Rise of Ant Financial, will the success story continue?

  • What is Ant Financial?
  • Journey to become king of unicorn
  • Will regulatory curbs hinder its success journey? 


Ant Financial, an affiliate and integral part of the Chinese giant Alibaba has emerged as one of the largest fintech companies in the world. In 2003, Alibaba started Taobao (a consumer e-commerce website) and launched Alipay (now Ant Financial) in 2004 as a third-party online payment platform; since then, it is playing a vital role in the success of Alibaba as its financial service arm. Ant Financial is much more than just an online payment service provider and has built its standalone presence with a wide range of financial offerings and unrivalled ‘TechFin’ capabilities.

Ant Financial spun off from Alibaba before Alibaba’s IPO in 2014 and it now runs China’s largest online payment platform ‘Alipay’. It also runs other related businesses including wealth management, microlending, credit scoring and online-only bank. Further, with the broader aim of making China a cashless society, Ant Financial is continuously expanding and enhancing its investments in financial and technological innovations.

Alipay holds a share of 53.76%, out of the total third-party mobile payment transactions in China (Q1 2018), this is way ahead of its follower Tencent Finance with a share of 38.96%. Alipay Universal Bill (a report, which shows the trend in the mobile payments transaction in China) shows that Alipay users accounted for 82% of the mobile payments, meaning 8 out of 10 Alipay users paid with mobile without a wallet in China (2017). This is backed by the popularity of Alipay money code as more than 40 Mn small and medium businesses across China have digitised their cash registers. 

Ant’s innovative and customer-friendly products have built significant consumer trust. Apart from online, it also tapped the offline market with the novel ‘payment with barcode’ and ‘soundwave payment’ technologies and became the first in China to implement fingerprint verification. Its account balance protection service allows users to claim compensation if their Alipay balance is lost through a theft. Additionally, users can access tax reimbursement services on overseas shopping or pay utility bills. According to the company, its ‘Caifu Hao’, an AI (Artificial Intelligence) powered interactive service for asset management firms, helped 27 China-based asset management companies to increase their operational efficiency by 70% through cutting of their costs into half and widening their customer base at the same time. Ant Financial’s robust IT infrastructure is powered by the latest technologies including Big data, cloud-computing, risk-control, facial recognition and artificial intelligence, which is working towards redefining users’ experience. Ant has also developed ‘3-1-0’ online lending, a service standard characterised by a three-minute application process and one-second loan grant, all with zero manual intervention. Moreover, Yu’e Bao, the largest money market fund in the world lets a consumer invest starting from just one yuan and allows Alipay’s users to buy investments with their spare change.

Ant Financial's divisions 

Furthermore, all the above reasons have boosted Ant’s valuations, making it one of the most valuable unicorns globally and leaving behind the likes of Uber and Xiaomi, while standing multiple times higher than most other start-ups in the domain. The company raised $14 Bn (June 2018) from investors including GIC, Carlyle and Temasek; indirectly putting a valuation of ~$150 Bn. Interestingly, at this level, it is even valued more than big names in the financial market like Goldman Sachs and Morgan Stanley. According to the company, it is following ‘glocalisation’ model as opposed to globalisation by partnering with companies in other countries to build a local version of Ant’s cashless payment technology. Ant’s current valuations imply 72-82x forward earning multiple, exceeding multiples of China’s three internet mammoths (30.9-66x), four global payment companies (13.9-37.6x) and four US-listed Chinese fintech firms (4.8-11.1x) as of 13th July 2018 (Source: Bloomberg). 

A review of the financial aspects of the company shows that Ant Financial’s pre-tax profit soared to ~9.2 billion yuan in 2018, a 65% YOY jump following an 86% growth in the previous year. More than half of the revenue of the company comes from Alipay payment service. In the next five years (2022), the contribution from payments is expected to shrink to 28% from an estimated 54% (2017) and the share of financial services is also anticipated to reduce to 6% from an estimated 11% (2017). The technology services division is expected to dominate the business going forward with its share in the total revenue is expected to increase by 65% compared with an estimated 34% (2017). All this shows Ant’s strategic shift from payment and financial services to a company providing these services with the ‘technology’ at its forefront.

Amid all the optimism, the company might get hit by the recent regulatory curbs in the country. Ant’s microlending division used to package thousands of consumer loans and sell these to institutional investors in the form of asset-backed securities (ABS). However, the government’s tightening of rules related to consumer lending during the late 2017 limits Ant to issue ABS exceeding 2.3 times of its total capital. This has resulted in the capital requirement in its microlending business. Yu'e Bao's asset growth has been slowing down due to a cap on its daily subscription and withdrawal limits. Further, this is expected to be a stumbling block for Cash Now, Credit Pay and MYbanks’s small loan units as asset and profit growth might be impacted adversely. Ant’s payment business arm Alipay is facing increased reserve ratio for client funds as well as transaction limits on QR code payments. Ant holds billions of yuan’s worth of client money in escrow, on which it used to earn a substantial interest income. People’s Bank of China last year ruled that third-party payment platforms are required to deposit 20% of client’s funds in non-interest earning reserves at designated banks, wherein the threshold was further raised to 50% (April 2018). The same is expected to be raised to even 100% by Jan. 2019, due to which Alipay’s earnings are expected to come under pressure.

Chinese authorities’ wariness about systemic risk brought by financial conglomerates like Ant Financial are not completely wrong considering the macro perspective. Currently, Ant Financial serves more users than some of the largest Chinese banks and such companies are considered ‘too big’ to fail and their collapse could pose a systemic risk to the whole financial system. Regulators are now considering the requirement of obtaining an operating license for those which operate in two or more financial segments and may face minimum capital requirements. Ownership structure and inter-group transactions may also be restricted for large companies in China. Certainly, all these regulatory actions might act as a setback on Ant’s profitability and may come at a cost to China’s largest fintech company. The ownership structure restriction and requirement of new capital infusion are likely seen as the major challenges in the near-term growth of the company. Positively, Ant’s strategy to move towards more of technology and less of financials are expected to support its long-term growth both in terms of revenue and profitability. The company’s outlook seems more likely to rely on a strategic shift to technical services, global expansion and start-up investments, among others. Ant's financials may not be looking so propitious 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 financial and technology domain, including the extensive base of clientele which stands as its biggest strength. Hence, with an IPO planned sometime in 2019, the company might unlock its true value for investors.

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