Ant Financial, the private company behind China’s largest digital payment service provider Alipay, has plans to shake up financial services globally.
In a wide-ranging conversation with FinanceAsia, its chief strategy officer, Chen Long, covered topics from the direction of financial regulation in China at a time when Beijing is looking to secure more control over the Big Tech to the firm’s overseas expansion plans.
Long, a former finance professor who joined Ant Financial in 2014, also delved into controversial areas such as customer privacy in the era of big data, as well as how the firm defends itself against cyberattacks and what China’s ban on initial coin offerings (ICOs) in September means for financial innovation.
He also identified the area of finance services he thinks most needs rebuilding: insurance. “We think it has to be broken – something has to change,” Long said.
Ant Financial has the firepower and data to do it.
The unit of China’s top ecommerce firm Alibaba has collected and stored customer’s payment records, creating a large pool of information that allows lenders and insurers to conduct credit assessments effectively.
“Alipay generates invaluable data for a data-centric group,” according to Piyush Mubayi, a Goldman Sachs equity analyst.
Ant Financial plans to serve two billion customers globally in a decade, versus its current customer mix of 463 million in China, 12 million across the Association of Southeast Asian Nations, and a further 180 million at Paytm in India. Ant’s $1.2 billion bid for Dallas-based money transfer service MoneyGram International is under review by the Committee on Foreign Investment in the United States (Cfius).
Ant Financial is “on track to be the world’s largest fintech company,” Mubayi said.
Investors are understandably excited about Ant Financial’s prospects and plans ahead of its public listing, tipped for next year. The IPO has the potential to be the largest fundraising ever by a fintech innovator. Ant Financial will still be 33% owned by Alibaba if the company is listed in the future, according to Alibaba’s annual report.
Ant Financial is already estimated to be worth more than $70.5 billion, according to equity analysts at Goldman Sachs; bigger than the market capitalisation of Swiss bank UBS.
First developed as an online payment system for Alibaba’s internet marketplace, its Alipay mobile payment platform has expanded into the physical world, enabling users to make payments instantly by scanning the QR codes in their smartphone.
It took a step further on September 1, deploying its facial recognition payment system “Smile to Pay” at a Yum China restaurant in its hometown of Hangzhou.
Chen also addressed fears that Ant’s online money fund Yu’e Bao, meaning leftover treasure, has grown so large it poses a systemic risk.
The following transcript of the conversation has been edited for clarity.
Q. Which areas of finance overseas offer the most promising opportunities for digital disruption and growth for Ant Financial?
A. There is so much that can be done in payments, wealth management, consumer loans, SME [small- and medium-sized enterprise] loans and insurance.
Finance is so far from being inclusive that we see blue ocean everywhere.
In the US, payments are very outdated, even though it is the most advanced financial system in the world.
People should have their own balance sheet to manage their financial life. It will come and it will come fast.
Finance will be democratised, just like at Yu’e Bao. You have just one yuan? You can still grow it. At a traditional bank if you only have a little money, then who is going to talk to you?
Q. What will you do with MoneyGram if Ant’s acquisition is approved?
A. I can’t discuss that but what I can say is that international cross-border payments cost up to 7% globally – more than twice as high as it needs to be.
Q. What are your plans for growing “Smile to Pay”?
A. There are different ways to complete payments. One of them is facial technology, but it’s not clear if it will become the most widely used way to complete payments in the future.
The key yardstick is the users’ experience.
We started with QR code payments [scannable codes that resemble square mazes], which became extremely popular.
When Apple Pay came out with its version of NFC [near field communications] payments there was quite some excitement, but it is far from being the major player.
Whatever payment method is most widely used will evolve the fastest and dominate payments.
Safety is not the major concern for payments – because transactions are already very safe, thanks to our AI-driven risk management system.
Our fraud loss rate is already lower than 1 in 1 million, meaning that for every one million dollars there is one dollar of loss.
That is better than bank debit or credit cards in China. Their official average loss rate is estimated to be about two basis points [0.02%]. Also, bear in mind that China’s bank loss rate is low compared with the rest of the world.
Q. Don’t people worry about privacy? Will this hamper Ant Financial’s development?
A. Privacy and data security are the building blocks of the digital age. People kind of assume in the big data age that their data will be detected and watched, but that is not the case.
Any data that is collected has to be authorised. Then before anyone can use it the data has to go through desensitisation, which means it will be made anonymous–no one will know you. Then the third step is that it will be encrypted. Even if someone steals your data they won’t be able to read it – there is a lock on it. After that, then people inside Ant Financial can start to analyse the data and use it.
In the big data age we understand you very well but we don’t know you – you are like a familiar stranger.
Without this protection finance would never progress – the business would be unsustainable. We’re just starting to take advantage of data to serve the customer well – it is crucial.
Right now we think it is big data but 30 years from now the amount of data could be 500,000 times bigger.
But in the meantime, the challenge of privacy protection and data security has just started.
