S10 - Fintech and finance transformation the rise of ant financial services PDF

Preview

Summary

E-business cases...

Description

FINTECH AND FINANCE TRANSFORMATION: THE RISE OF ANT FINANCIAL SERVICES Rainny Shuyan Xie, Sia Siew Kien and Boon-Siong Neo

HBSP No.: NTU144 Ref No.: ABCC-2017-021 Date: 25 August 2017 Rev date: 19 April 2018

I have been in finance for a long time and I have met finance professors and many finance practitioners, I almost never heard anybody talk about the dream of finance. In finance world, we are so used to the language of Wall Street. [But] if you look at any successful technology company, when they talk about the future, they don’t talk about how much money can be made, but more about how to solve problems for society, where are the pain points of the customers. The purpose of finance is to help society achieve its goals so it actually has its dreams. But in finance, we almost never talk about it. Chen Long, Chief Strategy Officer of Ant Financial Ant Financial was one of the most highly valued private companies in the world. Formerly known as Alipay (支付宝), it began as a financial affiliate of Chinese e-commerce giant Alibaba in 2004 and was later spun off as a separate entity in 2011. Since its early foray into Internet finance, the growth of Ant Financial had been spectacular. Alipay handled an estimated 54.1% of all online payments in China.1 Its money market fund, Yu’e Bao ( 余额宝), was the world’s largest money market fund with RMB578.93 billion (around US$93.25 billion) in assets at the end of 2014.2 Within 3 years since its incorporation, it became the world’s largest Fintech company offering a full spectrum of financial products from payment to loans, wealth management, credit-scoring, and insurance services to more than 520 million annual active users.3 As Ant Financial continued its relentless growth, however, it had to cope with more demanding regulatory environment in China tightened and the intense competition in the Fintech landscape. Eric Jing, its CEO, was task ed to steer its next phase of growth. A veteran of corporate finance with extensive experience working in MNCs, Eric drove key product innovations including Yu’e Bao, and oversaw the development of Ant Financial’s micro-loan and credit rating businesses. While the growth in the last few years had been nothing but spectacular, Eric wondered if he could lead Ant Financial to sustain the momentum to achieve new heights. How could it stay innovative amidst the rapid rise of other fintech players? How should Ant Financial position itself strategically as it moved forth to play a bigger role in the financial ecosystem? 1

2

3

Yu, S. (2017, April 7). Alipay leads China’s third-party mobile payment market in Q4 2016. TechNode. Retrieved from http://technode.com/2017/04/07/alipay-leads-chinas-third-party-mobile-payment-market-in-q4-2016 Shaffer, L. (2015, July 16). How China’s stock rout disrupted online funds, in a good way. CNBC. Retrieved from https://www.cnbc.com/2015/07/16/how-chinas-rout-disrupted-online-funds-like-alibabas-yue-bao-in-a-good-way.html Financial Times. (2016, March 8). Ant Financial’s latest fundraising lifts valuation up to $60bn. Retrieved from https://www.ft.com/content/d1c6cd5a-e509-11e5-bc31-138df2ae9ee6

Research Fellow Rainny Shuyan Xie, Associate Professor Sia Siew Kien, and Professor Boon-Siong Neo prepared this case based on interviews with Ant Financial. This case is intended for class discussion and learning, and not intended as source of research material or as illustration of effective or ineffective management. We would like to acknowledge a research funding from the Institute on Asian Consumer Insights for this project. COPYRIGHT © 2017 Nanyang Technological University, Singapore. All rights reserved. No part of this publication may be copied, stored, transmitted, altered, reproduced or distributed in any form or medium whatsoever without the written consent of Nanyang Technological University. The Asian Business Case Centre, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798. Phone: +65-6790-4864/6552, E-mail: [email protected]

