Ant Group: From Taobao to IPO
Only a couple of years ago, in June 2018, Ant Group had raised around $14 billion in what many called the biggest-ever single fundraising globally by a private company, reaching a valuation of over USD 150 billion.
And on August 25th, 2020, the group filed its IPO prospectus with the Hong Kong Stock Exchange. The company hopes to list in Shanghai as well, seeking a valuation in the $200–300Bn range — potentially leading now the largest IPO, bigger than Saudi Aramco’s record-breaking ~$25.6Bn last year.
For millions in the U.S. and U.K., this is an opportunity missed due to some heightened geopolitical issues. But for the group, the IPO only further establishes its position as the largest fintech in the world. The valuation would make it bigger than Deutsche Bank, Goldman Sachs, Citi, and even Wells Fargo — and a short number summary in its filing highlights why.
Formerly Ant Financial, the platform-led group has built a user base of ~711Mn MAUs and of over a billion annually — all using the Alipay super app to make transactions, handle assets, and avail outstanding balances worth trillions in RMB.
Working behind the Great Firewall of China, Ant Group is a company molded by the local pre-conditions of the country — and throws up a fascinating story of scaling the mountain top over fourteen years. This article in the following sections answers the how of the climb.
The Origins of Alipay
The story of Ant Group starts with… E-Bay.
E-Bay was one of the biggest successes of the dot-com bubble and had revolutionised e-commerce for B2C, and especially for C2C in the late 90s. E-Bay was hardly the only success — the bubble had seen hundreds rush towards e-commerce. But despite the competition, the online auction and shopping model of the company made it more resilient. And by 2001, the E-Bay user base had grown to become the largest of any e-commerce site.
This frenzy had caught up with China as well. Dozens of online auction sites cropped up as a result, in the early 2000s. The most prominent of the lot was Eachnet.com — China’s largest auction website — that was seeing transactions of items worth ~$2.5Mn per month in 2000. That was until 2002 when E-Bay acquired Eachnet and began gaining e-commerce share in China.
Meanwhile, Jack Ma and his team of 17 were building a B2B marketplace — Alibaba — and had tasted sufficient successes over its first couple of years. Despite, Alibaba was largely a local company by then with a focus towards SMBs, while E-Bay had gone global. Given the size of the opportunity in China, E-Bay had been aggressive in its approach towards it, and a concern that it would soon try to corner Alibaba and acquire it was obvious. But Jack Ma was stoic.
In May 2003, Alibaba’s subsidiary Taobao — meaning ‘digging for treasures’ — was set-up. It would compete head-on with E-Bay’s consumer-to-consumer (C2C) operations in China, then called ‘eBay EachNet’. The competition had heated up to such an extent that you would find it hard to miss either of the two names on billboards, public transports, or television.
Amid this competition for the consumer-to-consumer (C2C) battle lay one major issue — Trust. Mutual confidence for online commerce was not natural in China, and the word of scams on eBay was not hidden as well. There was then a quiet scepticism of using a C2C platform. How can you trust a stranger on the internet?
This was crucial since the internet has always been about scale. And solving for trust was essential in building that large network for eBay and Taobao. E-Bay had built an ingenious reputation system, but that would not work in China. It had also partnered with Escrow.com to offer custodial services. Eachnet, elsewhere, had built scale by creating local sites and encouraging an in-person exchange of goods. But Jack Ma was not winning this against E-Bay by keeping Taobao local. The platform needed to build trust between buyers and sellers. It needed to assure the quality of goods to buyers before allowing the exchange of money.
There was one another issue particular to China — the averseness to credit cards in the economy. Now, credit cards had formed an important safeguard against fraud for E-Bay consumers in other countries because most credit card companies provided fraud protection, which said that any credit was rolled back if the customers did not receive the items they had paid for. With poor penetration of credit cards, consumers in China had no such guarantees.
The low levels of trust for online commerce and an underdeveloped card network meant that Jack Ma had to come up with a unique solution to roll over E-Bay.
Enter: Alipay
Alipay was launched as an integrated escrow feature to Taobao in 2003. Using this service, a buyer would place an order and send the payment via check or card to the Taobao bank account, which would then act as a custodian of the money. As and when the buyer receives the goods and verifies the quality, the money would be shifted from the Taobao bank account to the seller’s. The escrow service solved the long-term trust issue between parties to the exchange.
