Eric Sy co-wrote this article.
Ant Group and China tech as a whole, have had a rough two weeks. After regulators halted its US$35 billion initial public offering on November 3, the company now faces an uphill battle as the country’s financial watchdog plans to increase oversight on monopolistic practices in the financial technology space.
This makes it significantly harder for Ant to scale quickly, given that minimum capital requirements may see the company operating more like a traditional bank and less like an asset-light tech player.
Should the proposed regulations pass, Ant may be required to provide at least 30% of funding for loans – a huge jump from its current situation, where only 2% of loans sit on its own balance sheet. Already, analysts are forecasting that additional capital and license requirements may slash Ant’s valuation in half.
These developments highlight the increasing challenges China’s tech giants are facing domestically and underscore the long-term importance of finding growth opportunities overseas.
Critical for growth
Since 2014, Ant has made dozens of international investments, with at least 13 aimed at taking a stake in the region’s e-wallet players. This includes investments in Korea, the Philippines, Vietnam, Thailand, Myanmar, Malaysia, Singapore, India, Pakistan, and Bangladesh, as shown in the graphic below.
By making these investments, Ant has laid the groundwork to expand its regional presence in markets that are still in the early stages of their fintech development and remain friendly to Chinese business guidance.
More importantly, Ant could provide local e-wallet companies with a playbook, leveraging its own experiences in evolving from a mobile payments app (Alipay) into a full digital bank. That said, Ant seems to have realized that applying its strategies in markets beyond China has been trickier than it expected.
From payments app to digital bank
Ant’s extraordinary business expansion progressed in four distinct phases:
Phase 1: Online escrow solution for ecommerce
Ant Group started as an online escrow solution to solve trust issues for ecommerce transactions. By serving as a payment middleman between buyers and sellers, it facilitated ecommerce adoption and allowed for more seamless transactions.
Phase 2: Mobile payments provider
The solution later evolved into a mobile payment service known as Alipay to enable merchant payments and make peer-to-peer transfers easier. QR codes made this process smoother and more efficient.
Phase 3: Lifestyle super app and data collection
In order to boost customer retention and collect richer data sets, Alipay expanded to offer lifestyle services across bill payments, shopping, entertainment, etc. As seen in the chart below, payment transaction volumes continued soaring as more and more users adopted Alipay for their daily needs.
Phase 4: Expansion to multiple finance verticals and cross-selling
Once payments volume reached a certain scale, Ant then leveraged the massive amounts of user data it collected to expand into other financial services, ranging from insurance, investments, lending, and credit scoring.
Because Ant had access to many unique data sets unavailable to traditional financial institutions, it was able to provide a superior customer experience (e.g., loans approved in minutes, pre-approved know-your-customer verification for investment products, etc.)
Critical to Ant’s success was its ability to cross-sell its users effectively, with as many as 80% availing of three or more financial services and 40% using five financial services on the platform.
Today, over 60% of Ant’s revenue isn’t generated by payments. Instead, it comes from digital finance tech platform services, which connects its users to hundreds of financial partners offering investment, insurance, and credit products. As seen from the chart below, the company’s tech platform revenue grew from 44% of total revenue in 2017 to 63% in the first half of 2020.
At the cusp of evolution
Local e-wallet players across Asia are currently somewhere in between Phase 2 and Phase 3 of Ant Group’s roadmap. As seen from the chart below, many Southeast Asian countries have already reached high levels of mobile wallet adoption, with a number of them hitting reaching penetration rates close to China’s level.
With Covid-19 further accelerating the adoption of mobile payments, regional e-wallet players are uniquely positioned to collect even more data across different services. This will give them better insights into their users, potentially opening the doors to other financial services, as with Ant Group.
Promising developments are also taking shape in certain markets.
Malaysia – Touch ‘n Go offers personal loans and car insurance via partnerships
Touch ‘n Go users can apply for personal loans with CIMB bank in 10 minutes or renew car insurance with Allianz within 24 hours.
Thailand – Ascend Money offers microcredit to underserved market
In September 2020, Ascend Money began microcredit lending, offering loans less than 10,000 baht to its 8.6 million TrueMove H postpaid customers. The microcredit lending market in Thailand is worth 5 to 10 billion baht.
Philippines – GCash rolls out health insurance and disburses hefty loans
In April 2020, GCash started offering health insurance to users for as low as 39 pesos a month, in partnership with AXA and MicroEnsure. GCredit, the digital loans facility of GCash, reported that it disbursed over 5 billion pesos in loans to over 550,000 users since its launch in March 2018.
Korea – KakaoPay online brokerage has more than 2 million new accounts
Around 2 million accounts have been opened with Kakao Pay Securities since it was introduced in February 2020. Users have made 220,000 investments on average daily in products such as public funds and micro investments.
These developments provide a silver lining for Ant, given that it can pivot its business to focus more on driving growth from international markets as it copes with new regulations at home.
Over time, Ant’s e-wallet investees will likely develop into their own forms of digital banks, whether by applying for the relevant licenses and building up their own balance sheets or partnering with existing licensed banks in their respective markets. Either way, Ant will be able to further entrench itself in the financial ecosystems of neighboring countries to reap future growth.
The path ahead
With the delay or loss of US$35 billion in potential IPO funding, Ant will probably have to take a slower and steadier approach to growing its business. Promotions and strategies will also have to be reassessed in order to avoid drawing Beijing’s attention on antitrust grounds.
Since China still needs to prove its capital markets a viable substitute for listings, this is by no means a nail in the coffin for Ant or its IPO plans. The new regulations, however, will rein in Ant Group’s tremendous historical expansion, forcing it to pause and consider how to diversify its sources of growth.
At least one report suggests that for now, Ant appears to be pulling back funding from its regional endeavors partly as a result of regulatory hurdles. But given the growth trends outside of China, a long-term retreat would be unwise.
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