Ant Financial — fintech’s super unicorn

understand what is Ant Financial and implications to the payment market in US

Who would have thought that the largest private company in the world is a fintech company? Well, it’s called Ant Financial, recently rebranded as Ant Technology, and currently valued at $200 billion. Ant Financial has become the key integral part of the Chinese digital life style such that without so would bring great inconveniences. Imagine a cashless society and Alipay is your access to the digital currency. This is why it was the very first app that I downloaded in China. I was able to go out without my wallet and pay for everything, even to the smallest street vendor, with Alipay using my phone to scan QR codes. Note that Alipay is the name of the app, and Ant Technology is the company behind Alipay.

In this article, I will try to explain what is Alipay, why it’s worth $200 billion, and the implications for the US market if any.

What is it?

Simply put, Alipay is Chinese super-app that handles all your financial needs. In the US context, it’s combination of Paypal, Stripe, Venmo, Apple pay, and Visa / Masstercard. Just like most other companies, it didn’t start out that way.

In the very beginning, like Paypal, Alipay started as the escrow account for Alibaba’s e-commerce to solve the trust issue. As more merchants signed on, and the problems with cash, Alipay saw potential in consumer offline payment space. Note that credit card never took off in China due to limited users base because of high income restriction, and limited merchant due to high processing fee. Alipay offered simple and cheap solution for the merchants. Merchants just need to print out the QR code, and can start to accept payments. For the user, Alipay focused on user experience (speed & success rate) in addition to subsidies. It’s adoption quickly grew. Today, it’s one of the very few way to make payment in the Chinese digital economy. Most importantly, with the help of partners Alipay pretty much transformed China from cash to a cashless society.

Why the massive valuation

So, how or why is Ant Financial valued at $200 billion? Well, let’s look at some numbers: China’s digital payment is a $33 trillion market with Alipay being the leader with 55.4% of the market in 2019. That means Alipay processed more transaction volume than largest credit card, Visa, did worldwide at ~$11 trillion.

Alipay currently has about 1.3 billion users with 1 billion in China. Just for context, the largest bank in US by asset JP Morgan only has 4 million accounts, though mostly high value accounts. Chime, the largest digital bank in US has about 7 million accounts.

One of the highlight achieved by Alipay is that it launched money market account, and became the largest saving account in the world. In late 2013, Alipay launched money market account so that their users can earn interests for excess money in their e-wallet. Because Alipay made the process so easy, just with click of a button, fast, free, and earns much higher interests than what the bank offers, ends up with ~$300 billion in asset, the largest of its kind.

Its revenue model

Currently, Alipay makes money from the following areas:

For merchants:

1. .6% processing fee

For users:

1. .1% processing fee for taking money out of Alipay for amount over the free quota
2. Interest on Installed payment & loan
3. Commission from financial products purchased on the platform, like buying mutual fund or insurance
4. Advertisement & partnerships: to leverage Alipay’s massive user base
5. Data: for targeted marketing & zima credit

Those in the payment industry should notice the paltry .6% merchants processing fee compared to the 2.65% fee for Square US, which already offers one of the best rate. Note that although Alipay is known for payment, but doesn’t make most of its money on payments. This has been Ali’s strategy from Alibaba to Alipay. Ali is known to create a eco-system that will offer essential services for free, and make money from other add-on or related service. Just look at Zima credit. Alipay can leverage user’s transaction data to create a credit score for each user in a country when there is no FICO or anything close. The application is so wide that it can be a major source of income for Alipay.

Payment in the US

Having enjoyed the convenience brought by Alipay in China, truly cashless, I often wonder whether we in the US will get to enjoy the same convenience anytime soon.

Let’s frame the problem. What’s the job? I think it’s the convenience brought by cashless. If we look at the US market a bit closer, we actually had a cashless solution called Bank Americard in 1958, which is known as Visa today. Though the origin of Bank Americard was to offer credit, I would argue it has very similar effect in convenience to cashless. Plastic or digital, that’s just the form.

That cashless solution almost 60 years ago was good, but not good enough in today’s standard. I still can’t go everywhere without my wallet or carry some cash. The plastic payments is not as widely accepted especially for smaller transaction. I am often met with a $10 to $15 minimum to use the card, whether it’s credit or debit. I think there need to be bigger separation between credit and debit card. For one, their fee are much different, with debit’s fee much lower. Debit card fee is often lower than 1%, but sometimes confusing due to the fixed part of the fee.

Besides a simpler and possibly cheaper debit card fee, another issue is to lower the merchant set up fee and simplify the process for accepting cashless payments. With Alipay, a street vendor in China can simply print out the QR code, and start taking digital payment. Paypal has launched initiatives for QR code in the US. Though the right direction, but hard to change muscle memory and it’s not the only option, so should consider offer incentives.

Another issue is will we see the like of Alipay in US? My answer is no. In trying to keep this article short, and not going off on a tangent, I will touch on my reasoning briefly:

1. The time for such fintech giant in the payment space has passed. Visa and Mastercard had such opportunity, but they decided to farm out the processor and gateway to ISOs and MSPs, which probably made sense at the time. Though if they didn’t it’s very possible that they will be subject to anti-trust questions in the US.
2. Barrier to entry still high in the payment space, and it’s very hard to come up with 10x better solution, let alone 10x *3 solution (user, banks, and merchants) to disrupt the industry.
3. Current incumbent is not looking to damage relationships with existing partners.

Conclusion

In this article, I tried to explain what is Alipay, its impressive number, business model, and whether we will see such transnational fintech in the US. Having experienced myself, I am really impressed at how a fintech company can help transform society. Not sure whether we will see another Alipay, but certainly looking to see more fintech app, solution , application, API that will bring value to the users.