Ant Group (Part 1) - What You Need to Know About History's Biggest IPO
It's the talk of the town. Analysts say Ant Group's upcoming IPO could raise over $30 billion in funding, making Ant not only the most valuable fintech company in the world, but also making Ant's IPO the biggest one in history.
But what makes this Chinese fintech company so valuable?
Here we provide a recap summarizing how a company named after one of the world's smallest animals - ants - can revolutionize finance as we know it in one of the world's biggest countries.
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A Brief Overview
Ant Group, formerly known as Ant Financial, is a digital finance tech company affiliated with China’s e-commerce giant Alibaba. Ant was initially founded as Alipay in 2004, an online payment platform with escrow functionalities that bridged the trust gap between buyers and sellers which subsequently spurred the popularity of e-commerce in China. The company has since been spun off and expanded to become a comprehensive platform for consumers to access digital finance services, with a particular focus on providing ease of access to credit as well as a wide range of customized investment and insurance products.
How is Ant Related to Alibaba?
Ant was spun off from Alibaba in 2011 when the former was still Alipay, although Alibaba currently has a 33% equity stake in Ant. Both companies work jointly to share their insights and expand infrastructure for e-commerce and services.
The Need for Ant
China witnessed a substantial rise in domestic consumption as well as a proliferation of small- to medium-sized businesses (SMBs) as its economy boomed. This led to an increase in private sector demand for credit and financial products which wasn't fulfilled by existing financial intermediaries. The reasons as to why this increased demand wasn't fulfilled are multifold. We discuss them in detail in Part 3, while the main points are featured in this article.
Chinese banks traditionally didn't lend to retail borrowers or small corporates.
As China’s economy grew rapidly, large businesses competed for loans from predominantly state-owned banks, with loans being granted primarily on the basis of relationship lending. Banks profited highly from originating these corporate loans, and didn't think it was a worthwhile investment to develop credit-scoring and risk models to grant additional loans to smaller companies or personal loans to individual customers.
Investing in mutual funds in China involved relatively high minimum required investment amounts and lofty commission fees.
The minimum required investment amount to invest in mutual funds or trust companies can be in the range of thousands or tens of thousands of yuan, while commission fees charged by banks for investors to buy funds is almost always upwards of 1%. Once these hurdles are crossed, a substantial trust rift still remained as investors were oftentimes misled into buying financial products that exceeded their risk tolerance.
The Chinese insurance industry was characterized by numerous scandals and a general lack of trust.
Consumers were frequently misled into buying pricey insurance products that they didn't want or that didn't particularly suit them. Since there was no convenient or efficient method of comparing different insurance contracts, many people ended up paying unnecessarily high premiums, while payouts were not always received as expected due to ambiguous contract wording and misrepresentation.
How Ant Revolutionized China's Financial Industry
It's a misconception that Ant is a financial services firm. As the renaming from "Ant Financial" to "Ant Group" emphasizes, Ant works with rather than competes with financial institutions. The company's goal is to leverage its advanced technology to accelerate the digitalization of the financial services industry by serving as an online digital finance platform to bring together buyers and sellers in order to generate greater access to credit and financial products for underserved retail investors and SMBs.
This is achieved through three main capabilities:
1. CreditTech - Meeting the Growing Credit Needs of Retail Consumers and Small Businesses
Ant’s CreditTech arm comprises two major products. The first is Huabei, which functions like to a virtual credit card, whereby consumers can pay in installments for goods they purchase from Alibaba or from Alipay partners. The second is Jiebei, a platform through which individual borrowers and small companies can take out small loans. Ant partners with approximately 100 partner institutions ranging from multinational banks and large scale national state-owned banks to regional and city-level banks, in addition to trust companies.
2. Investment Tech - Broadening the Investment Markets to Underserved Retail Investors
Ant's InvestmentTech arm functions as an online platform connecting asset managers with customers through the use of AI-based matching algorithms that provide individual investors with a wide range of transparent and personalized investment products to choose from. Investment recommendations are tailored based on each user’s risk tolerance, while financial product suggestions are presented in an easily comprehensible manner so customers who use the platform can develop a clear and thorough understanding of their options. Minimum required investment amounts and commission fees are significantly lower than those offered by existing financial intermediaries, thereby reducing the hurdles to investment.
The most famous InvestmentTech product in China is Yu’ebao, Ant’s money market fund that has become not only China's largest MMF, but also the largest MMF in the world. Users can deposit money in Yu’ebao and use this to pay for their purchases on Alibaba, while interest is paid out daily and money deposited in the account can be withdrawn at any time.
3. InsureTech - Bridging the Trust Gap in China's Insurance Markets
Ant's InsureTech division functions as an online platform connecting insurers with a large customer base. Users seeking to buy an insurance product through the InsureTech platform are given a customized selection of contracts to choose from based on their individual preferences that are presented in an easily understandable manner to allow for quick and efficient comparison. The scope of insurance products available don’t only include the traditional life, health, and property and casualty areas, but also newer, more innovative products such as insurances for phone screen damage or credit card theft.
The most noteworthy product in InsureTech is Xianghubao (which translates to “mutual aid”), an insurance-like program developed in-house by Ant. Members of the Xianghubao program pay dynamically adjusted bi-monthly contributions to a selected mutual aid pool, and can withdraw money when the necessary conditions arise. Contributions paid are significantly lower than the usual insurance contract premiums, as Xianghubao benefits greatly from economies of scale from its 107 million users as of October 2020.
And There's More...
In addition to the three core competencies above, Ant has also contributed to China's financial services industry in many other ways, and is still forging its way onwards to shaping the future of China's financial sector.
Alipay - An Unwavering Contender in the Digital Payment Markets
Ant's predecessor, Alipay, whose functionality is still a part of Ant Group, is still one of the most popular digital payment platforms in China today. Over a third of the Chinese population are monthly active users of the platform, along with more than 2,000 partner institutions in over 200 countries.
Zhima Credit - A Credit Scoring System for the World's Most Populous Country
Ant launched Zhima Credit in 2015, which has become the de facto credit scoring system in China. While the Chinese government does have an official “credibility blacklist” for those who have failed to fulfill their financial obligations or are guilty of financial misconduct, there was no official, easily accessible or widely used credit scoring system until the launch of Zhima Credit. Zhima Credit collects information from users of Alibaba, Ant’s CreditTech platform, as well as the government’s credibility blacklist to generate credit scores for individuals.
AntChain - Jumping on the Blockchain Train
Ant is also investigating blockchain technology through the launch of AntChain in 2018, although the technology and scope are still in their early stages.
How Big is Ant?
Small is powerful, to say the least. But to see just how powerful the collective power of many small ants (i.e. individuals, small businesses) can be, stay tuned for Part 2.
Check out the entire Ant Group series here:
Ant Group Updates:
Investing in China (Equities)
Investing in China (Fixed Income)
Glossary of All China-Related Terminology:
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