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Alibaba built the “Amazon of the East”. Now its fintech spin-off will become the biggest initial public offering of the year.
In An IPO market on fire, the biggest yet to come: Ant Group, a Chinese online payments giant created by Alibaba founder Jack Ma. The company applied for its initial public offering this week and is expected to be the most valuable company ever listed on a global stock exchange. The company plans to sell 10% of its shares on the Nasdaq-like Shanghai exchange and 5% on the Hong Kong Stock Exchange, according to MarketWatch.
The Chinese company is ltheIt is set to raise a record $ 30 billion in its IPO, which is expected to happen in October (for context, Saudi Arabian oil giant Aramco raised $ 25.6 billion in its IPO last December ).
Ant Group is the fintech that has outperformed all fintechs, and the success of its initial public offering will depend on how the market perceives its technology relative to his final. The company is the ultimate combination of Stripe, PayPal, Apple Pay, Venmo, FICO, and any of the many fintech companies in the US offering loan, savings and insurance products. While tech company stocks have risen sharply in recent months with the Nasdaq rising roughly 25% above where it was in February, stocks in financial companies, such as US Bancorp and PNC, have languished. Meanwhile, with an estimated valuation of $ 200 billion, Ant Group is worth more than most global banks. This is how Ant Group became the world’s largest fintech company.
Ant Financial, now known as Ant Group, was founded in 2004 by Jack Ma. Five years after he founded Alibaba, China’s largest e-commerce company often hailed as the Eastern Amazon. Ma had identified a customer trust issue, which was preventing the growth of his e-commerce business. Given China’s relatively weak consumer protection laws and deteriorating consumer confidence in quality control, people were reluctant to buy products online. So Jack Ma established the mobile payment platform Alipay as an intermediary who would keep the buyer’s money on deposit until a successful delivery was made, after which the money would be transferred to the seller. It was like PayPal, but with a much lower adoption threshold given the scarcity of alternatives.
Last year, Alibaba generated around $ 38.3 billion in sales in a single day during its Global Shopping Festival, the world’s largest 24-hour online sale held annually on November 11 to celebrate Valentine’s Day. Singles, a popular anti-Valentine’s Day holiday celebrating single people. in many Asian countries. Coresight Research reports that this Festival alone generates more sales than Black Friday and Cyber Monday combined.
At the end of 2006, more than 300,000 merchants accepted Alipay as a separate payment method, including gaming companies, travel websites, and online stores.
Since Alipay was effectively functioning as Alibaba’s growth engine, it was also able to cultivate its own merchant network. China’s digital payment infrastructure was relatively underdeveloped, with cash use still very high in the early 2000s. Alipay expanded outside of Alibaba’s footprint to facilitate other online transactions. At the end of 2006, more than 300,000 merchants accepted Alipay as a separate payment method, including gaming companies, travel websites, and online stores. The number of users increased rapidly, and in 2010, the payment method received official government backing, allowing it to develop largely without compliance costs and regulatory restrictions.
Today, Alipay has 1.3 billion active users annually (compared to 346 million active PayPal accounts worldwide). Most are in its local China market, but the company also has more than 300 million users in India, Thailand, South Korea, the Philippines, Bangladesh, Hong Kong, Malaysia, Indonesia, and Pakistan. It has a 54% share of the Chinese digital payments market, which in total made volumes of around $ 33 trillion last year. (The next biggest player is Tencent at 39%.)
Those volumes include many transactions other than retail. There are also peer-to-peer payments (similar to Venmo), transfers between a user’s own accounts, and payment for financial services and utility bills. But within retail, digital payments make up a large part of transactions. Much of that is done online, in keeping with Jack Ma’s original goal of launching Alipay to boost e-commerce, but digital payments are increasingly being used in the offline world as well. The number of QR code payments has exploded in China, helped by promotions mounted by Alipay and its peers.