Q. But aren’t hackers becoming ever more sophisticated and cyber attacks increasingly frequent?
A. This is the war everyone faces in the digital age including traditional banks.
Ant faces many cyberattacks every day, which gives us a lot of experience. We’ve seen the most attacks and we’ve learnt a lot from them. This means attackers have not yet been able to outsmart us thus far, but you can never say never.
Q. What is Ant doing in the field of insurance?
A. We probably have the largest number of insurance users in the world. More than 350 million people have used one of the insurance products on our platforms, such as shipping return insurance.
This is a classic example of how you can entirely design and change an insurance product through technology. If you buy this [shipping return] insurance you can return items bought online for free if you end up returning the products you bought.
We worked with an insurance company – which used its own actuarial techniques to set rates.
The insurance company lost tens of millions in half a year for this shipping return product, so our big data and AI department worked closely with them in order to better identify risk. As a result, they could distinguish between who would return items more often. With our big data analysis they were able to slash premiums for most people. In the end, everyone bought the product.
Shipping return insurance is a very cheap product but this is something we really care about – why do we care? Because according to studies without this insurance a customer would buy a bit less online.
The product actually stimulates consumption, creating a virtuous circle.
It is also good for the merchants because it reduces their costs. Before this insurance, whenever customers had a bad experience they would call the merchants and fight with them. So the merchants had to hire a big customer service force. With this insurance product, whenever the client is unhappy he gets paid and no need for long phone conversations with customer service.
This is a typical example of how financial innovation can solve a pain point in life.
Another example is account safety insurance.
You may have some money in Alipay but you might be worried about fraud and account theft so you buy insurance. It costs just one or two yuan to insure $1 million equivalent against fraud and identity theft.
We think insurance probably has the highest pain point among financial services.
Almost everyone doesn’t know which insurance policy to buy or who to trust: it’s like a black box. In other areas like payments, wealth management, or consumer loans you have seen some innovation, but in insurance, eh-eh, not so much.
We think it has to be broken – something has to change. Big data will help better price risk, for the benefit of everyone.
In car insurance a huge chunk of the cost is to verify the size of the loss in the case of an accident.
Now, you only need to take a picture and our image recognition-driven car exterior assessment technology, which we provided to several insurance companies, will tell you that the accident will cost you this much and recommend whether you should report to your insurance company or not (which might raise your premiums for next year). [Called scratch and dent insurance in the US]. Also it tells you where the nearest garage is for help.
Big data will also help reconstruct the experience of dealing with an insurance company. Insurance companies are running up to us to work with us on this.
We have developed a credit scorecard for car insurance – like a FICO score – so we can help insurance companies distinguish good drivers and bad drivers.
Q. Who owns the end customer when you partner with an insurance company?
A. It has to be beneficial to both sides and somehow it has to be sustainable.
We are better in using technology to reconstruct the users’ experience and better at reaching the customers. Financial institutions have a reputation, they have capital, they know how to design financial products. A lot of fund managers use Ant Fortune [an investing app]. They feel like this is their home; it’s a platform linking them together and we give them a lot of technical support.
Q. Yu’e Bao has grown so fast and it is so large that some people are worried about systematic risk? How does Ant Financial view this potential problem?
A. Yu’e Bao is a typical money market fund – it is pocket money for the online shoppers. Yu’e Bao is liquid, unleveraged, fully disclosed and transparent. Risk is quite low.
Money market funds are a different animal – they can only invest in best short-term debt. Also unlike banks, money market funds don’t have leverage.
Money market funds were first created in 1971 in the United States and they have never cost the taxpayers a penny. As far as I am aware, and I have studied this, there are only two funds that have lost any principal capital.
History tells us that thus far it is a reasonable regulatory arrangement.
The role of finance is not to kill risk, it is to balance the risk and benefits. Banks manage a mismatch in duration.
Q. Are know-your-customer requirements loosening up?
A. KYC is important. Identification [verification] is the basis of finance. So we spend a lot of time on it. [If there is a more secure, efficient and user-friendly indentification verification system] then it benefits everyone including banks and us. The basis of finance is KYC. You can go as far as your KYC stretches. If you cannot get comfortable with a customer and his/her identity, don’t serve them.
Q. Does China’s crackdown on Initial Coin Offerings (ICOs) suggest China is being less tolerant of financial innovation generally?
A. There must be some regulation of ICOs otherwise a lot of people’s money will be lost. To a large extent China is right to tighten regulations.
It is very hard for regulators to balance the benefits and risk. In the US, after the financial crisis regulation became so tight that banks don’t have much life anymore.
China is indeed emphasising more security these days for the whole financial sector.
Regulations have cycles just like business has cycles.
The biggest bubble in Chinese fintech that we have already experienced was in P2P [peer-to-peer lending]. More than two-thirds of P2Ps went under, and more will follow.
Back in 2014 Alipay made the decision not to provide payment services for P2P.
ICOs have taken only a few months to go through the same cycle that P2P went through across several years.
The combination of blockchain, bitcoin and the IPO creates a lot of uncertainty.
Yet the fintech trend is irreversible, and we believe that it will integrate into life, I call it FinLife. But in some areas it can afford to take a little break.