Banking like a BAT: Lessons from the East
- Posted on August 21, 2018
- Estimated reading time 3 minutes
In “The Lord of the Rings” trilogy when the wizard Gandalf comments, “Look to the East …”, I don’t think he was referring to the rise of Chinese financial technology titans. But he should have been. While everyone seems obsessed with the FAANG brigade (Facebook, Amazon, Apple, Netflix and Google), not many are focussing on the BAT crew from the East (Baidu, Alibaba and TenCent). This article will focus on Alibaba, but similar dynamics exist within the other two.
Alibaba doesn’t really want to be a bank. Banks are highly regulated, need lots of capital, have high levels of governance and are extremely complicated in terms of regulation and compliance. Alibaba is much more interested in building social, commercial and financial digital lifestyles – and that means credit and payments. They don’t want to make money out of payments and credit but they do want to build up traffic for their partners. Critically, they want to build the platforms that will help their partners grow their business.
Creating a platform for 100 million businesses
Jack Ma, the chairman and founder, stated: “At Alibaba, we treat it more like governing an economy, as we have to manage so many companies dependent upon us as partners. Any SME with an idea now has a way to realize that idea. Alibaba marketplace can find you buyers and sellers; we can provide you with computing through cloud; we can distribute and deliver your products. By 2036, we will have built an economy that can support 100 million businesses for billions of users. We won’t own that economy. We will just govern it.”
That’s why Ant Financial, Alibaba’s financial services subsidiary, offers its sellers instant loans against their sales rather than waiting for days for funds to be released from escrow accounts (via their online platform, created in 2003 to enable small businesses to sell goods direct to Chinese consumers). Ant Financial has incredible goals. At Davos this year, they announced plans to reach two billion consumers by 2025. There is no payment or bank thinking in Alibaba, just a technology firm that wants to enable the best customer experience. They want their customers to build bigger businesses with them – and they are prepared to offer zero-interest loans to do so. (Chris Skinner, a veteran of the financial services sector, recently produced a fascinating 25,000 word case study on Ant Financial in his latest book, Digital Human.) Ant Financial has a ‘3-1-0’ model:
- 3 minutes to reach a credit decision
- 1 second to transfer money
- No human interaction (as massive amounts of data are analysed by AI)
Alibaba has moved from escrow services to real-time payments and cloud and is now working on machine learning and AI-based structures. According to Skinner, it can process 250,000 transactions per second today, and is building systems to scale to over 100 billion transactions per day (Visa and MasterCard handle just over 60 billion transactions per year combined, and average near 2,000 transactions per second.).
The future really is mobile
As consumers in the West grapple with chip and PIN and contactless payments, China spent $5.5 trillion through their mobile apps – more than any other economy. The chosen mobile payment system for most Chinese citizens is Alipay, which has 520 million users and almost as many as all the mobile money accounts in the world combined. Payment is made by QR code, which is everywhere in China (even beggars use it). On Singles Day 2017 in China, Alipay processed $25 billion in transactions, 90% via mobile phones. The only mobile-payment service near to this is WeChat Pay, owned by (you guessed it) Chinese rival TenCent. Most Chinese use both and there’s an excellent article in Fortune about their rivalry.
Alibaba is over here
However, Alibaba is expanding its footprint globally. Its strategy is to acquire merchants in Europe and America to accept Alipay as a means of payment for Chinese residents or tourists. Chinese tourists alone spent $115 billion in 2017. Alipay offers services in over 70 countries to help its users make payments, exchange currency and get tax refunds at shops and airports. The company plans to offer its services through 1 million merchants worldwide in three years.
It has invested in mobile payment services in India, Indonesia, Malaysia, Philippines, Singapore, South Korea and Pakistan. In India, Ant Financial has helped Paytm grow ten times over the last two years and became India’s largest payment provider with more than 200 million users and over 11 million daily transactions. It has extended Alipay’s market reach and brought its technology standards to India, including its QR code payment technology.
Alipay has signed deals with Wirecard and Ingenico so their customers can use its mobile app in Europe, as well as a similar US deal with First Data. It attempted to acquire MoneyGram in America but failed due to political pushback. Instead, it recently announced a cross-border remittance service powered by blockchain technology for Hong Kong users of Alipay and Filipino users of GCash, the third highest remittance flow in the world. (Incidentally, Alibaba has the most Blockchain patents in the world). They are not just a Chinese operation and to think about them that way is to underestimate their influence.
What does this mean for banks?
Here are four areas to consider:
- You could argue that Alibaba is not a threat to the banks as they are concerned about the unbanked and increasing financial inclusion. But according to Findex (the financial inclusion index), the numbers from unbanked have declined from 2.5 billion (2011) to 1.7 billion (2017). 78% of the world’s unbanked adults receiving wages in cash have a mobile phone. The proportion of adults with a bank and mobile money account has increased from 51% (2011) to 69% (2017). Between 2014-2017, 515 million people acquired a bank account. These are the SMEs of tomorrow - and they need finance now.
- Banks fear digital platforms as those firms control the apps and sites where most people spend their time online. Alibaba has ambitions to develop and control one of the biggest financial platforms through its partner network by sharing its technology and making it easy for businesses to grow.
- Unlike banks, Alibaba does not have ‘dirty’ data. It can use AI to analyse massive amounts of information from its network. It can create a frictionless customer experience for obtaining credit and generating payments for the businesses it supports on its platform. Getting data-ready for AI, however, is possible.
- Banks need to be thinking strategically about how they operate profitably in a world where tech titans like Alibaba could offer zero-interest loans. If an incumbent bank’s margins are eroded in their core products and services, where would they go next?
There are lessons to be learned by banks from the major Chinese tech titans. Given their ambitions, it’s best to start thinking seriously now about how such businesses could undermine future bank profitability. Forget FAANG. Look to the East …