How Ant Financial is transforming the Chinese payments industry

Alibaba’s financial affiliate group is reaching out to the under-banked in China.

Alibaba’s Ant Financial Services Group has brought people with low income and limited to no credit history onto the financial grid by incorporating digital payments into existing e-commerce and social media platforms — a feat by any standards, especially as other markets, like the U.S., lag behind.

By using the customer data from those transactions, Ant has been able to give them access to other financial services its created that look a lot like typical core banking products — savings accounts, credit assessment and loans for consumers and small businesses — according to a report released Wednesday by the United Nations Better Than Cash Alliance.

“That Ant Financial is now able to analyze all that data and leverage the platform to extend loans to companies or individuals has had a big impact on how they produce new businesses,” said Camilo Tellez, head of research for Better Than Cash Alliance and the lead author of the report.

Ant Financial has basically found a way to scale financial access and wellness tools similar to existing apps in the U.S. either struggling to take hold or not really integrating with the other existing offerings – like the savings app Digit or micro investing app Acorns. But U.S. customers still largely pay with plastic, whereas mobile payments are so big in China that Ant can use transactional and other alternative data to create a true financial ecosystem. Friction around customer data is one of the biggest things in the U.S. keeping financial services siloed.

Ant Financial launched in 2014 and as of September 2016 had loaned $107.3 billion in loans to more than four million small businesses over its Alipay platform to date, according to the UN report. Grameen Bank, the Nobel Peace Prize-winning microfinance organization and community development bank, has lent $17 billion since its inception in 1976.

In China, 79 percent of adults have had a bank account at some point, according to the UN research, but only 10 percent of them have borrowed in the formal financial system and for them, their digital footprint of transactional data and payment behavior can add to their credit histories. The same is true of small businesses, which historically have had difficulty accessing credit or taking out loans because China’s major banks are so heavily focused on lending to state-owned enterprises. Sesame Credit, Ant’s social credit scoring system, now has more than 350 million registered users and 37 million small businesses that buy and sell on Alibaba Group marketplaces. Sesame examines customers’ credit history, financial behavior, contractual capacity, identity and users’ social networks.

There are also accessible ways for people to save and invest their money. Alibaba’s Yu’e bao lets customers invest the money “left behind” on digital wallets into a money market fund, earn interest on that spare change daily and still have the freedom to withdraw the funds when they want. Alipay effectively acts as a fund manager but is treated as a distribution service from a regulatory perspective. Customers can also use Yu’e bao funds to make e-commerce purchases. Yu’e bao, which now serves more than 152 million customers, grew its assets under management to $117 billion in 2016 from $29 million in 2013.

“You have all these different opportunities being created through these messaging platforms for younger entrepreneurs for small and medium sized enterprises,” Tellez said. “Hopefully some of that impact will be found in other markets and similarly be able to provide SMEs better access to capital.”

In China, merchants are required to accept mobile payments — each point-of-sale terminal needs to have near field communication technology built in — so they’re more accessible, user friendly and more people can take advantage of the opportunity, which allows more data to enter and flow through the system.

The closest thing to a social payments platform in the U.S. is Venmo, which stops at peer-to-peer money transfers. But Tellez says he sees Venmo 2.0 bringing the money transfer capability to merchants. While the U.S. has so far missed out on a lot of mobile payments opportunity the China has been using to the advantage of its financially excluded consumers, it’s possible merchant partnerships with Venmo or something like it could be how we actually start integrating mobile payments.

“As companies are leveraging more data analysis and they start looking at how to integrate wallet functionality into everyday activities, the wallets will become like silent pipes through which payments move,” he said. “We’ll see more partnerships happening where you don’t even recognize that you’re using Venmo to pay for things, it’ll be more seamless.”

PayPal-TIO deal could increase Venmo revenue, utility

PayPal’s merger strategy has long been focused on digital offerings. Reaching the physical world, however, has been a real challenge for the payments giant.

Now PayPal is trying to change that. The recently announced acquisition of Canadian bill pay service TIO Networks for $233 million would not just give them greater reach but a greater opportunity to work more with people who are excluded from the banking system.

“It’s been clear for a while that PayPal has a vision to democratize financial services,” said Anuj Nayar, head of global initiatives at PayPal. “A lot of this stuff we’re doing specifically to hit the underserved. People are being disenfranchised … it’s incredible how high a proportion of the U.S. population couldn’t raise $400 in an emergency.”

About 15 percent of U.S. consumers don’t have a bank account, according to Pew Charitable Trusts. For many of them, digital financial services seem ill-suited to their needs since they deal mostly in paper checks or cash. And while targeting people off the financial grid is laudable, the deal, which is scheduled to close in the second half of 2017, is as much about the transaction volumes PayPal would acquire, if not more, as servicing the unbanked.

