Ant Financial, a Chinese fintech, did not exist five years ago. It is now one of the world’s largest financial institutions. Ant, an Alibaba Group subsidiary, is now 50% larger than Goldman Sachs. Ant’s most recent valuation was $150 billion, while Goldman Sachs’ was $99 billion. While some may argue that Ant Financial operates in a larger market and thus on a larger scale, this does not explain Ant’s explosive growth in the Chinese market, which has long-standing banks gnashing their teeth.
Ant to Change How It Makes Loans with New Consumer-Finance Company
The Chinese banking and insurance regulator said Thursday that it had approved Ant Group Co.’s application to establish a consumer finance company, the first step in the financial-technology giant’s restructuring. Ant will own 50% of the new company, which will be registered in the southwestern municipality of Chongqing, with the remaining shares held by six other shareholders. Chongqing Ant Consumer Finance Co. is authorized to conduct consumer lending and other business operations. It will own Ant credit services Huabei and Jiebei, which are used by nearly half a billion Chinese people. Ant’s massive consumer-lending business was one of the areas that enraged Beijing. People who borrowed money from Ant’s platforms had a total of $271.1 billion in outstanding loans at the end of June last year.
Ant originated the majority of the loans in collaboration with commercial banks, which provided the majority of the debt funding. Many of the loans were obtained by young people with no credit history. Ant’s activities were frowned upon by regulators because they encouraged some people to borrow and spend beyond their means, posing risks to the banks that provided funds for the loans. Two state-owned financial institutions are among the shareholders in the new consumer finance company. Nanyang Commercial Bank, a subsidiary of the state-owned China Cinda Asset Management Co., owns 15.01% of the company, while China Huarong Asset Management Co., one of the country’s largest distressed asset managers that also operates other financial businesses, owns 4.99%. Contemporary Amperex Technology Co., China’s largest producer of lithium batteries for electric vehicles, owns 8% of the company. The remaining shareholders include a Taiwanese bank’s mainland Chinese subsidiary, a transportation and surveillance services provider, and a medical-device manufacturer. Ant is owned in part by Alibaba Group Holding Ltd., which also owns a third of the company.
How Ant Financial Became the Largest Fintech in the World
With its linear microlending and micro-investing, it combines this platform approach in everything from payments and lending to insurance and investing. This hybrid approach combines complementary platforms and linear services to create an unprecedented breadth of the financial services ecosystem. Ant, a mobile payments company led by billionaire Jack Ma, has been forced to restructure its operations after Chinese authorities canceled its initial public offering in November.
Ant’s platform business model is critical to its growth. This business model begins with Alipay. Alipay, like PayPal, facilitates payments between any two users, whether they are shoppers and small businesses, roommates, or street performers and commuters. In 2017, Alipay had over 700 million active users and processed over $8 trillion in transactions, which is equivalent to 65% of China’s GDP. Ant Financial also offers other financial services to that captive audience through ecosystems for insurance, credit, loans, credit scoring, and wealth management, in a cross-selling move as old as the business itself. What’s fascinating about Ant Financial is how it’s managed to mine gold from its Alipay customer base and use that data to build a network of interlocking platform businesses in financial services.
How Ant’s financial services platforms are changing traditional finance
Ant’s only financial services platform is Alipay. It also owns and operates an open insurance marketplace with over 80 insurance companies on the platform, which has a user base of over 400 million. Meanwhile, Ant Fortune has made asset management and retirement planning more accessible. The platform, which has 180 million users, is home to all 116 of China’s mutual fund managers. Most importantly, the platform’s algorithm recommends funds based on each user’s financial profile and goals, closing financial literacy gaps that may have prevented many users from investing in the past. It’s worth noting that the platforms cross-sell services across Ant’s ecosystem, ensuring that each new venture has the user base required to attract third-party financial institutions. In other words, Ant can guarantee access to a large pool of potential clients, and financial service providers can’t pass up the opportunity to join such a large network. This large consumer base also allows Ant to launch new financial products, such as Yue Bao. Ant’s money market fund is called Yue Bao, which translates to “leftover treasures” in Chinese. With $251 billion in assets, it is now the world’s largest money market fund. Yue Bao simplified the process of investing in a money market fund for consumers. It is possible to open an account for as little as 1 yuan ($0.15).
Yue Bao was able to identify users who had a positive balance in their Alipay digital wallet by using Alipay data. Users who have a balance will be contacted, educated on the benefits of a money market fund, and invited to open an account. They could, of course, invest in any of the funds listed on Ant Fortune. Ant’s investment platforms were an instant hit in a market devoid of consumer financial products. Ant provides both platform (Ant Fortune) and linear (Yue Bao) asset management services, implying that platform transactions generate a large enough margin to justify Ant’s continued investment in it. Most importantly, whether a user chooses a third-party financier on Ant Fortune or Yue Bao, that user remains within the Ant Fortune ecosystem.
Regulatory tightening will slow down the linear services
Ant’s size has made it a significant player in the Chinese financial industry, although it is not a bank. Ant’s success is unusual in a country where the government owns or controls the majority of large financial institutions. As a result, it’s not surprising that the Chinese government intends to enact new financial regulations to oversee large fintech firms.
Ant has already felt the sting of government oversight. Its linear micro and SME lending arm was making riskier loans and passing the risk on to investors by selling the loans as asset-backed securities. In 2017, the Chinese government mandated that money market managers set aside 0.5% of net assets as a reserve for bad debt. Ant’s ABS volume fell by 65% in the first quarter of 2017. As regulation tightens, Ant is increasingly relying on its platform model, acting as a facilitator rather than a traditional lender. Reuters reports that Ant’s revenue is shifting away from traditional financial services and toward facilitating third-party financial institutions.
For example, even though Ant’s P2P lending platform, Zhao Cai Bao, experienced some high-profile difficulties, including a large default by one of the companies that issue bonds on the platform, Ant has not abandoned the platform approach to lending. (Zhao Cai Bao is now a fixed-term deposit investment platform with a secondary P2P market.) Instead, it is focusing on making its platforms more accessible to larger financial institutions. Jack Ma, the founder of Alibaba Group, announced that Ant will focus on revenue from technology services and seek partners to handle loan issuance. This change will better align Ant with the government’s financial sector strategy while allowing it to innovate and grow at what it does best in building platforms.
How to Compete With Ant Financial
Ant Financial isn’t satisfied with simply capturing the Chinese market. Its model is also being exported throughout Asia. It has made significant investments in Southeast Asia and India, including in Paytm, India’s wildly successful Alipay clone. It has also formed high-profile partnerships in Europe but has made less progress there – at least for the time being.
When faced with the prospect of competing against Ant Financial, companies should combine the best aspects of Ant’s model with what traditional financial institutions already do well.
For example, we recently discussed how lending marketplaces benefit both financial intermediaries and consumers. As the owner of a lending platform, a bank would have the first refusal on any loan and would then refer rejected clients to a marketplace where borrowers could shop for the best lender. Given that banks typically reject the majority of potential borrowers, this marketplace approach allows them to keep the customer relationship while also bringing in new customers.
That is only one example. The platform mindset that underpins everything Ant does is critical. A platform approach bolstered by the customer base and resources of a traditional financial institution will result in a potent combination that even Ant may find difficult to match.