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Ant trail leads to riches in China’s fintech world

It started off as a fintech ant and now strides the China landscape like an online colossus. In the space of three years, Ant Financial has become a major player in the world’s second-largest economy.

Last week, the affiliate of the sprawling e-commerce giant Alibaba raised an incredible US$14 billion in a single round of investment, valuing the group at about $150 billion. This dwarfed the $4.5 billion funding it tapped into back in 2016.

“The company will continue to invest in developing its blockchain, AI [artificial intelligence], security, Internet of Things and computing capabilities to upgrade its global technology platform,” Eric Jing, the company’s chief executive officer, said.

Part of Ant’s attraction is its subsidiary Alipay, the online mobile payment platform, which has 870 million active users with 600 million in China and 270 million in the rest of the world.

Figures released showed that the group recorded a 65% jump in profits for the fiscal year of 2018 by “expanding its footprint in wealth management, consumer lending and overseas markets.”

“[It] posted 9.18 billion yuan ($1.4 billion) in pretax profit in the year [which ended in] March,” Bloomberg reported after calculating Alibaba’s earnings report.

As for the big picture, China’s fintech industry generated more than $103 billion in revenue last year, a rise of 55.2% in just 12 months, data compiled by iResearch Global highlighted.

By 2020, the online consultancy has estimated that could swell to 1.97 trillion yuan.

Love affair

Driving these numbers has been the country’s love affair with internet shopping and offline smartphone payments for a vast range of products from a carton of milk to a Mercedes sports car.

“China is recognized as the most advanced market for mobile payments in the world, thanks to WeChat and Alipay,” Paul Haswell, a senior partner at international law firm Pinsent Masons, said.

But then, fintech in the dragon economy is booming.

A survey by China Money Network in Hong Kong revealed there were 138 Chinese unicorns or companies valued at $1 billion or more last year. At least 19 were in the fintech sector, including Ant Financial.

Another report by the global accountancy KPMG and Australian investment firm H2 Ventures showed that five of the top firms in their 100 Leading Global Fintech Innovators were Chinese. The top three places were filled by Ant, online property insurance company ZhongAn and financial firm Qufenqi.

“These companies are like rock stars in their own country but we in the West don’t really know them yet,’’ Spiros Margaris, a venture capitalist and fintech advisor in Switzerland, told the business and news website Alvexo, which is owned by VPR Safe Financial Group.

“Alibaba and Tencent with their success stories shed light on the potential of China, and fintech is just a part of it,” he added.

The depth and scale of the industry are underlined by the variety of services on offer online. Peer-to-peer, or P2P, lending platforms have become incredibly popular, despite the risks, as well as the massive migration to internet banking.

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Cut-throat competition has also triggered innovation with a seamless web of online to offline payment methods, which in turn has boosted “retail transactions,” the Brookings Institute, pointed out.

“QR codes, a type of matrix barcode, have been key in facilitating the offline-to-online interaction and are widely used in China’s retail businesses, from street food vendors to Starbucks,” Wei Wang, a senior research analyst, and David Dollar, a senior fellow at the John L. Thornton China Center, wrote for the Washington think tank’s report.

“A shopkeeper can display a code that customers scan with their mobile phone to initiate a payment, or a customer’s WeChat or Alipay account can generate a unique, transaction-specific code that a retailer scans to complete a transaction. In either case, the mobile phone acts as a kind of payment card,” they added. “Money transfer between parties is also as simple as sending a text message.”

But even though China has “become the global leader in online lending” there are still challenges and risks involved in the industry.

P2P lending and other online financing portals have surged to the point where regulators have struggled to keep up. Now, it accounts for about 9% of the $10 trillion shadow banking industry.

“[The country] has become a leader in online lending, accounting for three-quarters of the global market,” Wang and Dollar, of the Brookings Institute, said. “The majority of [this] is peer-to-peer [with] online lending platforms [connecting] potential borrowers with lenders who are seeking returns higher than bank-offered interest rates.

“[Yet the] absence of regulation sparked the boom but also gave rise to a market brimming with scams and high-risk financial models,” they continued.

‘Double-digit returns’

“The most headline-grabbing case was Ezubao, a platform that lured investors with promises of double-digit annual returns. It attracted $7.6 billion from nearly one million users in only 18 months before it was identified as a Ponzi scheme, with more than 95% of its borrowers being fictitious,” Wang and Dollar added.

Since then, Beijing has brought in a raft of legislation to try to crack down on online financial sites, touting short-term loans and high-yield investment products.

Still, at the heart of the fintech boom are companies such as Ant, which reportedly received nearly $10 billion in its latest round of investment from blue-chip players, including Singaporean state-owned wealth fund Temasek and global private equity firm Carlyle.

Already there are plans for the group to shift its main business to technology services, and broaden its payments and consumer finance section outside the country.

Part of the reason is the Chinese government’s concerns about “systemic risk” from financial holding companies, Caixin, the business website based in Beijing, reported.

By turning itself into an “advanced technology provider,” Ant will open up new revenue streams. So far, it has signed a deal to provide biometric identification and AI-encrypted risk management systems to bricks-and-mortar banks, such as China Everbright and Shanghai Pudong Development.

The group also plans to reach two billion consumers globally with its payments network in the next three or four years through investments and strategic partnerships with Southeast Asian firms as well as tie-ups in South Korea, Japan and India.

“With the help of our partners, we are going to accelerate our strategy,” CEO Jing said.

Diversification will be the key to this “strategy.”

It could also be crucial to the entire fintech market as Beijing grapples with the dark side of the sector while forging ahead with its technology revolution through President Xi Jinping’s “Made in China 2025” policy.

Read: China has too few chips to play in high stakes tech game

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