Case I Fin Tech and Finance Transformation PDF

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FNCE 385 - Spring 2020 Q3 - FinTech: Business, Finance, and Technology - Prof. Shimon Kogan...

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Discussion Questions Please address all the following discussion points: 1. Ant Financial business grew out of Alibaba’s commerce business. What elements feed this synergy? In order to achieve success in e-commerce, Alibaba needed a way to efficiently and securely oversee the monetary exchanges involved in the B2B and C2C transactions which comprised its business. Ant Financial grew out of this need. Serving as an escrow intermediary between sellers and buyers, the first form of Ant Financial, Alipay, offered a solution to this issue. By mediating the exchange, Ant Financial could offer sellers and buyers additional protections regarding the transactions thereby strengthening their trust in the platform. This trust was an essential development in the rise of Alibaba’s e-commerce business, and represented a key point of synergy between Ant Financial and Alibaba. In a way, Alibaba initially legitimized Ant Financial simply through their association, and in turn Ant Financial legitimized Alibaba by introducing additional trust in transactions through the protections offered by escrow. As Alipay developed further into Ant Financial, the synergy with Alibaba continued to grow. a. The already established, immense Alibaba e-commerce platform and consumer base. This provided the trajectory for it to handle 54.1% of all online payments in China. By building off of the already existing Ant Financial platform, the company was able to garner more customers and increase their cash flow by providing another service in which customers were able to grow the money within their Ant Financial accounts. Alibaba’s connection to the e-commerce and e-marketplaces such as Taobao enabled them to gather more “data, browsing behaviors, sales, transactions, and payment collections” to look past credit records in order to provide services such as interest free financing and loans. This relationship was synergistic, even described by Eric Jing (CEO) as an “ecosystem.” b. After going public, Ant Financial invested in Koubei.com (lifestyle search engine) that would give insight to consumption demand in real-time of various offers while also bringing in other services such as food-delivery app Ele.me, allowing a greater use for Alipay accounts and increasing the likelihood that individuals would use similar platforms. c. Low operating costs of ventures such as MYbank, enables for lower interest rates than traditional banks. The online platform also provided access to a larger demographic, including rural farmers who were previously underserved. d. The data gathered from the Ant Financial led to even more possibilities of expansion, including Antsdaq, an equity crowd-funding platform. This also platform allowed them to target large buyers. e. Alibaba’s partnership with offline companies such as Suning Commerce (an electronics retail chain) required Suning to use the payment services of Ant Financial. Therefore, as one company grew in partnership to another, they utilized Ant Financial services as a payment medium for the transactions.

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Alibaba’s technological capabilities, especially their early investment cloud computing/cloud services allow Ant Financial to handle a larger amount of transactions at a faster and lower cost than traditional credit card companies. 2. Ant Financial is said to be the world’s largest FinTech company. Apply our definition of FinTech (topic 1) to Ant Financial and discuss how technology and data analytics are being used to drive down financial frictions. Under the definition of fintech as “the use of technology and analytics, often through new business models, to lower frictions in financial services,” Ant Financial has utilized the online technology of the already existing Alibaba commerce site in order to expand into smoothing out friction of payment transferring from the consumer to the merchant. The CEO of Ant Financial, Chen Long, also supports this through the company’s business model by stating clearly that the company’s goal is to effectively solve problems for society at the “pain points” of the customers. Through an online platform, the company also provides various financial services such as “payment to loans, wealth management, credit-scoring, and insurance services.” In order to bridge the information gap, Ant Financial was formed in order to “address the lack of trust between merchants and customers” by acting as an Escrow account in which they would first receive the payments from the customers and not yet release the payment to the merchant unless the product or service was delivered. Using technology, they made up for the gap in wealth management services, by developing Yu’e Bao. They were even providing financing through Huabei by using personal credit scores, historical activities, reputation on Alipay, Taobao, and Tmall in order to provide an interest free financing, or allow customers to pay back after a larger time period with some interest. Before this, there were limited possibilities of this due to the “lack of individual credit records,” but the use of data through their already existing transactions allow them to reduce the friction that previously existed within the industry and allowed for the facilitation of this financing process. This similar big data could also provide “unsecured, uncollateralized loans” to the SME merchants that the larger banks had previously overlooked. E-commerce databases such as B2B platform, Taobao platform, Alipay platform were used for strategic data analytics for “marketing (to understand customer behaviors and preferences for targeted recommendations), credit assessment, and risk management.” This can be seen in their product, Zhima Credit, a platform that used analytics-based credit scoring that used online and offline transaction data. This was a step ahead of the traditional banking credit scoring systems which were only based on demographic, income, residence, and tax assessment. Utilizing consumer behavior lowered the risk by providing a more comprehensive credit assessment. Fraud detection and risk management were also addressed when Ant Financial used data analytics to incorporate compliance practices and risk control. Controlling and lowering risk in the process of finance would allow effectively provide services without the problem of asymmetric information. This led to lower fraud-loss rates for Ant Financial compared to other banks, including US companies. Ant Financial was able eliminate major customer pain points through innovations such as an online platform, using alternate sources of data to examine credit worthiness, analyzing patterns in fraud, and developed trust with the consumer through eliminating these pain points. All of this contributed to lowering frictions in what was a high friction market which made them very successful. 3. Ant Financial has stated that it is not competing with banks but rather enabling them. If you were the CEO of an incumbent bank, how would you evaluate this statement?

