In 1988, Jack Ma would have been Unbankable
When Jack Ma graduated in 1988 he was earning $20 dollars per month or less than $1 dollar a day. For Banks, this meant that offering him a personal current account was unprofitable. They would therefore either not bank him or try to charge peripheral fees (e.g. overdrafts) or cross-sell other products (e.g. credit card, insurance, etc.) to make up for Ma’s “unbankability”.
Fast-forward 26 years and as Alibaba floated on NASDAQ raising $21.8bn to become the one of the most capitalized internet company surpassing Ebay and Amazon and trailing Microsoft, Google, or Apple. This has made by any standards Jack Ma is one of Asia’s most bankable clients and China’s richest man. However, today he will expect to be banked in a digital way.
This classic rag to riches story has a particular echo in a country like China. Would the future Mr or Mrs Ma be unbankable today? The short answer is ‘yes’. Only 64% of the Chinese population is formally banked (compared to 97.5% in the UK). This means that there are some 432m people that are non-banked, part of which can be attributed to the fact that they are not sufficiently profitable for traditional banks.
(Another issue is that Chinese Banks are also not sufficiently rewarding for customers, pushing them to put their money in alternative non-bank deposits which yield a higher return. Due to the fact that these operate outside the formal sector, they are part of the growing area which is shadow banking, which I’ll cover in another post).
Tomorrow, things may change partly due to the impact FinTech has on the financial lives of low-income populations. Indeed, innovation brought by FinTech has not only allowed a decrease of the operational cost of proposing financial products such as a basic current accounts, but has enabled verifying if a customer is bankable even if they were never banked before.
The first point touched on the fact that FinTech is increasingly unbundling financial products proposed by full-service banks. This has many implications, amongst which their capacity to deliver a comparable financial product (e.g. current account, personal loans) at a much lower price point.
Indeed, those new companies are not only using the most efficient IT systems, but can acquire them at a much lower cost than before as its products and services have increasingly become comoditized. Add to this the fact that FinTech companies will not have multi-million dollar litigation costs following from years of miss-selling, as well as the fact that they operate in a regulatory gray area that lets them propose a near-perfect substitute to otherwise regulated financial products with means they don’t face equivalent compliance costs. When combining those elements one starts to sees how Fintech can compete not only on price but also on quality of delivery.
The second point is perhaps less obvious for someone living in the west who has been banked since early age. However, it represents a common problem for a lot of individuals who, without a previous financial history, cannot access financial products without incurring a premium charge for their lack of traceability.
The issue here revolves around the fact that being formally banked doesn’t just bring immediate benefits, but also builds over time a profile of an individual, which we more commonly call a credit score. Again, here Fintech offers opportunities to capture non-financial data (e.g. social network activity, online shopping patterns, etc.) to create a digital identity of a person and access their credit worthiness. In other words, financial evaluation can increasingly be made with precision without using classic credit bureau data sources (e.g Experian). Indeed, Alibaba is an example of this by proving SME loans which are fully unsecured but leverage on over 1,000 alternative data sets, which eventually helps the company maintain a default rate much bellow 0.5%.
So here we have it, tomorrow’s Fintech could provide the future’s “Mr Ma” not only banking facilities but do so in a profitable way and also cross-sell lending products without necessarily charging a risk premium due to lack of financial traceability.
For Mr Ma FinTech also allows him to manage his wealth from the convenience of his smart phone as well as letting him cashing in on his numerous ventures (some of which still have to IPO as they were segregated from the Alibaba group for regulatory reasons):
- Alipay — Payment processing handling over 1 million transaction per day
- Yue’Bao — Near substitute to current accounts attracted more than $94bn of deposits
- AliFinance — SME Loans with over 409,000 borrowers receiving between $3k to $5k.
What emerges from this story is a unique moment in time where FinTech is both the only economically viable way to bank the poor, but is also the most demand-led way to bank the affluent.
Mr Ma’s example reflects how in less then 30 years, the use of technology in finance has meant that FinTech can have a quasi-universal application servicing the poor and the rich alike. This is great news because companies will start to look at innovative ways to focus on a market that has for too long been forgotten. A market that represents, 2.5 billion people without bank accounts, out of whom 1.2 billion are in Asia.
So here it is let’s remove the “un” in “unbankable” and maybe it will be again due to one of Mr Ma’s venture as Alibaba is applying for a private banking licence.