Can Ant Financial’s Good Finance Model Replicate Alibaba’s Success?

“We only do good finance” is perhaps the most remembered quote from Li Cheng, Ant Financial’s CTO, during his talk speaking to an audience of Chinese young engineers at Silicon Valley’s Computer History Museum on May 8th.

Ant Financial, an affiliate of Alibaba but independently operated, recently has caught much attention for its humongous financing round of $4.5 billion with a $60 billion valuation. Li Cheng’s statement easily reminds us of what Jack Ma told about his mission “we are here to help small businesses” when he introduced Alibaba to the US media for its IPO in 2014. Can this socially innovative business model drive another success like what Alibaba has achieved?

“Good finance has a good purpose. We serve the real economy.” Li Cheng further explains what he means by “good finance.” The real economy is related to actual good production and services. The opposite is involved with buying and selling on the financial markets.

Alibaba’s record-breaking $25 billion 2014 IPO did not include the Paypal-like service Alipay, which is the core business of Ant Financial now. Alipay powers 58% of China’s online payment transactions as estimated by Credit Suisse.

Building on top of Alipay, which has been in existence since Alibaba begins to take off, Ant Financial is expanding to become an all around financial service provider. Ant Financial’s personal wealth management product is Yu’e Bao, making use of the balance on Alipay accounts, offering users a higher interest rate than big banks and instant withdrawal without penalty.

Lucy Peng, CEO of Ant Financial, described vividly, “Most of our users are working class and even migrant workers. We want their dinner to be able to have an extra bun or even a chicken leg every day because of us.” Many of traditional banks’ wealth management accounts require a minimum fund of several thousand yuan, but Yu’e Bao reduced this barrier to one yuan.

The simplicity in transferring funds from Alipay’s balance to Yu’e Bao significantly contributes to Yu’e Bao’s rise. Within a few taps in the mobile app, the money is deposited to make earnings and there is no penalty or restrictions in withdrawal. This convenience and efficiency brought by Yu’e Bao technology are tough for the large traditional banks to match. 269 million users have opened a Yu’e Bao account with real name registration. The latest number reported by China Securities Daily shows the fund of Yu’e Bao has reached 762.6 billion yuan ($117 billion) by the end of the first quarter of 2016. It is an increase of 22.86% compared to the fourth quarter of 2015, making it the largest money fund in China.

Li Cheng summarized the purpose of this Yu’e Bao product as “Little, Safety, and Happiness.” The average amount in Yu’e Bao tends to be smaller than traditional banks. Their users’ top expectation is safety given every penny is earned in a hard way. Ant Financial’s approach is to invest in the real economy that real entities can build products and provide services. “It is healthy return. We want our customers’ money to be safe. We are not playing a money game that does not add real value.” said the CEO, Lucy Peng, to Chinese media.

Zhao Bo, a 25-year-old entrepreneur, based in a third tier city called Anji, opened a Tmall store selling office chairs in 2015. Tmall is another flagship e-commerce site by Alibaba for branded products. Their monthly revenue grew rapidly to RMB 600 thousand (USD100 thousand) within three months since he started.

He wanted another boost to his business, so his store participated in Tmall’s marketplace wide promotions. All of his chairs were sold out quickly, and he was short of RMB 160 thousand (USD 24.5 thousand) to cover the cost of restocking. Buyers’ payment would not be immediately available until ten days later. Instead of waiting for ten days, he turned to Ant Financial’s MYbank that made a loan to him within one day.

The vice president of MYBank, Weixing Zhao, earlier told TMTPost, “In the past year, 3000 Taobao and Tmall stores in Anji got loans with a total worth of RMB 108 million from MYBank.” If we calculate with these two figures, the average loan amount for small business borrowers in a typical third tier city is about RMB 36 thousand (USD six thousand). Providing services for such small amount of loans often cannot cover larger banks’ cost. MYBank brings fast and convenient services that are usually enjoyed by bigger clients to smaller businesses.

​Another reason for small sellers are denied by traditional banks is that they do not have enough assets as collateral. Banks consider this type of investment too risky. In the past, they often borrowed from friends and family, but now the first ever virtual bank that runs on the cloud can give out loans after they submit an application online.

Ant Financial has a unique advantage in underwriting powered by the enormous amount of data from their e-commerce platform to lower the risks. According to Li Cheng, “we have built an automated underwriting engine based on our proprietary transactional data between sellers and buyers. We can make a decision within seconds.” How much transaction data they have? In 2015 Single’s Day Sale (Alibaba’s largest annual sale), their servers dealt with 85900 payments per second surpassing VISA’s world record of 56000 payments per second.

“If we think of Ant Financial as a tree, our payment service Alipay is the trunk. Our wealth management tool Yu’e Bao and online virtual bank MYBank are the branches grown out of Alipay.” Li Cheng said at the talk. They did so by quickly developing new branches. A big opportunity for Ant Financial right now is building China’s first ever personal credit system. Unlike in the US, China does not have an equivalent of FICO scoring system. Ant Financial’s Zhima Credit is trying to close the gap. Computed from signals such as changes of addresses, products bought on Taobao, and utility bills paid through Alipay, Zhima Credit Score has been accepted by their partnered hotels and car rental companies to eliminate deposits.

In front of an interested audience of Chinese young engineers in Silicon Valley, Li Cheng revealed they are exploring VR technologies to augment experiences of financial services and biometrics to offer more secure and easier payment methods. It is truly an exciting time for the Chinese Internet industry if we imagine these new technologies are enjoyed by Ant Financial’s 450 million users.

By Huan Sun.

Originally published at

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