What The Largest Global Fintech Can Teach Us About What’s Next In Financial Services

Ant Financial was initially launched to support online payments. Today, it’s the largest fintech player globally.

As the financial affiliate of Chinese e-commerce giant Alibaba Group, Ant Financial encapsulates a fintech ecosystem that starts with its dominant mobile payments service, Alipay, and expands into credit scoring, wealth management, insurance, and lending.

At $150B, the current valuation of Ant trumps the market capitalizations of leading financial institutions around the world, from Goldman Sachs and Morgan Stanley to Banco Santander and The Royal Bank of Canada.

As China undergoes a cashless revolution, many view Ant as a mobile payments company.

But Ant  — which today counts nearly 600M Alipay users, plus 110M+ Alipay partners across 15 countries — is much bigger than payments alone.

100M+ users use all 5 of Ant’s key functions, meaning that they not only use Ant’s payments function to make everyday purchases, but also use Ant to take out loans, buy insurance, check credit scores, and invest assets in Ant’s money market fund — Yu’e Bao.

That’s not to say Ant doesn’t face its share of challenges. In the last year, Chinese regulators have clamped down on China’s burgeoning fintech sector. Ant has responded by curbing some of its services, including the financial uses of its credit scoring product, Sesame Credit, and lowering daily withdrawal limits for Yu’e Bao users.

Ant is also focusing more and more on the “tech” (rather than the “fin”) side of fintech.

It considers tech services to be an enormous market opportunity. This summer, Reuters reported that in 5 years, tech services (including online risk management and fraud prevention for financial institutions) will make up 65% of Ant’s revenue, compared to 34% in 2017.

Ant’s tech services include instruments for financial partners such as biometric IDs and image recognition tools for auto claims.

In this analysis, we trace the evolution of Ant Financial, from its beginnings as a rapidly growing online payments service to its position as a multi-faceted financial services giant today.

Table of contents

• The rapid rise of Alipay
• Ant’s financial products
  • Wealth management
  • Insurance
  • Lending
  • Credit scoring
• The effects of regulation
• Open platform strategy
• Globalization strategy
• Looking ahead

The rapid rise of Alipay

In 2004, Alibaba Group launched Alipay to support online payment transactions on Alibaba.com and Taobao.com. Alipay quickly become the leading online payments service provider in China, claiming more than 50% market share and 47M users by 2007, according to Alibaba Group.

To understand the fast rise of Alipay, it’s important to understand the backdrop to payments in China.

Low credit card penetration: China has just .31 credit cards per capita, vs. 2.5 credit cards per capital in the US. Notably, card payments accounted for $5.7T of US transaction volume in 2015. Because credit cards were not widely used in China, Alipay’s escrow-based system and broad accessibility resonated with consumers.

Weaknesses of China’s banking system and state-owned enterprises: In China, banks set strict requirements around credit card applications and lack strong tech expertise or direct-to-consumer relationships. As the designated online payment service for the 80M users on Alibaba’s Taobao marketplace (by 2008), consumers naturally adopted Alipay.

China’s transition to a consumption-driven economy: In what’s often referred to as “the consumer upgrade,” China’s consumers are increasing spend on travel, household goods, dining, fashion, and more. By 2008, Alipay was increasingly becoming an accepted payment method for retailers and service providers outside Alibaba’s ecosystem.

When Alipay hit 100M users by 2008, China’s transition to a smartphone-based economy was just starting to take place. Between 2008 and 2014, China’s mobile internet users grew from 118M to 557M. At the same time, Alipay’s market share in China’s mobile payments industry grew to 83%.

Since then, a couple critical drivers have enabled Alipay’s mobile growth, and the growth of China’s mobile payments industry overall.

The first was the transition of e-commerce from online to mobile.

As China’s smartphone growth ballooned, Alibaba and other leading e-commerce platforms in China started to aggressively promote and market mobile shopping. The result was a near total transition of consumer interactions on Alibaba’s marketplaces to the smartphone.

In 2011, Alibaba’s mobile e-commerce penetration in 2011 stood at less than 15%. By 2015, it had grown to close to 50%. In 2018, Alibaba’s mobile e-commerce penetration is expected to reach close to 85%, meaning that people are most commonly buying things on their smartphone.

P2P money transfers also helped drive mobile payments in China. In 2014, Tencent created the WeChat Red Envelope feature, followed by Alipay’s launch during the 2016 Chinese New Year. The product, which allows users to seamlessly send small amounts of money to others in the form of Chinese Red Envelopes (or hongbao), drastically changed how users engaged with virtual money transfer functions.

By 2016, China’s mobile payment volume originating from personal application functions (including transfers between accounts) grew to $6.5T.

The WeChat Red Envelope feature also enabled competition for Alipay in the form of Tencent’s mobile wallet, WeChat Pay.