Page 2 ABCC-2017-021

ALIBABA’S INITIAL FORAY INTO INTERNET FINANCE We never meant to be a player in the financial industry, but because the underserved customers in the financial industry and how it hampered the growth of e-commence business, we gradually established the Internet finance products for the consumers. Eric Jing, CEO of Ant Financial Pioneering the growth of e-commerce, Alibaba had launched a series of B2B and C2C e-commerce outfits (e.g., Taobao [ 淘宝 ], Alibaba.com, Tmall [ 天猫 ]) since 2003. As Alibaba delved deeper into these emarketplaces, however, it quickly realised that trust was a limiting factor to its ability to expand. Alipay was conceived to address the lack of trust between the merchants and customers. It functioned as an Escrow account. Buyers would send money to Alipay and once Alipay received the money, it would notify the merchants who then made the deliveries. When the customers received the products, Alipay would then release the money to the merchants. E-commerce and e-payment go hand-in-hand. Alipay was created to build a new trust system. Without Alipay, there is not much online shopping to talk about. Eric Jing, CEO of Ant Financial Alipay unleashed the growth of e-commerce. Very quickly, Alipay became a powerhouse in China’s online payments market, securing a significant share of the Chinese consumers, with 454 million customers in 2017.4 The rapid expansion of mobile-commerce5 led Alibaba to develop the Alipay Wallet (支付宝钱包) app on popular smartphones. A slew of innovations then followed. For example, the idea of individual consumers parking small sums of money in their Alipay accounts led to the launch of Yu’e Bao, a money market investment product. Rather than leaving money in their accounts without interest, Alipay users could put their money into Yu’e Bao and earn interest, with just a few clicks. There was no minimum investment threshold and customers could withdraw their money at any time. Up till then, individuals had limited alternatives of investing their savings. Wealth management services for average individuals in China were underdeveloped. The deposit rates in banks were generally unattractive and deliberately fixed and controlled by the state. The development of Yu’e Bao6 was an important milestone, making people realise that Alipay was not just about online payments but also a way to manage your wealth. The beautiful part about Yu’e Bao is not about making money market fund available online. It is actually in combining two positions together, one is consumer, and one is investor, i.e., I call them the “invesumers ”. They are not the typical investor. They are consumers with pocket money. They would like to use it whenever they want. But if they don’t need to use it, the money can grow. The concept of an ordinary money market fund, now combined with payment under cash management, works wonders for the customer experience. Chen Long, Chief Strategy Officer of Ant Financial

4

5

6

Statista. (2017). Number of active consumers across Alibaba’s online shopping properties from 2nd quarter 2012 to 2017. Statista website. http://www.statista.com/statistics/226927/alibaba-cumulative-active-online-buyers-taobao-tmall The World Bank. (2016). Expanding opportunities. In World development report 2016: Digital dividends (pp.100–145). Washington, DC: Author. The money market fund was managed by a fund company Tian Hong for which Ant Financial had some influence in, with a 51% controlling interest. Zhang, M. (2014, March 11). Alibaba’s online money market fund Yu’E Bao: 8 things you need to know. International Business Times. Retrieved from http://www.ibtimes.com/alibabas-online-money-market-fund-yue-bao-8-things-youneed-know-1560601

Page 3 ABCC-2017-021

Yu’e Bao grew to become the world’s largest money market fund, with a staggering balance of US$165 billion, as at the 1st quarter of 2016.7 After Yu’e Bao, a web-based sales platform for third-party investment products, Zhao Cai Bao (招财宝), was launched in 2014. Investment offerings included fixed-term deposit products from other financial institutions. To encourage customers to pay with Alipay, Huabei ( 花 呗 ), a consumer financing product, was also introduced. It functioned like the credit cards except that the personal credit scores were calculated from users’ historical activities and reputations on Alipay, Taobao, and Tmall. Based on their individual credit lines, users could purchase products on Taobao, Tmall, or third-party businesses. They could return the money within an interest free period or pay back with some interests beyond this free period. Such consumer financing facilities were not common in China before Huabei was launched. There was a lack of individual credit records for banks to assess individuals’ credit worthiness. As of 2014, the People’s Bank of China (PBOC) maintained credit histories for around 350 million citizens – less than one-third of the adult population. Without a credit history, individual consumers struggled to obtain financing.8 In the same manner, SME (small and micro enterprise) merchants were also constrained by the limited financing facilities. Initially, Alibaba worked with the traditional banks to make financing easier for these merchants. But Alibaba soon became aware of their deficiencies . The financial industry in China was monopolised by big banks, which typically served the state-owned enterprises and large enterprises. The financing needs for SMEs were high, yet it was difficult for them to access such facilities. We gave [the banks] 100 customers but they picked the top two and returned the rest to us. For the banks, the loan amounts were too small. It was risky, there was no collateral. But for those SMEs, they didn’t have very good credit history nor did they have good collaterals. Then we started to work backward to have this micro-loan license, so we could do so ourselves. Chen Long, Chief Strategy Officer of Ant Financial AliLoan (阿里微贷) was then established in 2010 to offer unsecured micro-loans for SMEs. We provide unsecured, un-collaterised loans to them by using big data. The scheme is progressive. When we have more data and business behaviours, we can give more, so we adjust the credit line accordingly. It is kind of more data, more behaviours, more understanding about the merchants. We really started with small amount at a time. Eric Jing, CEO of Ant Financial The Internet finance offerings of Alibaba thus expanded significantly. The tight integration between the various Alibaba’s e-marketplaces (e.g., Taobao) and Alipay was highly synergistic, a strategic combination that enabled the collection of large amount of real-time data on online browsing behaviors, sales transactions, and payment collections.

