At the time, the Zhejiang Ant Small & Micro Financial Services Group was a $ 50 billion company disrupting China’s financial system, providing anyone with a cell phone an easy way to pay and invest their savings without having to to get to the bank.
Today, Ant is aiming for a valuation of $ 200 billion to $ 300 billion in a dual listing in Hong Kong and Shanghai, although meetings with investors are still ongoing.
It still dominates mobile payments in China, but instead of competing with the financial industry, it has become a digital supermarket of other people’s offerings, allowing users to buy on credit, invest in mutual funds and find insurance from established players.
It even changed its name from Ant Financial to Ant Group to emphasize that it is a technology company rather than a financial services company.
Ant made a net profit of 18 billion RMB ($ 2.6 billion) out of 120.6 billion RMB last year. It eclipsed that figure in the first half of this year, according to its IPO, with net profit reaching RMB 21.9 billion. This growth has impressed analysts, with David Dai of Bernstein Research suggesting that Ant should eventually trade at a earnings multiple 30 times similar to that of its peers Tencent and Visa.
Ant’s transformation from a direct provider of financial services to an aggregator of a large number of customers for the services of others began in 2017, when regulators in Beijing began to worry about the role the company played. was playing in the financial system.
The fees Ant collected last year for matching its users with loan, wealth management and insurance offerings from financial firms contributed 63% to its first-half revenue, up from 44% in 2017.
Nonetheless, Martin Chorzempa of the Peterson Institute of International Economics think tank noted that large parts of the Chinese financial system have been reorganized around technology platforms.
“It is Western bankers’ worst nightmare of what would happen in an open banking system,” Chorzempa said. “Essentially, the banks lose their direct relationship with the customer and it all gets publicized by the platform.”
Ant payment app, Alipay, was launched in 2004 as a service for buyers on Alibaba’s e-commerce site. Today, it’s also widely used in the real world, with over 80 million merchants making payments through the app every month.
But Ant’s payments business, which processed 118 billion rmb ($ 17 billion) in transactions in mainland China from the year through the end of June, is increasingly under pressure from WeChat, owned by Tencent.
Its share of the Chinese third-party payments market fell from three-quarters in the first quarter of 2015 to about half in the first quarter of this year, according to Analysys.
In a store in Beijing’s Qijiayuan Market that sells soft drinks, snacks, and wines, almost all shoppers scan the Alipay or WeChat QR code to pay. “Most customers use WeChat Pay these days, very few use Alipay and even fewer use cash,” said owner Ms. Xiao. Neither Tencent nor Ant charges it any fees for transactions.
Ivan Platonov of research firm EqualOcean said buyers prefer to use WeChat because they can easily switch between in-app messaging and payments. WeChat is also the dominant channel for money transfers between friends and relatives. But Alipay’s monopoly on payments for purchases on Alibaba’s e-commerce platforms allows it to remain the leader in e-commerce payments, Platonov said.
Mr. Dai said that while payments are the channel that draws users into Ant’s other offering ecosystem, they are not profitable as a standalone line of business. This is in part because regulators in 2017 began to reduce the amount of unused cash held in user accounts that payment groups could invest for their own benefit, a major source of interest income, by $ 100. % to zero.
The reduction in the share of payments in Ant’s revenue – from 55% in 2017 to 36% in the first half of the year – also helped strengthen Ant’s financial results.
Consumers who pay with Alipay are also starting to borrow there. Alipay arranges small loans to consumers and small businesses and collects a service fee from the lender related to the loan balance.
Last year, revenue from its lending business grew 87% year-on-year to Rmb42 billion and was Ant’s main revenue driver in the first half of the year. About 500 million customers have taken out loans through Alipay in the past 12 months.
The balance of consumer loans it has granted stood at 1.7 billion rmb as of June 30, 98 percent of credit extended by its 100 partner banks or securitized by the company and sold on the market. China’s total outstanding credit on bank cards and credit cards was Rmb6.5tr in the same period.
“A lot of the decision-making, the data, the risk analysis, the rules, the financial product – it’s all designed by the tech company, not the banks,” Chorzempa said. “The banks provide the capital, but in a way the banks are becoming stupid pipes. . . vying for customers and businesses on the platforms of the big tech giants, ”he said.
This year, the coronavirus epidemic has pushed up loan default rates. While Ant is not responsible for defaults, it is important for its lending partners to keep the rate low. The company had previously struggled to transform its advertised credit scoring system, Sesame Credit, into a useful determinant of lending and it was only mentioned a few times in Ant’s 674-page prospectus as a “score of”. trust ‘useful for hotel reservation and biking without deposit. rentals.
Ant launched its Yu’E Bao fund in 2013, allowing customers to invest the growing stacks of cash in their Alipay accounts. For years, its subsidiary Tianhong Asset Management invested all the money and ranked as the largest money market fund in the world.
This is no longer the case today, with stricter regulations starting in 2017 gradually requiring Tianhong to reduce the amount that each user could invest with the fund. Morningstar analyst Chloe Qu said regulators acted when they believed the Yu’E Bao fund had become so large that a wave of withdrawals could pose systemic risk to the financial system.
Ant now offers competing funds in the Yu’E Bao Slot Machine, and Ms. Qu said that most users have no idea which company is actually managing their money. “If you can get your product in the Yu’E Bao channel, it’s like a money making machine, people just pile their money up,” she said.
Ant earns a small commission on the money its more than 500 million users invest with its asset management partners such as the Chinese joint venture Invesco and Bank of China Investment Management. It is the largest online investment services platform in China in terms of assets under management, with a total of Rmb4.1 billion invested through the platform as of June 30.
Last year, the business line grew 22 percent year over year and added RMB 17 billion to Ant’s turnover.
Insurance and other projects
Ant’s insurance business contributed 7% to revenue last year, growing 107% year over year. As with its other offerings, the company collects fees based on the percentage of premiums and contributions that users pay to insurance companies distributing the products.
The company’s innovation initiatives, like a blockchain project, are equally small, contributing less than 1% of revenue last year.