When the company announced its quarterly earnings at the end of January it highlighted the successful growth of PayPal-owned Venmo, which processed $5.6 billion over the quarter, up 126 percent from the previous quarter. But Venmo transfers are free for users and PayPal doesn’t make much from them. Similarly, people making cash payments to billers are probably doing so through a kiosk or 7Eleven, Family Dollar or other retailer, said Michael Moeser, Javelin Strategy & Research’s director of payments.

“PayPal makes [revenue] when you use its wallet at a merchant,” he said. So by bringing billers into its network PayPal argues that it’s creating more opportunities to generate fee revenue.

If PayPal can get data on people who are outside the mainstream financial system, and as a result, aren’t on the radars of credit bureaus, it could potentially help build and maintain records of the volumes of data that show people’s financial integrity and responsibility, said Ramesh Siromani, a partner in the financial institutions practice of A.T. Kearney, a global strategy and management consulting firm.

As important as it is to bring attention to and target these customers, this deal, for PayPal, is still all about adding more ways to get volume into its business that wasn’t previously there. TIO processed $7 billion in bill payments in 2016. It boasts 14 million customers, 10,000 biller partners and 65,000 retail locations.

In the long term, PayPal could use the TIO network to bring more utility to the Venmo app, Moeser suggested. PayPal declined to comment.

“Say you and your three roommates get a collective utility bill, and one person is getting the funds from the other roommates so he or she can pay that utility bill,” he said. “When you get money from your roommates you don’t have to go to a separate function or log into your mobile or online banking, you could do it all from your Venmo wallet and there’s an opportunity for Venmo to get some sort of interchange [fee] from that biller.”

Nayar did not comment on the company’s future plans beyond the deal, which has still not been completed. For now, he said, PayPal is focused on serving customer needs, and finding a way to bring people with limited financial access into its business and into the mainstream financial system is on deck.

“Across the board we’re focusing on needs of customers,” Nayar said. “PayPal’s are two fold: merchants and consumers. For both of them there is a massive unmet need and PayPal is sort of the only global third party payments network that does it all at scale — we have three digital wallets in total,” he added, referring to the PayPal digital wallet, Venmo and Xoom.

For the last five to 10 years, the conversation around financial inclusion has drawn attention to the exorbitant fees people end up paying just to cash a check or send money to family in a different country. In that time, technology developers have built software that allows them to perform these basic functions for little to no fee, and more quickly.

Adopting these technologies aren’t as easy as it sounds though, said David Sica, a principal at venture capital firm Nyca partners. There’s a huge financial literacy component that could be addressed through great marketing and product design.

“What often gets missed is the consumers trust that check casher, they trust the service that for the last 20 times they’ve used it does what it’s supposed to do,” he said. “If I’m a check cashing customer, I’m not going to rock the boat. I’m going to go where I know I can cash the check and remit and I’m fine paying the fees because it’s more important to get it done. It’s unrealistic to think the unbanked, underserved population will start acting and behaving like a Venmo customer on day one.”

4 charts on the state of mobile payments for the underbanked

4 charts on the state of mobile payments for the underbanked

Mobile payments solutions have transformed geographies that were once underbanked or even unbanked, allowing for modern finance and commerce to take hold.

Though the path to financial inclusion is still long and many geographies still lack many services, the transformation is underway.

A recent study by PWC highlights the opportunities mobile payments have in addressing regions that lack broad access to financial services.

The unbanked don’t have a formal bank account. People who have a formal bank account but, because of lack of funds or poor credit history, rely on ancillary services, are considered underbanked.

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There are about 2 billion unbanked and underbanked individuals in the world today. The unmet deposit demand of the unbanked demographic is at least $360 billion, according to the study.

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Mobile payment solutions are the first step in tapping into the underbanked opportunity. According to the GSMA, an association of approximately 800 mobile operators around the world, in 2014 there were 255 mobile money services operating in 89 countries. In 2014, there were more than 300 million registered mobile money accounts globally, with half of them located in sub-Saharan Africa.

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Kenya is the poster child for mobile payments. There are now more than 26 million mobile money accounts in Kenya, roughly equal to the adult population of 26.8 million, according to PWC.

In other markets, penetration of mobile payments is still low. For example, although 91 percent of adults in Ghana own a mobile phone, only 5 percent have used a phone to pay bills, and 1 percent have used a phone to pay for goods in a store.

However, a clear trend of startups offering more advanced mobile financial services on top of payments is emerging.

Even advanced services such as insurance have seen an uptick in developing countries. Premiums from developing markets now represent 18 percent and 16 percent of total non-life and life premiums, compared with 7 percent and 4 percent, respectively, in 2000.

Incumbent banks and fintech upstarts are exploring ways to expand the services they offer to unbanked and underbanked. In order to do this successfully, they must create solutions that are accepted by customers, are easy to implement, and mitigate risk. Among the offers that are being tested are lending marketplaces, P2P insurance and blockchain-enabled financial services.