Alipay was popular right from the start. But as volumes surged, so did the error rates and pressure on Taobao to handle such transactions without a license. There were legal and credit risks. Either way, the endeavour had made the conviction to transform the payment experience stronger in Jack Ma’s mind.
Soon, in 2004, Alipay started forming partnerships with leading Chinese banks and also signed a long-term agreement with China Post — allowing consumers without accounts or cards to fund their Alipay accounts at any of the 66,000 post offices. Alipay, along with other locally relevant tactics, allowed Taobao to win over Chinese consumers. And from a market share of over 70% in 2003, E-Bay had fallen to shut down its main website in China in 2006.
For Alipay, Taobao was only the beginning. In December 2004, Alipay was spun off Taobao.com and under the entity named Zhejiang Alipay Internet Technology Company. Soon, www.Alipay.com went online and the service was transitioned from an integrated shopping tool to an independent payment system. This was done on the back of a collaboration with Commercial Bank of China, and now Alipay was to act more as a payment gateway and processor — similar to PayPal — instead of a bank. Soon more banks, incl. CCB, partnered with Alipay to hold the backend — which helped establish credibility to the already popular payment service.
The majority of customers for Alipay for the initial few years were still largely from Taobao, but the network was gaining recognition as an independent network similar to Visa, Mastercard, and the local UnionPay. By early 2007, more than 300,000 merchants were accepting Alipay, and by the year-end, more than 50 million customers were registered. Roughly $7.14 Bn was being processed over Alipay by then — 47.6% of all online transactions in China.
No doubt that the growth in e-commerce and Taobao (with no less than 80% share of the e-commerce market in China by 2010!) in particular compounded Alipay’s popularity, but it was equally the unmatched understanding of local conditions that further strengthened its position.
Mastering Digital Payments
The payments ecosystem of China has remarkably been as innovative as it has been laggard in the last decade. Credit cards, which are a popular payment method elsewhere, are still nascent in China — forming just 10% of the entire card network. At the same time, mobile-based payments — which are becoming mainstream today — have been habitual for the best part of the last decade in the country.
Not to mention, Alipay has had an immense part to play in transforming the digital payments for the country. Today, roughly 54% of all mobile transactions in China happen over Alipay — led by a network of 80 million merchants and over a billion users, as highlighted in the prospectus.
I have tried to summarise the digital payments solutions and strategies that have helped Alipay gather its popularity:
- E-Wallets: Much like India, as smartphones became cheaper and the network services improved in stability, Alipay saw an increasing consumer interest towards maintaining money over virtual accounts on Taobao. Adding two and two, e-wallet was introduced as a simple payment storage facility in 2008. The wallet has been a constant feature of Alipay since, but its use has expanded to domains outside Taobao. A year later, the mobile app for AliPay — then with over 180 million users and a daily transaction volume exceeding RMB700 million — was launched along with the wallet facility.
- Quick Pay: much to the envy of traditional banks, Alipay — along with 26 other payment companies — was granted a third-party payment license in 2010. This officially kick-started its fintech operations. Around the same time, Quick Pay was launched in collaboration with UnionPay — which allowed cardholders to make online payments using the app without the need to switch to bank websites.
- Barcode Pay: The next innovation accelerated Alipay’s use to offline merchants by allowing consumers to simply scan their unique QR codes. Each merchant and buyer in this service is allocated an individual QR code, and it does not matter who the scanner is — as long as the scan is done from one smartphone to another. The benefit is that this system completely cuts out the card-reading terminal that is used for cards and allows lower cost and better speed for transactions.
All combined, these innovations in digital payments changed how people in China buy anything, with even street vendors sporting the familiar QR codes today. As a result, Alipay and WeChat — proprietary super platforms of Alibaba and Tencent respectively — now account for ~90% of all mobile payments in China. The vast majority of these payments are done through QR codes. Not only this, mobile payments today make over 80% of all Chinese payments value — highlighting the maturity of digital payments in a country of over a billion.
From Payments to Building an Empire
The financial services arm of Alibaba was synonymous with Alipay till the early 2010s, but over the last few years — the diversification and expansion into wealth management, credit, banking, and insurance have transformed the company balance sheet.