RESTRUCTURING ALIBAB A’S FINANCIAL SERVIC ES TO ANT FINANCIAL In 2011, Alipay was restructured out of Alibaba due to regulatory requirements for third-party payment licensing. In 2014, prior to Alibaba’s IPO, five of Alibaba’s business units and Alipay were brought together

7

8

Flood, C. (2016, January 31). China tightens money market regulation. Financial Times. Retrieved from http://www.ft.com/cms/s/0/66f85d72-b949-11e5-bf7e-8a339b6f2164 Hou, L. (2017, January 17). Wealth management products prove popular among Chinese, report says. China Daily. Retrieved from http://www.chinadaily.com.cn/china/2017-01/17/content_27981171.htm

Page 4 ABCC-2017-021

to form Ant Financial, officially known as Zhejiang Ant Small & Micro Financial Services Group. Jack Ma, owned 76% of the stake in Ant Financial.9 From the Alibaba ecosystem perspective, we are part of the ecosystem. We are so deeply connected. Our blood, the same blood, same colour. From legal perspective, we are two independent businesses with separate shareholders. They are in the marketplace business, we are in the financial services. Our relationship is mutually beneficial and complementary. Eric Jing, CEO of Ant Financial Starting a new chapter, Ant Financial’s newly articulated mission was to bring about small but positive changes to the world (see Figure 1).10,11 Its vision was “to use technology to enable partners to bring equal financial services to the world”.12 To achieve this vision, Eric and his team made every effort to enable its customers and its merchants on both sides of the e-marketplace. Figure 1: The Vision Statement of Ant Financial

Source: Ant Financial Services Group

To Be the Finlife Enabler for Customers All our innovation started with one key point – to be customer-centric and how to solve the problems for the customers. Eric Jing, CEO of Ant Financial With its intense focus on customers, Ant Financial wanted to embed finance seamlessly in the daily life of its customers. Alipay Wallet, for example, infiltrated deeply into the everyday life of its consumers. It extended the reach of Ant Financial to offline merchants, which offered a wide range of user-centric services 9

10 11

12

Osawa, J. (2014, December 7). Alibaba: Alipay processing more transactions through mobile devices: Mobile payments account for 54 out of every 100 payments. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/alibaba-alipay-processingmore-transactions-through-mobile-devices-1418000582 Ant Financial Services Group. (2017). Our culture, About us. Ant Financial Services Group website. Millward, S. (2015, June 25). Alibaba launches online bank: “It’s for the little guys, not the rich”. TechinAsia. Retrieved from https://www.techinasia.com/alibaba-launches-online-bank-mybank Anadolu Ajansi. (2014, October 16). Official launch of Ant Financial Services Group brings new financial ecosystem to China. Anadolu Ajansi website. Retrieved from http://aa.com.tr/en/archive/official-launch-of-ant-financial-services-group-brings-newfinancial-ecosystem-to-china/110249?amp=1

Page 5 ABCC-2017-021

in places, such as shopping malls, convenience stores, taxis, cinema, restaurants, hospitals, and government agencies (see Figure 2). Finlife is the combination of finance and real life, powered by technology. It is not about technology, it is about how to use technology to apply to finance to make it useful to consumers in the real world. In the past, finance and various consumption, business, and social scenarios are often separated. In the future, the two are becoming one. Finance should be seamlessly embedded within these scenarios, not separated. Chen Long, Chief Strategy Officer of Ant Financial Ant Financial partnered with market leaders in various consumption scenarios. For food and dining, Ant Financial invested in Koubei.com (口碑), a lifestyle search engine that provided real-time consumption information, especially on restaurants’ offerings, related discounts, and coupons. Other domestic investments by Ant Financial included Chinese food-delivery app Ele.me (饿了么) and the taxi firm Didi Chuxing (滴滴出行). As users put in more money into their Alipay accounts to facilitate their daily consumptions, it also increased the likelihood that these users would use its other financial services, such as Yu’e Bao. Figure 2: User-centred Services Provided by Ant Financial

