There's a fintech revolution happening in China’s payments space, and one mobile startup is giving the banking industry endless nightmares.
Its sheer size is mind-boggling—the company handled more payments than Mastercard last year, completing more than $8 trillion of transactions, more than twice Germany’s GDP. The fintech startup now controls the world’s largest money-market fund and makes loans to tens of millions of people every year.
Founded by Chinese billionaire and Alibaba Group chairman Jack Ma, Ant Financial Services Group has developed into the world’s biggest fintech firm, making products that let people to do things like pay for their insurance or buy groceries on their mobile phones.
Jack Ma created Alipay, a subsidiary of Ant Financial, in 2004 to give Chinese customers who lacked credit and debit cards an easy way to shop in the vast online marketplace. The platform has grown from strength to strength and now boasts 620 million users.
Vampire Startup
As Alipay grew, Jack Ma discovered that banks were not doing nearly enough to support small businesses and begun advancing them small loans. In 2010, Alipay was carved out of Alibaba after the authorities said the platform would need a new license to operate.
By 2013, Alipay was holding customer funds worth billions of dollars in escrow. It was around that time that the company came up with the idea of investing idle customer funds in money-market funds to earn an income. The money market fund, known as Yu'e Bao for "leftover treasure," allows customers to invest as little as 0.01 yuan ($0.0015). The fund pays interest rates several points higher than what banks pay on short-term deposits, something it’s able to do because its status allows it to invest in riskier products than what banks are allowed to tap. Related: How Will A Global Economic Crisis Impact Bitcoin?
A boom in asset-backed securities issued by micro-lenders that package consumer loans into securities has been fueling the company’s growth.
China’s banks, including the country’s largest, are not happy with the turn of events, and are now grumbling that Ant is siphoning away their deposits, forcing them to pay higher interest rates to attract deposits and even leading to the closure of branches and ATMs.
One state-owned TV channel has described Ant’s massive money market fund as a “vampire sucking blood from banks”.
And they are trying to put the clamps on Ant.
Earlier this year, China’s central bank scuttled Ant’s year-long efforts to build a national credit-scoring system by barring banks and institutions making loans from using it. Unlike the U.S., China lacks a national credit scoring system.
Meanwhile, regulators have issued a slew or rules requiring money-market funds to sharply lower high-yield assets that allow them to pay high interest rates to customers. This move has put pressure on Ant’s money market inflows.
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The authorities are also considering whether to designate Ant as a financial holding company and thus require it to meet bank-style capital requirements.
Ant Financial Repackaging Itself
Increasing oversight by regulators could hold back a golden age of fintech growth in the country. Ant Financial is, however, trying to repackage itself to make sure it does not make the authorities feel uncomfortable.
Fintech startups backed by Chinese tech heavyweights such as Baidu and JD.com have in recent months been moving away from directly offering financial services towards providing platforms that traditional banks and money lenders can use to reach their customers. Ant is doing the same, noting that the company does not fund most of its loans from its own balance sheet but rather makes it easier for banks to extend their loans and lower risks.
"I don't think banks see us as a disrupter," Ant's general counsel Leiming Chen has declared. "We complement them and are helping them reach more customers."
By Alex Kimani for Safehaven.com
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