Ant Financial isn’t meant to be a financial services company, though it has been operating as one – at least for the last few years. After all, payments have accounted for much of Ant’s success, and the firm holds licenses to operate in key financial areas.
Its massive business has challenged China’s financial order and made traditional service providers like banks and insurance groups wary.
Contrary to common belief, however, the Alibaba affiliate has set out to be a technology – not financial – services firm catering to the traditional players, instead of replacing them. And it’s on track to reach this goal.
An ecosystem approach
Ant started out as Alipay, an escrow service for Alibaba’s Taobao marketplace, in 2004. As it grew into a goliath in its own right, it spun out in 2011, with Alibaba agreeing to take a share of its profits rather than equity. It was only this February that Alibaba finally bought ownership in the firm, taking a 33 percent stake.
Since its spin-out, Ant has devised in-house products spanning banking, wealth management, lending, and insurance – services that have eaten away market share from financial institutions. Later on, it began offering its technology to those same institutions, turning them into enterprise customers.
Rather than be seen as a competitor, Ant wants to position itself as a technology partner of the traditional financial sector.
The way Ant operates is similar to Alibaba’s approach to ecommerce. Just as Alibaba provides marketplaces for sellers and buyers to trade, Ant runs platforms that allow financial services firms to reach end-users. These third-party providers pay Ant technology service and commission fees.
Ant also sells its software to help these traditional players beef up their internal products. For instance, Bank of Nanjing has been using Ant’s risk control technology and Huaxia Bank has leaned on Ant in its transition to blockchain, AI, and biometric verification.
“Like Alibaba’s ecosystem in the ecommerce industry, a similar ecosystem will emerge in the financial industry,” stated CEO Eric Jing when Ant officially launched as Alipay’s parent in 2014.
Opening up, gradually
If Ant wants to be an ecosystem instead of a purely financial company, why did it launch its own financial products in the first place? The fact that Ant has amassed a range of licenses has turned heads.
In response to the criticism, Ant’s vice president Chen Liang told media in late May: “We can’t make financial institutions the guinea pig, so we’ve become one.”
He explained that for a newly minted technology to mature, it needs to go through trial and error in real-life scenarios.
“Obtaining licenses doesn’t mean that our goal is to be a financial institution,” he added.
Two years after Alipay launched, it started opening up its payment system to ecommerce platforms apart from Taobao. Joyo, the China subsidiary of US e-tailer Amazon, was among the first to try it out.
Ant has also started to let third-party players tap the massive user base it has accumulated from Alipay, which controls a whopping 54 percent market share in China. Over time, the payments app branched out into other financial services. Wealth management service Ant Fortune, which launched in 2015 and is accessible via the Alipay app, now offers products from 100 asset management firms.
When asked whether Ant’s worried that third-party businesses will outflank its own products, a spokesperson told Tech in Asia: “We are dedicated to building an open ecosystem with all our ecosystem partners in China and beyond.”
As aspects of Ant’s financial business draw increasing government scrutiny, the company may be hoping its platform approach will act as a stabilizing force for future income.
In what’s considered an attempt to prevent misuse of client money, the People’s Bank of China in January unveiled rules requiring non-bank payment firms to allocate 50 percent of their total client funds in regulated interest-free reserve accounts. This is up from a previous rate of 20 percent, and the ratio is expected to increase to 100 percent over time.
The new regulation is strangling an important income source for the 267 affected payment companies, including Alipay and Tencent’s financial unit Tenpay, which runs Alipay’s counterpart WeChat Pay. These firms typically deposit client reserve funds – prepaid sums they hold temporarily before transferring to sellers – in banks to earn interest.
See: How WeChat Pay became Alipay’s largest rival
It’s not known how much these funds account for Ant’s income, but a report from market research firm TrendForce gives a sense of the industry’s scale. The total amount of reserve funds that will transfer from third-party payment providers to the control of the Chinese government is estimated to be around US$77 billion.
Ant’s other sprawling business line, Yu’e Bao, which means “leftover treasure” in Chinese, is also facing mounting regulatory pressure. In just four years, the money market fund has became the world’s largest, with US$211 billion in assets, by offering better interest rates than banks.
Yu’e Bao lowered in August the maximum amount individuals could deposit, which analysts suggest was a preemptive move against a clampdown on money market funds investing in interbank deposits.
“The goal of regulators is to rein in financial risk,” notes a Beijing-based market analyst who requested to stay anonymous. “No one expected Yu’e Bao to grow this big, so regulation is inevitable.”
Sources have told local media Kai Qi and Reuters that the share of Ant’s revenue accounted for by online payments will fall to 28 percent by 2021 from the current 54 percent. Financial services will make up 6 percent, down from 11 percent, while technology services will shoot up to 65 percent, from about 34 percent.
“[Ant’s] technology service platform is comparable to Taobao and Tmall. EBITDA margin for Alibaba’s core ecommerce businesses was 62-65 percent from 2015 to 2017, so a technology service platform providing wealth management, micro-lending, and insurance will also enjoy a relatively high margin as it develops,” Zhao Xianghuai, chief finance analyst at Essence Securities writes in a report.
Like Alibaba’s ecosystem in the ecommerce industry, a similar ecosystem will emerge in the financial industry.
According to Reuters’ sources, Ant’s overall revenue is projected to grow at 40 percent annually from 2017 to 2021.
Ant’s plan to become an ecosystem is evident in its latest funding round that closed at US$14 billion, making it the largest-ever single fundraising globally by a private company.
The giant plans to use the new injection to further invest in technology and expand overseas, where it hopes to bring the same set of “technological know-how and risk management capability” to local partners, according to a company statement.
The firm did not disclose its valuation, but market watchers have estimated it to be around US$150 billion, far exceeding Goldman Sachs and Morgan Stanley. It’s widely regarded as the final round before Ant’s much-anticipated IPO.
“[Ant’s] latest financial round signals that it will be increasingly a technology company going forward and that it will be investing more new capital in this direction, including through partnerships,” observes Luke Deer, who researches China’s financial technology at the University of Sydney. “Rather than being seen as a competitor, Ant also wants to position itself as a technology partner with the traditional financial sector. Ant it’s doing everything to move its tech services forward.”
Currency converted from Chinese yuan. Rate: US$1 = RMB 6.49
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