While Alipay dominated the early rise of mobile payments in China, WeChat Pay used the combination of product innovation and partnerships with high-frequency mobile marketplaces — including Didi Chuxing and Meituan-Dianping — to establish market share.

These growing use cases for mobile payments in the everyday lives of Chinese consumers catapulted China’s mobile payment volume from $1T in 2015 to $15.5T in 2015, with WeChat Pay and Alipay making up a whopping 92% of China’s total mobile payment volume as of Q3’17.

Ant’s financial products

In October 2014, Alipay was rebranded as Ant Financial

While mobile payments made up the bulk of Ant’s revenue in its first 10 years (accounting for 54% in 2017), Ant’s decision to add additional financial services products to its platform has broadened its opportunity to bring in more revenue per user.

In this sense, Alipay’s mobile payments service is now starting to act merely as the gateway to Ant’s broader suite of financial services.

Wealth management

Perhaps Ant’s savviest moves have been in wealth management. Noticing that Alipay users were leaving leftover money in their Alipay wallets, Ant acquired a small fund manager called Tianhong Asset Management in 2013.

The move was aimed at launching Yu’e Bao, a digital money market fund platform allowing Alipay users to invest idle cash sitting in their virtual wallets. Yu’e Bao quickly grew to become the largest money market fund in the world, with over 400M users and $211B assets under management today.

Beyond Yu’e Bao, Ant also operates Ant Fortune, a marketplace that pairs China’s asset management companies with consumers.

Notably, Ant claims 116 — nearly all — of China’s mutual fund asset management companies sell products on Ant Fortune to its 180M users. This is notable because Ant sees strong margins on its marketplaces where it charges financial institutions fees for tech and services.

More recently, Ant Fortune has looked to expand the breadth of wealth products on its platform. In August, Ant Fortune announced it would put 14 target-date retirement funds on its platform, which allow users to allocate a pool of investments to varying degrees of risk based on when an investor is expected to retire and cash out.

Insurance

Insurance is another financial category where Ant uses a marketplace model to serve its hundreds of millions of consumers.

Ant claims that 392M users annually use Ant’s insurance marketplace to find thousands of products sold by over 80 Chinese insurance companies. Like Ant Fortune, Ant’s insurance services also see strong margins, charging insurers tech and service fees to be featured in its marketplace.

This is a different insurance strategy from Tencent, which has largely opted to strike one-off partnerships for customized insurance solutions through its online insurance agency WeSure. Launched in November 2017, WeSure has struck partnerships with insurers such as Taikang Life, to launch a healthcare product called WeMedicare Insurance, and MetLife China to launch an aviation accident insurance product for Chinese travelers.

Lending

In lending, Ant offers three major financing services:

Ant Micro-Loan: The credit loan service arm of Ant’s private commercial bank, MyBank. The platform provides micro-credit loans to small businesses in China and issued loans to 3M applicants by mid-2016.

JieBei: A consumer credit loan service for Ant users with high Sesame Credit scores (600+). JieBei claims to hand out, on average, 3000 yuan (roughly $440 USD) to consumers each month, driving consumption on Alibaba’s shopping marketplaces.

Huabei: Huabei, or Ant Check Later, was launched in April 2015 to allow users to buy items with credit with no-interest installment repayment. HuaBei claimed 80M active users at the end of 2016.

Ant has put an emphasis on the impact artificial intelligence has in driving its loan success. In an article in Harvard Business Review, Ming Zeng, Chairman of Alibaba’s Academic Council, noted that Ant’s use of algorithms to process the huge amount of transaction data generated by small businesses on its platform has allowed it to lend more than $13.4B to nearly 3M small businesses.

Credit scoring

Launched in 2015, Sesame Credit (or Zhima Credit) provides a private credit scoring and loyalty program system using data from Alibaba’s services to compile its score. Because China lacks a reliable credit system like FICO in the US, Sesame provides its consumer and business users with a score from 350 to 950 and may reportedly be used in China’s forthcoming social credit system.

Together, these financial services categories make up the Ant Financial ecosystem.

The effects of regulation

One of the biggest topics in China’s fintech sector in 2018 has been the impact of regulation.

In peer-to-peer lending, for example, regulators have set forth a number of laws and regulations aimed at regulating the explosion of the industry. Such rules reportedly have helped cut the number of P2P lenders in China by half.

Regulation has also had an effect on Ant’s growth. One of the most notable examples of this was Ant’s decision to limit the growth of its money market fund Yu’e Bao.

With Chinese regulators exploring new licensing and minimum capital requirements rules, Ant imposed a ceiling of RMB 100K per individual, down from RMB 1M as it looked to reduce investment risk. In May 2018, Yu’e Bao went further, lowering its daily withdrawal limit from RMB 50K to RMB 10K. The average amount users have invested in Yu’e Bao is RMB 3,300.

These measures have had a significant effect on Yu’e Bao’s AUM. At the end of Q1’18, Yu’e Bao had $266B AUM. By the end of Q2’18, that had fallen $55B to $211B AUM.

