Hey everyone—apologies for the delay—the Ant Financial IPO doc was way deeper than I thought!
Next week, we’re publishing my research notes on the Ant Financial IPO filing after reading through it, as well as another essay on Ant Financial’s business model shift away from payments. Unlike other essays, we’re going to be sending these directly to your inbox—if you’re interested in, just fill out this form.
Playlist of the Week
My friend Brooke LeBlanc (who also works in the fintech space) made this great playlist for our feature—it’s a dope mix of rap and house music. If you like it, give her a shout @brookeleblanc on Twitter.
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When Alibaba first launched a digital wallet, I wonder if Jack Ma knew that he was building what will become the largest fintech company in the world.
US fintech folks don’t talk enough about Ant Financial—we all focus on the public market SMB lenders or payment processing, but on the other side of the world, Alibaba and Ant Financial have transformed financials services in China.
For us here, its a clear example of technology gone right—because of Ant Financial, millions in China have access to financial services when they wouldn’t have before.
However, Ant Financial has quietly been forced to tranform its business over the past few years—moving away from a platform that creates financial services products to becoming a platform for other financial services providers. Its serendipitously positioned Ant Financial to dominate the financial services landscape in a post-COVID world.
The backstory behind Ant Financial is has parallels to Amazon and AWS—both companies started building something that they didn’t realize could be a product on its own. Alibaba started as an e-commerce marketplace, connecting sellers and buyers in China. Similar to Amazon, but a slightly different business model. While Amazon acts as a reseller, taking ownership over supply and other aspects, Alibaba is merely a conduit. The core e-commerce platform monetizes by charging brands for placement—essentially an advertising business model built on a shopping website.
Back to Alipay though. Back then, Alibaba’s digital mall, Taobao, had issues around accessibility but also just inherent transaction failure—because people couldn’t trust these sellers, or merchants couldn’t trust that consumers would pay them, fraud rates were a huge issue.
Alipay launched as a payment processor to power transactions on the Alibaba platform. By processing payments, Alibaba could use technology to mitigate fraud and improve the user experience. However, over time, Jack Ma and the team realized that their total market was limited by the amount of people that had access to digital payments. In the early 2000’s when Alibaba was being built, China was not the global powerhouse it is now—access to banking services for rural China was abysmal back then. It prevented Alibaba’s digital mall, Taobao, from being able to live up to its fullest potential. This realization led to the Alipay team to think about how they can transform financial services using technology.
Fast forward to 2020 and the rebranded Ant Financial is a financial services behemoth.
Over the past few years, Ant Financial has started diversifying its businesses by selling technology infrastructure products to banks. The strategy is clearly outlined in the filing— by leveraging their technology layers, they can create more customized financial products to sell to Alipay users.
“Financial institutions can access our platform to distribute credit, investment and insurance products, powered by our intelligent decisioning and dynamic risk management solutions as well as technology infrastructure. As a provider of technology, we collaborate with, rather than compete against, our partner financial institutions.
Through the massive reach of the Alipay platform to all levels of the economy, we have established the “capillaries” of the financial system to complement the “arteries” operated by major financial institutions. Our platform model whereby banks can tap into our customer reach and technology to provide financial services facilitates efficient allocation of capital while achieving societal goals of inclusiveness and sustainability. “
Much of the filing is dedicated to two parts: what technological capabilities they offer institutions, and how those technologies power innovative technology. These products help connect users in the AliPay network and institutions:
CreditTech, which focuses on consumer and small business credit; InvestmentTech, focused on investments; and InsureTech, focused on insurance.
Let’s not get into the nitty gritty here: essentially this is just Ben Thompson’s aggregation theory applied to financial services. Ant Financial has been able to acquire a large number of users, and are selling them personalized financial products. Because they both develop these products and also feature partners, they have two ways of making money—lead generation fees and monetizing the financial product. For CreditTech, this means making money off lending. For InvestmentTech, this means increasing AUM as a way to decrease cost of capital, as well as fees and commission from brokerages for moving money into their products. For InsureTech, this means making money off fees based on premiums and how much users are constituting to the program.
In aggregate, these three revenue lines already account for the majority of Ant Financial revenue. At the end of 2019, it was around 56.2% of revenue; at the end of June 30th, 2020, total revenue across CreditTech, InvestmentTech, and InsureTech accounted for 63.4%. In the first half of 2020, total revenue had already suppassed 2019 totals. What led to the boost?
Clearly COVID has been a catalyst around this change. But how can Ant Financial’s business capitalize on the change in digital financial services in a post COVID world? In my opinion, there are two key avenues:
Expand consumer reach, as a way to sell personalized financial services products
Expand enterprise technology services, and sell technology to fintech startups and financial institutions across the world.
