offers insurance products via its partnership/JV/Investment relations with China Taikang (Life insurance), China United Insurance (Agri), and Cathay Century Insurance (internet-related insurance, such as e-commerce or IoT). Apart from that, over 80 insurance companies are selling more ~2,000 products via Ant Financial’s open platform. Ant Insurance Service had 392 million users, and it was growing premiums at 43% year over year (as of FY 2017).
Ant Financial Cloud
Ant Financial Cloud is an open platform that provides customized cloud computing services for financial enterprises. Ant Financial Cloud integrates numerous basic capacities of Ali Cloud with customized R&D based on the demands of the financial industry.
Challenges Facing Ant Financial
Amidst all the optimism and shiny performance numbers, Ant Financial may get hit by the recent regulatory tinkering in the country – for instance, its asset-backed securities offering. Ant lends money to Alipay users and bundles these debts into asset-backed securities (ABS) for sale to investors. In 2017, the tightened regulations related to consumer lending became a hurdle, and the volume of ABS sold by Ant Financial slumped from RMB 31 billion ($4.6 billion) in the first quarter of 2017 to RMB 10.7 billion ($1.6 billion) by March 2018. Yu'ebao's asset growth has been affected due to a limit on its daily subscription and withdrawal limits. Furthermore, this is expected to be a hurdle for MyBank’s small-loan units as asset and profit growth would be affected.
Challenges Facing the Payments Business in China
New rules about handling customers’ funds will cost a lot to Alipay. Alipay is facing increased reserve requirements for its client funds along with transaction limits on QR code payments. Earlier, Ant used to hold client money in escrow, which it could invest like banks do, without paying interest to customers. In 2017, the People’s Bank of China issued a rule that third-party platforms would deposit 20% of the client’s funds in non-interest earning reserves at designated banks. This threshold was further raised to 50% in April 2018, and by January 2019, it was set to 100% – this was a significant setback for Alipay’s business.
Considered for Included in Systemic Risk Category
Ant Financial has become so big that regulators would consider it a too-big-to-fail financial institution. Consider this fact: China’s nominal GDP stands at around $12 trillion, and Ant manages one of the world’s biggest money-market funds and facilitates nearly $2.4 trillion of mobile payments every three months. Currently, it serves more users than some of the largest Chinese banks, which could qualify any financial institution to pose a systemic risk for the financial system. To be safe, regulators have considered the requirement of obtaining a license for companies that operate in two or more financial segments along with minimum capital requirements like traditionally regulated financial institutions.
Changing Focus – From B2C to B2B
Ant’s growth rate and its potentially important scale of business will increasingly bring it to regulatory scrutiny. As the oversight grows and restricts its ability to play around with financial products, the company will shift its focus from financial products to running a technology platform that serves other financial companies.
As of March 2019, Ant Financial had provided technology solutions to over 200 financial institutions, which includes approximately 100 banks, 60 insurers, and 40 wealth management companies & security brokerage firms.
In March 2019, it announced that it would unveil a new core banking platform co-developed with Hoperun Information Technology. Its Distributed Core Banking Platform (DCBP) aims to facilitate financial service institutions to address digital challenges, such as distributed development, product management, and others.
“This is just the first of many collaborations that we plan to form with other talented partners that will enable us to provide better technology solutions to the challenges faced by financial institutions.” – Liu Weiguang, Vice President of Ant Financial
Ant expects that its move towards ‘more technology and fewer financials’ will support its long-term revenue and profitability growth. The company’s outlook seems more likely to rely on a strategic shift to technical services, global expansion, and startup investments, among others. Ant's financials may not be looking so bright with the changing dynamics in terms of regulatory factors, though its potential continues to be huge, backed by the length and breadth of products offered by the company across the financial and technology domains, including the extensive base of clientele, which remains its biggest strength.
Ant Financial’s IPO
The market has been speculating Ant Financial’s IPO for a couple of years. In 2018, Ant was tipped off to file for an IPO, but it ended up raising $14 billion in Series C. In 2019, the company is reportedly preparing for an IPO on China’s new Nasdaq-style equity board. Sooner or later, the company is likely to file for the IPO, and that will strike the biggest gong which is going to be heard for a long time with regard to success stories in FinTech.
Current Affairs: May 1 – June 20, 2019
What Was Hot in FinTech
Rush for Talent
- Europe’s big financial firms are trimming staff to brace for Brexit. On the other hand, their emerging competitors in FinTech are hiring aggressively, according to a report by Bloomberg. “FinTech hired aggressively in the first quarter in the UK, Europe’s FinTech hub… That follows a 61% increase in new FinTech roles in 2018 that made it the fastest-growing part of London’s pre-Brexit economy.”