Initially, when Ant Financial began as a platform of payment transactions, they partnered with various traditional banks to smooth out the process of online transactions by providing a platform in which B2B and C2C exchanges could take place. However, Ant Financial’s growth into the various financial services including wealth management, loans, credit scoring, and insurance has threatened the very backbone of the traditional banking industry by taking away the consumer base. As CEO of an incumbent bank, the rise of Ant Financial which within 3 years garnered 520 million active users on an annual basis, is concerning. In the beginning as a platform of payment transactions, they quickly grew to fit the needs of the consumers. Even establishing Yu’e Bao in order to invest the small funds they kept within the bank, making up for the absence of interest the customers were getting from keeping their money within the Alipay accounts. By becoming more attractive than traditional banks who were “unattractive and deliberately fixed and controlled by the state,” they were threatening the financial structures of most banks. Lending is the leading revenue stream and a source of capital from the people is most essential to traditional banks. By taking the customer’s capital, Ant Financial was a large competitor. Not only did Ant Financial target the everyday consumers of these banks, but they also initiated a relationship with the underserved small and micro merchants. It could be argued, Ant Financial worked with the traditional banks “to make financing easier” for the small and micro enterprise merchants as they provided specific services to smooth out the inefficiencies of larger banks who had only focused on larger conglomerates. By initially teaming up with traditional banks, they realized the established banks were not properly providing for this demographic. Ant Financial then began providing services that suited their platform in order to gain the previously disregarded, smaller enterprises as consumers. Ant Financial also helped other financial institutions through their Caifu Hao platform where they allowed third-party financial institutions sell wealth management services. However, their Yu’e Bao service was a potential source of competition toward these third-party financial institutions as they too offered alternative ways to invest and manage the funds that people had put into Ant Financial. This is disabling the bank’s ability to provide a wealth management service as well. By providing the service at a low to no cost, traditional banks could not compete. Ant Financial also utilized the data they had gathered over the years through the transactions and consumer behavior data found within their various branches. Through this, they were able to establish Zhima Credit platform, used various sources of data based on a person’s behavior on and offline lowered the risk by creating a better idea of an individual’s credit score compared to traditional banks. By doing so, they were able to more efficiently provide financial services such as loans, interest free financing, and other services at a lower risk and lower interest rate. This promise of lower compliance costs provided a larger incentive for people to steer away from traditional banks. Ant Financial claims to have "actively collaborated with the banks and other big players to make finance more accessible” by cooperating with the Postal Savings Bank of China to introduce a faster and more convenient way of banking for rural banking. However, it seems as though they have also took advantage of the underserved market by targeting these poorer individuals using their accessible online platforms Wangnong Pay and Wangnong Credit, as well as their lower rates to be more appealing to these individuals. Therefore although Ant Financial has “collaborated with more than 400 financial partners, more than 200 banks, 100 firms, and about 80 insurance companies,” it seems as though it is a threat to

traditional banks as they recognize the inefficiencies of the already existing financial institutions and utilizing their platform in order to provide a better experience. Therefore, although they may be advising other banks on speeding up the process for customers, Ant Financial not only offers the speed but improved operational efficiencies from various sources of friction. This in turn undeniably attracts more individuals to Ant Financial, thereby making it a threat....