Ant has also taken steps to curb the use of Sesame Credit scores for financial use cases.

In January 2018, Ant was punished for automatically enrolling users into its credit rating system and, a month later, Sesame Credit stopped servicing unlicensed financial businesses, including certain banks, consumer finance companies, and online microlenders.

Today, Sesame is largely used for non-financial purposes, such as credit checks for bike rentals and visa approvals. Ant portfolio company Hellobike, for example, offers a deposit-free bikeshare service in 180+ cities for users with a 650+ Sesame Credit score.

Finally, Ant has taken steps to curb asset-backed securities in its consumer lending unit. With the consumer upgrade in China creating a surge of demand for Ant’s consumer credit products, Ant has created a structure in which it packages its loans into asset-backed securities, which it then sells to investors.

As regulators required lenders to consolidate securitized products on their books, Ant saw a big drop-off in ABS issuances.

Ant’s open platform strategy

One of the key tenets of Ant’s strategy is its focus on providing an open platform for existing financial institutions to leverage Ant’s technology and tap into new users. As it shifts its revenue focus away from primarily financial services, Ant is prioritizing the tech services it provides to banks, asset management companies, and insurers.

For example, asset managers offering target-date retirement funds on Ant Fortune have access to analytics to target customers as well as AI-based services like automated e-brochures.

This is the most important aspect in understanding the plausibility of Ant’s $150B valuation: Ant doesn’t need to rely on payments for profitability if it can use payments as a gateway into its financial services ecosystem, where it charges financial institutions tech and service fees with high margins. (Recall 100M+ Ant users use all five of its core financial services.)

Ant’s open platform strategy and moves into tech services show that the company is not afraid to lose money in acquiring users into its ecosystem.

One of Ant’s key focuses for acquiring users is offline payments. In Q1’18, Ant swung to a big quarterly loss by promoting offline mobile payments, ranging from fast food to department stores to public transportation.

To ensure that financial institutions view Ant as a strategic partner rather than a rival, Ant is promoting new technologies and collaboration. One example of this was Ant’s decision to launch two new money market funds operated by external parties (Zhong Ou and Bosera Funds) as alternatives to Yu’e Bao.

In the insurance industry, Ant has encouraged insurers to operate on its marketplace by developing new tools for insurers. These include an image recognition tool for assessing car damages and a car insurance tool that quantifies a car owner’s risk analysis into a numerical score.

Ant has also pursued more partnerships with China’s major banks to provide technology services, including transaction, security, financial intelligence, and customer engagement tools.

As more Chinese consumers begin using the internet to access financial services beyond payments, Ant is betting that its pervasive mobile payments service will lead users into its marketplaces, enabling strong financial growth into the future.

Ant’s globalization strategy

Looking to the longer term, Ant is focused on expanding its presence globally to drive growth. In an earlier talk, Alibaba Group executive vice chairman Joseph Tsai remarked that the overall vision for Ant Financial is to enable its users to make purchases and transfer funds globally.

“If you have a network of partners that are all on the same technology stack, interoperability is not a problem. In the future, someone who uses the Philippines version of Alipay could come to Hong Kong and shop at any store that accepts Alipay. That’s the vision.” — Joseph Tsai

Ant’s globalization strategy to date has focused on striking partnerships and making minority investments with local partners. Southeast Asia, in particular, has been a major focus as Ant hopes to link its technology into partners across markets including Thailand, Indonesia, and the Philippines.

More recently, Ant has looked to Latin America for new partnerships. In March 2018, Ant partnered with Openpay to expand its footprint in Mexico.

In some cases, Ant has helped its partners by investing in ecosystem development around them. In India, for example, Ant has made a major investment in India’s leading mobile wallet Paytm. After seeing success with Paytm in India, Alibaba invested in Paytm Mall (now valued at ~$2B), the online retail branch of Paytm Group. Paytm Mall is targeting $10B in gross merchandise volume by March of 2019.

Ant also invested $200M in India’s food delivery app Zomato, valuing the company at $1.1B. Zomato reported 3M monthly orders in July 2017.

Looking ahead, it wouldn’t be surprising to see Ant foster more ecosystem development with its local partners across Asia.

Looking ahead

In many ways, Ant is transitioning into its next stage as a company.

While Ant is still very much synonymous with mobile payments in China, the fintech giant is expanding. Increasingly, Ant is putting more of focus on optimizing its financial institution partners with technology, as more Chinese consumers look to fintech services to make investments, buy insurance, and take out loans.

Earlier this year, Ant said that it planned to push back an initial public offering, noting that it was unlikely that the company would pursue an IPO by the end of 2019. Many speculate that Ant’s model is challenged by regulation and increasing competition with rival WeChat Pay.

But as Ant continues to evolve, it wouldn’t be surprising to see Ant substantially deepen its influence and impact in financial services, as payments becomes the gateway, rather than the focal point.

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