Source: Ant Financial Services Group

Ant Fortune (蚂蚁聚财) was another example. Launched in 2015, Ant Fortune aimed to be a comprehensive wealth management platform that catered to individual consumers, who had little financial management expertise. It integrated Ant Financial’s popular money market fund, Yu’e Bao, with thousands of third-party financial products available through Zhao Cai Bao.13 Some 70% of Chinese citizens do not buy financial products because most financial products in the market are designed for high-networth investors and portfolio management requires both time and expertise. Ant Fortune aims to provide investment options for those who are left out by the current wealth management products by lowering the entry threshold, and for those who have little time or know-how to grow wealth. We do not charge commission for the fund products as we launch Ant Fortune, simply to make sure that those who lack money to build a large portfolio have equal and fair access to manage their wealth. Leiming Yuan, General Manager of Ant Financial’s Wealth Management Unit

13

Erikson, J. (2015, August 18). Ant financial app aims at simplifying investing for China’s masses. Alizila. Retrieved from http://www.alizila.com/ant-financial-app-aims-at-simplifying-investing-for-chinas-masses-2

Page 6 ABCC-2017-021

In addition, Ant Financial also expanded to offer online insurance. In November 2013, Alibaba partnered with Tencent and Pin An Insurance to establish China’s first and only company with an Internet insurance license, Zhong An Online P&C Insurance Co. (众安保险). Zhong An had underwritten over 630 million insurance policies and serviced 150 million clients in its first year of operation. It applied big data pricing and scenariobased innovation across the insurance value-chain from product design to claims servicing. Zhong An’s online model was attractive, with lower operating and distribution costs. For example, its popular shipping insurance for returned purchases was priced at around RMB0.50 per policy. Ant Financial also opened up the online insurance platform Leyebao (乐业保 ) to other insurance companies. By the end of 2015, there were 76 insurance players participating on Ant Financial’s insurance platform with more than three million users. Ant Financial also invested US$188 million to buy a 60% controlling stake in Cathay Insurance in 2015.14 The investment helped Alibaba to broaden the available product range and innovate in creating new insurance products to suit the needs of SMEs operating on Taobao. In March 2017, Ant Financial announced its “next generation” wealth management platform, Caifu Hao (财富 号), a new marketplace where third-party financial institutions could open their own shops and sell their wealth management products, like a Tmall. It was accessible via Ant Fortune, which had already partnered with 100 funds. Caifu Hao would help financial institutions better target their customers and offer financial institutions more control over their products and content, such as publishing their own investment analysis reports.15 The successive series of Internet finance innovations were all aiming to address customers’ financial needs. See Figure 3 for a snapshot of the services on the Ant Financial app. Technology fundamentally changes how finance reach your customers, serve your customers. Finance is with you anywhere anytime. We call this 無微不至 [literal translation: no detailed need that cannot be reached]. It is available, wherever you need it. Good finance is like tap water. You just open the tap and water flows out. Chen Long, Chief Strategy Officer of Ant Financial Figure 3: A Snapshot of Services on the Ant Financial App

Source: Screenshot of Alipay iPhone application. 14

15

Asia Assets Management. (2015, September 14). Ant Financial takes 60% stake in Cathay Insurance. Retrieved from http://www.asiaasset.com/news/cathayAnt_da1806.aspx Xiao, E. (2017, March 29). Jack Ma’s Ant Financial to build an open marketplace for finance products. TechinAsia. Retrieved from https://www.techinasia.com/ant-financial-to-launch-caifu-hao

Page 7 ABCC-2017-021

To Be the CFOs (Chief Financial Officers) for the Merchants Ant Financial also sought to enable its merchants to obtain bank financing because these SMEs seldom had CFO expertise. Providing small loans to these merchants was a first enabling step. In June 2015, Eric took on his role as Chairman of MYbank (网商银行) – the first Internet bank in the country. MYbank was established through a 30% stake in a joint venture comprising a group of private firms, including the China’s largest privately owned diversified conglomerate.16 The low operating cost allowed it to offer more attractive loan interest rates than traditional banks. MYbank was a...