This is not surprising, however. With the commoditization of payments, there is little room to gain from margins on processing or for providing the front-end gateways. And so the question of expansion was always a matter of when and not if, even if the margins on payments were to be reasonable. Moreover, the extent of information on customer purchase behaviour and wallet holdings on Alipay were reasons enough to look at the other alternatives.
From < 30% share of non-payments industries in Ant Group’s revenues only four years ago, the expansion has raised the revenue share to over 60% in 2020. With the revenue from payments itself growing in double digits, this growth in credit, investment, and insurance technologies has been astonishing from any measure.
How did it expand from payments?
1. Ant Fortune
In 2013, Alipay introduced Yu’ebao, meaning leftover treasures, a money market fund that asked users to invest the money lying idle in their e-wallets. The strategy to attract users was quite simple and effective:
- Identify: use Alipay data to identify users who had a positive balance in their e-wallets
- Educate: contact and educate them on the benefits of investing in the fund
- Make Accessible: the users were allowed to invest at a low threshold of RMB1.0 — making the fund widely inclusive, and they were also offered an instant redemption feature that allowed users to pay with their Yu’ebao accounts instantly or even redeem those funds on the same day
The convenience and the utility were attractive enough to gather millions of interested users. With an annualised return of over 4 percent, over 1.5 percentage points above the savings rate, Yu’ebao at one point handled ~$250Bn — significantly more than JPMorgan US Government Money Market Fund (the largest in the world). But the AUM in the fund has since come down and is no longer the highest due to the local tightening regulations on money market funds.
It must be noted however that while the profits for Alipay on Yu’ebao are on the technology service fees, Tianhong Asset Management — a subsidiary of Alibaba — exclusively handled the Yu’ebao fund till May 2018. Moreover, today, Tianhong is the largest mutual fund company in China by AUM. Since May 2018, as Alibaba allowed third-party mutual funds to be list funds through Yu’ebao, 24 third-party funds have been added to the list.
With the gaining popularity of Yu’ebao initially, Ant Financial introduced Ant Fortune — a mobile wealth management platform — on the Alipay app. The platform acts as a broker and matches users — based on their data — with investment solutions across fixed-term savings, investment funds, crowdfunding projects, P2P loans, and stock markets.
As of 30 June 2020, the platform offered services of approximately 170 asset managers and over 6000 products to choose from, with an investor base of >500 million users investing roughly RMB4,099 billion or RMB4 trillion across the products. Yu’ebao remains the biggest money market fund in China, even as Ant Fortune rolls out new solutions such as Yulibao — an investment management product for small businesses.
2. Consumer and SMBs Credit
Ant Group had gradually gotten into lending with its business unit Ant Credit offering micro online loans to small and micro enterprises, and to individual online entrepreneurs. But the growth in consumer credit had been low in China overall, and the main problem lay in the lack of ability to assess credit risk for small businesses and consumers.
With access to big data on over 300 million consumers through Alibaba platforms, Ant rushed to solve the problem by introducing Sesame Credit Management in January 2015. This was a private credit-scoring program that would allot credit scores to customers based on their transaction history and engagement with Alibaba affiliated products. The focus was, from the beginning, on serving those with little credit history and resources amongst small, privately owned-companies.
While Ant Group itself does not provide credit, it acts as a platform to match users — based on their credit scores — and financial institutions to offer the best lending solutions. For providing this service, the platform again charges technology service fees as a percentage of interest income on credit balance from the customers.
For their credit portfolio, Ant offers two products to consumers: Huabei and Jiebei — two of the most widely used consumer credit products in China today.
- Huabei: an unsecured revolving credit product for daily purchases with a minimum credit line as low as RMB20. The main utility of the product, however, is in its instant issuance at the point of sale. Moreover, consumers enjoy upto 40 days of interest-free period with access to 3–12 months EMIs with this simple line of credit.
- Jiebei: unlike Huabei, Jeibei was launched to finance large consumption transactions. The focus with Jiebei has been on consumers with higher Sesame credit scores. The minimum credit line is also higher at RMB1,000, with no interest-free period for the consumers.
Combined over the two products, and some through the small loan companies on the platform, Ant Group as of June 30, 2020, had enabled an outstanding balance of RMB1,732 billion for consumers and RMB422 for small businesses. Moreover, the platform was offering loan services through partnerships with over 100 banks — who were underwriting ~98% of all loans enabled through the platform.