Facebook’s Crypto move
- Facebook has announced to launch its own cryptocurrency ‘Libra.’ It aims to facilitate users to buy things and transfer money at nearly zero transaction fees. In a smart move to ensure interoperability, Facebook also introduced its own Calibra wallet is to be built into WhatsApp, Messenger, and Facebook app. Calibra wallet will be managed by Facebook’s subsidiary company called Calibra. Libra will be governed by a Switzerland-based non-profit called Libra Association which aims to promote the open-sourced Libra Blockchain and developer platform. Uber, Visa, Andreessen Horowitz, eBay, Mastercard, PayPal, and others are part of its governance body. The crypto’s Libra’s value will be tied to a basket of assets, including currencies such as the US dollar and the Euro.
BigTechs’ FinTech Game
- Apple’s announcement of the launch of Apple Card in partnership with Mastercard and Goldman Sachs sparked global discussions around what is in it for Apple and why Goldman Sachs. Apple Card is tied to Apple Pay’s business. According to Jennifer Bailey, Apple’s Vice President of Apple Pay, said, “To create a credit card as innovative as Apple Card, we needed a bank that was willing to do things that had never been done in the industry before so we partnered with Goldman Sachs.” With this partnership, Goldman Sachs will gain consumer financing experience. According to David Solomon, Chief Executive Officer of Goldman Sachs, “This partnership is a major step in the growth of our consumer franchise, furthering our vision to create the leading digital consumer platform.”
- JPMorgan Chase has announced to shut down its mobile-first banking app Finn. Finn was introduced in 2018 with the aim to target younger customers who favor digital engagement over conventional banking. However, customer adoption was lukewarm, and it could attract only 47,000 customers (according to Cornerstone estimates). The bank will roll its customers to the parent company’s banking products.
Forever Seeing Regulatory Eye
- In June 2019, India introduced a bill titled ‘The Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’ that proposes a complete ban on the cryptocurrency trading and makes it a criminal offense with 10-year jail time. This covers activities such as crypto mining, holding, transferring, disposing, issuing, or dealing.
- N26, a Germany-based neobank unicorn FinTech, has come under scrutiny from German banking regulator Bafin for its complacency about customer complaints of fraudulent transactions. Bafin’s investigation report has uncovered issues in staffing, outsourced task management, and engineering problems.
- WorldRemit, a remittance service FinTech, has raised $175 million in series D from TCV, Accel and Leapfrog. WorldRemit has been focused on individuals living and working abroad, but with new funding, it plans to expand the business and focus on payments between small businesses as well. The startup is estimated to be valued around $900 million.
- BlueVoyant, an enterprise cybersecurity startup raised $82.5 million from new and existing investors, including Fiserv. The FinTech is estimated to be valued around $430 million.
- TransferWise, an international money transfer FinTech, has reached $3.5 billion in valuation after the new funding round. In May 2019, it closed $292 million secondary funding round.
- Wealthsimple, a Canadian online investment services & commission-free trading app provider, raised $74.5 million from Allianz X, the digital arm of German Insurer and asset manager Allianz. Before this, Allianz has focused its investments on truly digital players such as Lemonade, BIMA, GO-JEK & SafeBoda.
- Branch International, a digital lender with offices in San Francisco, Lagos, Nairobi, Mumbai, and Mexico City, raised $170 million in Series C funding. Branch has over 3 million users in Kenya, Nigeria, and Tanzania, as well as India and Mexico. It became the first Africa-focused company to raise such a large amount.
The convergence of Crypto and Conventional Business
- Litecoin Foundation has announced a partnership with Bibox Exchange and Ternio, a blockchain firm, to launch a physical cryptocurrency debit card named “BlockCard.” It aims to allow users to spend cryptocurrency funds online as well as in physical stores. Bibox Exchange will act as custodian of users’ funds.
- Coinbase has launched its Visa debit card in six European countries. Visa and Coinbase collaborated to launch a crypto-based debit card that will allow users to purchase things using fiat money converted from cryptocurrency stored in online wallets. Talking about this partnership, Gartner’s Vice President of Research Avivah Litan said, “I think it's fascinating Visa signed up for this. It's really good news because they have the scalability to make it succeed with merchant reach, their network, their fraud analytics."