While Alipay created great value for Alibaba by reducing friction in e-commerce, it did not initially realize much value on its own. Even today, Alipay charges a heavily discounted fee on the payments it executes for Alibaba, and peer-to-peer payments are free. In an interview in March, the company’s chief executive, Simon Hu, said that 50% of daily transactions are free.
Alipay built its financial services strategy around two resources: access to data and access to client funds.
To capture value, he needed to maintain control of client funds. Alipay pays the cost up front each time users upload money to the system, a 0.1% fee charged by the user’s bank. To cover that cost, you need to hold the funds for as long as possible. In the early days, Alipay was able to reinvest the funds left in user accounts to earn interest. However, the Chinese government gradually eliminated that opportunity, requiring Alipay to park funds in a low-interest escrow account within the banking system.
So the company turned to other financial services. Alipay built its financial services strategy around two resources: access to data and access to client funds. In 2014 it was restructured as Ant Financial and obtained private capital. It obtained a license to operate a new banking business, MYbank, and promoted its money market fund, Yu’e bao (pronounced yoo-uh-bow), which he had released a year earlier.
Since the beginning of 2019, digital financial services have generated more revenue than payments. Today, Ant Group manages more than $ 560 billion in wealth management. About a quarter is managed internally as part of the Yu’e bao money market fund, which gained popularity as a place for consumers to park additional cash at an enhanced interest rate through a few clicks on their smartphone (Yu’e bao translates to “leftover treasure”). Chinese consumers now treat the fund like a checking account. It initially offered an interest rate of 5% at a time when banks were offering only 2.75% on deposits. Since then, rates have dropped and, subject to heightened regulatory scrutiny, the company imposed a cap on investment amounts.
Ant Group’s second key resource, data, is leveraged through the company’s credit rating service, Credit Zhima (or Sesame Credit). The service generates credit scores based on public data, but also leverages alternative data such as relocation trends, money transfers, shopping activities, and even social relationships. The score is useful not only for obtaining credit, but also for giving customers access to car rental or hotel reservation services, and for borrowing more mundane items such as umbrellas and mobile phone chargers at local stores, all without a deposit. A good credit score even exempts clients from having to apply for a visa if they want to visit certain countries like Singapore and Luxembourg (they would need a score of 700 for that, in a range of 350 to 950).
Credit scoring provides another lever in addition to payments functionality to improve customer retention. But it is not a profit center in itself. Rather, its value comes from Ant Group’s loan business. In this case, the company is focusing on small business loans for consumers and small businesses, which it can offer quickly. Loans are currently the company’s largest revenue driver, contributing nearly 40% of revenue in the first six months of 2020 (the company has also recently added insurance products, capitalizing on current low levels of insurance penetration in China).
In total, Ant Group offers products in five business areas: payments, wealth management, credit rating, loans and insurance. Their cross-selling has been near perfect. According to the company, “the vast majority of Ant Group’s digital payment users were also users of digital financial services.” The company has also said that 80% of clients use three or more financial services and 40% use all five services.
Prior to its IPO, Ant Financial has changed its name back to Ant Technology. It published a three-year plan in March focused on opening the Ant ecosystem to a wider selection of partners, not just financial institutions. Its new application incorporates local services such as food delivery, transportation and medical services, reflecting the degree to which the company hopes to integrate into the daily lives of its users. Somewhat disturbing, said a company spokesperson The Guardian, “The idea is that people are living their lives through this platform.”
In this latest iteration, Ant Group is further strengthening its moat. However, this could become a liability. Although regulators have tended to lag behind fintech developments in China in the past, lawmakers in China are already putting more pressure on Ant. Its IPO prospectus warns of “the evolution of regulatory regimes, which may adversely affect our business and prospects. ” The company’s decision to go unlisted in the US also reflects the growing tensions in US-China trade relations and increased scrutiny of Chinese companies by the Trump administration. All the more reason why investors will be watching this IPO closely.
This is a shortened version of an in-depth analysis that was previously published on Net interest.