Given Ant Financial’s current trajectory and macro trends, the second option is the clear path forward.
It’s not that the first one won’t work, it very possibly could. But it’s harder to execute. There are macro level issues that I think will prevent Alipay from extending its consumer brand beyond China. It’s not like Alipay hasn’t been trying; according to Quartz, Ant Financial is in 54 countries. But given the consumer behavior differences and the amount of marketing and effort necessary, it only makes sense to Alipay to focus on a few strategic countries, perhaps in Southeast Asia. Alipay’s also tried to use another method to gain consumer distribution—partner or invest in companies. Ant Financial is a major investor in India’s PayTM, a payments startup, and SnapDeal, an e-commerce platform. In June, Alipay announced a partnership with 5 major European digital wallets, where they agree to use Alipay’s QR code technology to provide access to users across all these platforms.
And while these efforts are great, they’ll take a long time to achieve fruition. As we’ve discussed in the past, consumer financial brands take ages to develop.
But even with those partnerships, I think Alipay will have a hard time due to the geopolitical climate. In fact, the Ant Financial S-1 document mentioned “geopolitical tensions” or some version of that phrase 15 times in the document—more than “open platforms,” which Ant Financial says is a core mission value for the company. It’s clear that the US-China tensions are going to be a factor for Ant Financial’s future growth—if Trump think TikTok has too much influence on American culture, what will politicians think if a Chinese firm started offering a robust financial services product in the US?
This is why I think Ant Financial selling technology services to financial insitutions and fintech companies makes the most sense. The go to market strategy here is pretty unique compared to other fintech infrastructure platforms, offering both infrastructure and distribution to users through Alipay, but in theory it’s a similar value proposition.
In its public offering documents, Ant Financial outlined 4 key benefits it offers financial institutions: broad and targeted reach, intelligent decisioning systems, dynamic risk management systems, and technology infrastructure.
We’ve been over the first one already. Let’s dive into the other 3.
Intelligent Decisioning Systems—Ant Financial helps institutions by offering a real-time decisioning service to determine risk and match products with customer. What’s interesting is there there are two things going on here—first, the risk assessment part, then the identifying potential customers and matching them with products. Essentially, is a real-time risk assessment and financial product recommendation engine all in one.
Dynamic Risk Management Systems—these combine the decisioning system with other major factors, including “risks relating to KYC, fraud, AML, credit, liquidity, operations, security and data privacy.”
Technology Infrastructure—Ant Financial’s tech lets it scale to billions of transactions. The firm also offers this to financial institution partners as a technology service. It scales too—Ant Financial says “during the 11.11 global shopping festival in 2019, the peak payment transactions per second was 459,000.”
Even one of the three of these services would be a value add for regional bank in the US. The combination of all three will help an institution compete with fintech startups and be able to offer high quality, competitive, digital financial products to customers. And, post COVID, it’s been attractive to financial institutions in China:
“The number of customers paying for Ant to help them build mobile apps and provide cloud computing power jumped by 175% in the two months through April, and it’s now working with more than 200 lenders, according to the company. Inquiries to collaborate with the tech giant increased by 400% over the period…[the client]pays a one-time license fee to Ant for its cloud products such as mPaaS and SOFAStack and also an annual fee for software support and maintenance.”
Ant Financial acknowledges the opportunity to expand internationally in the filing: “We intend to work with our partners and develop more comprehensive digital payment, digital finance and daily life services for consumers and businesses beyond China.”
The question is: where? Its an interesting question that has geopolitical issues too. Given the synergies with Alibaba, I fully expect Ant Financial to focus on emerging countries. (But, I can see some issues around Chinese companies providing financial infrastructure to emerging countries, given China’s Belt and Road Initiative.) And there’s still a lot of growth in China itself. But my thesis is that in an emerging country where financial services infrastructure is poor, Ant Financial can:
Get consumers on a high quality financial services and commerce platform
Get help from financial institutions onboard users for them by offering them modern financial services technology
Offer SMB focused financial products to enable merchants (on Alibaba and in general), which creates more transaction opportunities between merchants and consumers
Essentially, in an emerging country, where the ingredients around digital services adoption are ripe to take off, Ant Financial can improve the digital financial ecosystem for consumers and merchants and turn it into a flywheel for Alibaba.
That’s what I’d do anyway. There’s a lot of other evidence in the IPO filing that hints at this too—sections on how fruitful partnerships between financial institutions have been, for instance. But given the dramatic shift in financial services caused by COVID, the opportunity is ripe for Ant Financial to take their ambition to transform finance global.