For SMBs in particular, MYBank — a challenger bank launched in January 2015 — helps offer additional insights and services to Alipay. MYBank strictly operates small/mid-sized loans (< RMB5 million) for three types of customers: for people in rural areas, for internet start-ups, and for Tmall/Taobao sellers. Since the bank operates across the China market and is not restricted to a particular application, it offers great expertise in assessing risk and pricing credit products.
On the other hand, as Sesame and other credit risk models continuously monitor consumer loan performance, the qualifications for drawdowns for each user are adjusted in real-time. There is also an active focus of the platform on managing the delinquency rates for the partner lending institutions on the platform, which feeds into the credit scoring and limits.
Moreover, apart from actively managing credit risk, the platform largely automates loan servicing (in case the consumer misses the due date) as well as collections from Alipay or Yu’ebao account balances — as agreed upon in consumer contracts. This convenience of access to credit along with the ability to monitor consumer habits rigorously makes the value proposition of Ant Group’s lending extremely attractive.
3. Mutual Aid and Insurance Technology
China has made rapid advancements in basic health insurance coverage, with ~95% of the population covered as per 2011. However, there have been calls for innovation in insurance products along with concerns over the reporting of coverage numbers. Recognising this opportunity, Alipay has designed a range of insurance products that are more accessible to the general population and cover a broad range of issues:
- Xianghubao, a mutual aid program
- Haoyibao, a health insurance product
- Quanminbao, a pension annual product
- P&C insurances — auto insurance, accident insurance, shipping return insurance, and other scenario-based insurances
The most popular of all has been Xianghubao — the mutual aid program — that was launched in October 2018 and provides coverage for over 100 critical illnesses. The popularity draws from the design of the product. Made in collaboration with Xinmei, Xinanghubao does not require any premium payments for joining. Instead, all the consumers enrolled in the program pay a part of any successful claim that is made. In only a year, the program was able to gain over a 100 million members — faster than Sesame Credit or Yu’ebao did, with an annual payout for a member being ~RMB29 — lower than the health insurance product.
At the same time, the no-cost sign-ups have allowed greater awareness through the mutual aid program, gathering traction for the traditional health insurance product of Ant Group — Haoyibao.
The P&C insurance arm of the group is where the other innovations take place. For instance, along with partner insurance providers, Alipay offered business interruption coverage to offline merchants during the COVID-19 outbreak, with over 50,000 SMBs signing up.
Across the categories, Alipay offers over 2,000 insurance products. And over 570 million Alipay users — as of June 30, 2020 — have purchased insurance or were insured over the platform, or participated in the Xianghubao mutual aid program. Moreover, over the twelve months ended June 30, 2020, the platform had enabled insurance premiums and contributions worth RMB52 billion and potential coverage in trillions.
Final thoughts…
As Ant Group hopes to raise the biggest IPO we have ever seen, its prospectus throws light on what made it the biggest fintech giant in the world. Revolutionising the digital payments in China, Alipay helped people jump the hurdle of broken credit cards system through innovations in e-wallets, quick pay, and QR payments. Such has been the domination that Alipay today makes up more than half the mobile payments in the country.
While the first few years were spent perfecting the payments, Alipay has since turned into a super-platform with credit, investment, and insurance solutions contributing >60% of the revenues in 2020 for the group, and potentially a larger share of the profits. Frighteningly, each digital finance technology has seen double-digit growths over the last three years — signalling the massive potential that still exists.
Saying that, the platform faces risks from competitors such as Tencent, fear of regulation crackdowns from the government, and the constant ire of traditional banks from whom Alipay has long been taking away customers. Yu’ebao and Xianghubao are cases in point of how regulations can lead to penalties or changes in rules that immediately affect the entire business model.
But these concerns should not occupy the investors in Hong Kong and Shanghai for long, with the potential to invest in a company that is almost doubling its valuation every couple of years. To add, the article only covers a small set of key products of the Alipay super app. The use cases of the Alipay app, however, range from mobility services and local services to environment-friendly products such as Ant Forest as well as donation programs such as Alipay Charity and Ant Farm.
With these facts, whatever the result of the IPO, the prospectus has helped us realise the magnitude of Alipay, and it would be interesting to see its developments in public over the next few years.
Hope the article was worth the time. Feel free to add a response below or to send me your thoughts over Linkedin. Thank you for reading!
