Ant Financial Services Group, an arm of e-commerce giant Alibaba, is generating excitement among bankers and investors as it gears up for an initial public offering that could be next year’s biggest deal in financial technology.
The biggest winner from a listing could be Ant, or parent Alibaba, or investors, or underwriters. Or it could be China’s smaller companies, currently starved of credit. Ant’s listing is therefore an important milestone for the Chinese government’s ongoing programme to reorient the economy by transferring wealth from state-owned enterprises to the private sector.
Alibaba, Baidu, Tencent and JD.com have all capitalised on their success in e-commerce by boosting their online payment capabilities and now offer a wide range of financing options. Alibaba and JD.com offer SME loans to their merchants and/or suppliers, and consumer loans to their clients for online purchases, noted a November research report by Goldman Sachs.
Market participants expect all four will continue to focus on consumer banking, credit cards and SME banking online to leverage their enormous retail and SME client base.
“One of the advantages [internet companies] have [over traditional banks] is they are processing millions of transactions on a daily basis. They have a lot of information about their clients,” said a banker familiar with Ant Financial. “And that data and information is what really helps them understand their customers’ needs and their customers’ personal situation.”
It is an argument extended by Mark Chan, partner at law firm Berwin Leighton Paisner. “[Traditional] banks call clients to ask what their interests are and whether they’d like to buy something. But Alibaba knows your preferences and what you want or need to buy,” he said. “It’s like Facebook.”
Having access to such invaluable client data will allow the fintech industry to evolve quickly, the Singapore banker added. “As long as you’ve got access to data and information about your customer, that should provide you with a platform to develop a fruitful, broader financial services business.”
Alibaba, Baidu, and Tencent have growing advantages in several key banking services, Goldman argues. These include transactions (capturing online transactions and expanding into off-line transactions), payments (using online and off-line payment services to obtain payment data), data (using the data to gather and analyse customers’ information, shopping behaviour, and ability to repay loans), and regulatory requirements (so far, internet players face limited regulatory scrutiny compared with banks but this will change).
Goldman Sachs’s report argues that Alibaba is the leader, with its strong franchise, online payments, data mining, and risk management capabilities.
Tencent has advantages in gathering retail customers through WeChat, its instant messaging service, while Baidu has good data mining and search traffic abilities, although it will take time for the two to build up e-commerce transaction and payment platforms, the US bank’s report said.
Barclays noted in another report that non-mortgage consumer loans accounted for 2% of GDP in China, compared with 9% in Hong Kong and 21% in the US at year-end 2012. Many of these borrowers are not served by banks.
According to McKinsey, China’s consumer credit could hit 9% of its GDP by 2025.
While the fintech industry looks promising, traditional banks will retain long-established strengths. Cheap deposit funding, on-site due diligence, a substantial capital base, and a broad physical network necessary for complicated and larger transactions, such as mortgage and SME loans, will help support banks’ business, Goldman Sachs said.
Large-cap financial services firms — namely Ping An Group, China Merchants Bank and ICBC — are best placed to defend themselves against internet companies, due to their strong IT capabilities and internet-focus.
The banks most at risk are the mid-cap banks — BoCom, Citic Bank, Shanghai Pudong Development Bank, Huaxia and China Everbright Bank — with weak retail banking franchises and little SME experience, two areas the internet finance industry will exploit in the coming years.
Outlook
Why is fintech creating such a buzz? The growth potential alone is staggering. Large state-run banks have favoured loans to state-owned enterprises (SOEs), overlooking small-to-medium enterprises and consumers.
State-run banks have had little incentive to lend to SMEs and consumers for a host of reasons, including China’s loan quota policy, government guarantees for SOEs and an undeveloped credit investigation for smaller borrowers, according to the Goldman Sachs report.
As a result, the costs of funding incurred by SMEs are 16% or higher, considerably more than 5%-6% for larger corporates, and many SMEs and consumers have limited access to bank loans or corporate bonds, the report noted.
“The big issue with banks is that they really just lent to the SOEs,” a Hong Kong ECM banker said. “They never did personal finance or SMEs. China has never properly addressed the market for giving credit to consumers.”
This could represent an enormous opportunity for Chinese internet companies such as Alibaba, online gaming and social networking website Tencent, search company Baidu and JD.com.
“It’s a very interesting area and certainly one some people are watching very carefully,” one Singapore-based IPO banker who declined to be named told FinanceAsia. “A lot of these technology and e-commerce companies can provide the infrastructure that doesn’t exist in the traditional Chinese banking network. When you think of the sheer volume and population in the third- and fourth-tier cities that don’t have access to traditional bank accounts this technology will provide an [important] channel for them.”
Alibaba was one of the pioneers in this space, the banker added.
“Alibaba first came up with the concept of Alipay wallets, which can earn interest when [customers] weren’t spending the money. That attracted a huge amount of deposits that effectively took away deposits from traditional banks,” the banker said.
For the six months leading up to October 2014, 49% of new Alipay wallet users were from first- and second-tier cities, while 51% came from third- and fourth-tier cities, according to Alibaba.
As e-commerce traffic is increased, the shift by internet companies into financial services looks set to continue, the banker said.
Goldman Sachs projects internet finance loans in China will total Rmb6.8 trillion ($1.19 trillion) by 2024, representing a compound annual growth rate in the next decade of 76% from the start-up loan base of Rmb7 billion in 2013.
Alibaba, Tencent, and Baidu are forecast to generate consumer and SME loans/payment-related business net profits of $29 billion by 2024, while JD.com will net $11 billion in profits.
On the Chinese mainland, third-party payment tools, offered mainly by Alibaba and Tencent, made up 76% of online shopping volume in 2013, compared with only 15% in the US, where e-commerce payment is still dominated by US banks, the Goldman report noted.
The Barclays report notes that third-party payment transaction volume has increased by more than 50% each year in the past few years. In 2013, some 67% of total transaction amounts in China came from point of sale (POS) terminals, followed by online payment (29%) and mobile payments (4%), the May report says.
