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China’s digital-payments giant keeps bank chiefs up at night

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IN WESTERN countries it is common to talk about American technology being dominant. From an Asian perspective that seems off. Fresh from visiting the region, where buskers and kerbside fishmongers can be paid by presenting a phone, Schumpeter has found it a shock being back in New York. There, buying most things involves signing bits of paper and PIN numbers are viewed as dangerously transgressive. Only 2% of credit- and debit-card transactions in America are authenticated with PIN numbers; 19bn cheques are written in the country every year.

Asian firms have leapfrogged ahead, offering a new model of financial technology. Exhibit A is Ant Financial, a payments company affiliated with Alibaba, one of China’s two giant internet firms (the other is Tencent, whose WeChat messaging app is ubiquitous and supports payments). Ant is popular in China and has ambitions outside it. Already the world’s most valuable “fintech” firm, worth $60bn, it has 520m payments customers at home and its affiliates abroad have 112m, mainly in Asia. In May it signed a deal to install its payments system in millions of American retail outlets. Ant is in the process of buying MoneyGram, a Texas-based money-transfer firm active in over 200 countries.

One admired boss in the conventional banking industry says Ant keeps him awake at night. For protectionists, the firm is evidence of a Chinese plot to control the world’s financial plumbing. For consumers, it could boost competition in a cosy industry.

Ant was spun out of Alibaba in 2014. Its core business is enabling payments by a vast army of customers to the 10m or so merchants who use Alibaba’s e-commerce sites. This accounts for over a quarter of its revenues, according to CLSA, a brokerage. And it gives Ant huge scale at home. China’s internet-payments market is the world’s biggest, reckons Goldman Sachs, with $11trn in transactions last year, twice the size of America’s credit- and debit-card industry. Ant controls 51% of it. The firm is 16 times larger than PayPal, an American counterpart, on this measure.

China’s lead is about more than size, though. People make payments mainly by using phones. Whereas Western products such as PayPal and Apple Pay often piggyback off credit-card firms’ networks to access clients’ funds, China’s firms can access bank accounts directly, cutting out the middlemen.

Ant has developed a menu of services: its home screen lets you buy train tickets, pay utility bills and invest in mutual funds. Yu’e Bao, a money-market fund run by Ant, has $166bn of assets. Ant lends to its clients, but so far its balance sheet is modest: outstanding loans to small firms were $5bn in 2016. Fees are low, but Ant’s profits still reached a chunky $820m last year, up by 14% since 2014. (It does not publish its books, but some figures can be inferred from Alibaba’s accounts.)

Jack Ma, the tycoon who controls Alibaba and Ant, has a grand vision to turn a Chinese empire into a global one. For Ant there are two opportunities. One is a business known as “merchants acceptance”, machines for paying for goods in shops and hotels. At the moment Chinese travellers abroad, whose ranks reached 120m in 2016, often use UnionPay, a card provider. Ant is muscling in, letting people use Alipay when they have weekends in Dubai or make family trips to Disneyland.

Longer term, the goal is to create a huge online network of local consumers and merchants in other countries, replicating Ant’s model in China. But building relationships with local banks and firms takes time. And in poorer countries few people have bank accounts to connect to their mobile accounts. Instead they hand over cash in shops and kiosks to fill up mobile wallets.

As a result Ant is expanding through local subsidiaries or affiliates. Along with Alibaba it owns about half of Paytm, an Indian digital-payments star. And it has bought stakes in fintech firms in Thailand, Singapore, Indonesia, the Philippines and South Korea. Buying MoneyGram would not bring cutting-edge technology—its core activity is cash remittances—but would give Ant licences abroad and clients who could be prodded to use digital services.

Ant’s scale, innovation and drive mean it is well placed. But it faces three hurdles. First, rising competition is dampening margins. At home WeChat has helped boost Tencent’s market share in digital payments from 15% in 2014 to 33% last year. Abroad, Ant is not the first mover. In South-East Asia several e-commerce and ride-hailing firms are bolting payments onto their apps to attract and keep more customers. DBS, a regional lender, is a leader in digital banking. In America, Apple Pay is accepted in 4.5m locations and could get more popular.

As Ant grows it must manage a second problem, its tangled links with Alibaba. The original spin-off was controversial. Today Mr Ma controls a majority of the firm’s voting interests. State-backed funds and entities collectively own about 15%. Alibaba doesn’t own shares in Ant but is entitled to 37.5% of its profits. If Ant does an initial public offering this agreement can change and Alibaba would get 33% of its shares. The two firms share joint ventures and executives. They pay fees to—and receive them from—each other. There is a risk of conflict and muddle.

Paying its dues

Ant’s final hurdle is that foreign governments may not like Chinese firms having a big role in their financial systems. America’s national-security review panel, known as CFIUS, is looking at the MoneyGram deal. On economic grounds they should welcome Ant, so that it can disrupt the bloated credit-card industry. Visa and MasterCard extract over 0.10 cents of net income for every dollar of payments. Ant takes a smaller cut, of less than 0.03 cents.

China’s financial system is isolated from the rest of the world. Ant has evolved in a distinct—and more efficient—way. The task now is to persuade other countries that its approach is safe, transparent and free from government interference. It had better hurry up. Sooner or later Silicon Valley’s giants will catch up.

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Julio Marchi ©

Publisher / Editor at BS News & Media Services
A free thinker, not labelled as anything, not associated with any party, not part of any group or engaged with any religion... A simple guy tired of the nowadays bullshit who decided to promote more serious debates about what is really happening hoping to bring back intelligence to the superficial and shallow news & headlines that unfortunately took over the existing media scene.
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