- Fintech Overview: From Ant Financial Business case until microcredit ripping with opportunity
Luciano De Carvalho Rodrigues
Just now·13 min read
The objective of this report is present an Ant Financial Business case analysis, passing for their mission and vision, cause of success and possible replication overseas. Furthermore shows main areas in which FinTech companies operate and specialyzing how micro credit and marketplace lending is ripe with opportunity. This insights and arguments are based on a review FINTECH AND FINANCE TRANSFORMATION: THE RISE OF ANT FINANCIAL SERVICES by Rainny Shuyan Xie, Sia Siew Kien and Boon-Siong Neo, and others papers about financial sector.
Analysing the “Ant Financial Case”, featured by AsiaCase.com, we could learn about how to route the business growth based on the company vision and their mission.
In the topic “RESTRUCTURING ALIBABA’S FINANCIAL SERVICES TO ANT FINANCIAL” the writers, Xie, Kien and Neo describes theirs mission and vision as “Ant Financial’s newly articulated mission was to bring about small but positive changes to the world. Its vision was “to use technology to enable partners to bring equal financial services to the world”. To achieve this vision, Eric and his team made every effort to enable its customers and its merchants on both sides of the e-marketplace.”
Firstly, the Vision Statement of Ant Financial is listed as below:
Our vision: Bring small and beautiful changes to the world
- Leverage the power of internet and Big Data
Empower Financial Institutions to create Ecosystem
Serve SMEs and individual customers
Provide Inclusive Financial Services
We could notice that some questions guide the decisions as: How will we solve problems for society? How will we decrease the pain points of the customers? How can we help society achieve its goals?
I think that Ant Financial has been so successful considering four main points. Firstly and mainly in effectively applying their mission and vision in each new strategic action. Secondly, always looking for the customers needs and solving customer friction with technologies.
With this guidance each growth step was applied. For example, using Data Analytics they supported financial innovations crossing databases and metadata from many platforms allowing capabilities for credit assessment, and credit scoring system. Through data analytics Ant Financial could leverage their products and services.
The third success point we could notice is that Ant Financial used to provide platform solutions centring on this architecture and solutions, as a “user-centred services provided by Ant Financial”, mentioned in the figure 2.
For example In the case of a private credit scoring and loyalty program system developed by Ant Group, named Zhima Credit, such credit scoring services were provided by Zhima Credit to other organisations. In other words, Zhima credit solve the frictions with fraud and credit management, customer authentication, credit rating and credit score services and finally prove this platform for lending and e-commerce sites. Thereby it could be possible to reduce the unit cost (a friction), and the low operating cost allowed it to offer more attractive loan interest rates than traditional banks. Then with a low cost they could be able to improve financial inclusion. This is the fourth success point analyzed.
Quoting a data example for reducing cost impacting the operation expansion, when they scaled the operation using Cloud computing, see that:
“Underlying the application and data layers was a set of secured, reliable, and scalable technology infrastructure that Ant Financial had built over the years. Cloud computing was deployed to ensure cost efficiency and system stability. For example, the per-transaction cost for the Alipay platform was below RMB0.02. As a result, Alipay could afford to charge only 0.6% of the processing charge to merchants versus the 3% charge by typical credit card companies. The strong technology capabilities of Ant Financial were partly attributed to Alibaba, which had been an early adopter of cloud computing and became a major player in offering cloud services with the third-largest cloud capacity in the world. The technological prowess of Ant Financial was clearly evident in its smooth handling of the humongous transaction volume on Single’s Day on 11 November (i.e., often deemed as the world’s biggest online shopping day)”
On the other hand, the risk is measured with more information and more data about the customer’s behavior. Using big data is possible to expand significantly the internet offerings, as the affirmation below:
“We provide unsecured, un-collaterised loans to them by using big data. The scheme is progressive. When we have more data and business behaviours, we can give more, so we adjust the credit line accordingly. It is kind of more data, more behaviours, more understanding about the merchants. We really started with small amount at a time.”
In Conclusion, Ant Financial’s success is based on their mission and vision applied to solve the customer’s frictions and sector frictions, proving created technologies as a platform, reducing unit cost, to finally spread and archiving this commitment to improve financial inclusion.
Considering the topic “EXPANDING ANT FINANCIAL’S FINTECH MODEL OVERSEAS” we have in mind that the next Ant Financial goal is expanding its payment services overseas and their strategy is finding local partners who know about regulation and Ant Financial supports the technology.
Somehow, Ant Financial, Alibaba, and others chinese companies impact the financial industry overseas, yet. When the products are on sale and bought abroad in China from the merchant sites in some cases through new methods such as dropship, the fintech landscape has been impacted by Ant Financial.
But the goal is even bolder: “Ant Financial was hoping to bring its success in Internet finance to the underserved in many emerging countries.”
Analyzing if some success can be replicated outside of China, we notice that it is possible where the regulations allow their dive deeply in the market. In other ways, if the regulations hinder their performance in the market it won’t be easy.
For example, in traditional allied countries in Southeast Asia, India and Thailand e-commerce market Ant Financial is acquiring firms and expanding their business, as described below:
“With the recent acquisition of Lazada by Alibaba to expand into the Southeast Asia e-commerce market, Ant Financial also reaped the benefits of payment integration with Lazada customers being able to pay through Alipay.”
“In 2015, Ant Financial ventured into India by purchasing about 40% of Paytm (India’s largest e- commerce platform with 122 million users and 23 million mobile wallet users) for US$680 million and another US$100 million for the online marketplace Snapdeal, which gave it an immediate payment foothold in India. In addition, Ant Financial also bought a 20% stake in Ascend Money on 1 November 2016, an online payment provider based in Thailand.”
So far we are talking about easy and flexible regulations in allied countries in the east. On the other hand we could have thought of the second condition, if the regulations hinder their performance in west trades.
Analysing the Chen Long affirmation about Jack Ma thoughts we found some possible obstacles, lets see that:
“Jack Ma spoke about this concept of e-WTO [World Trade Organization]. An e-WTO is very much like Alibaba. He wants to promote international trade for SMEs and customers. If you have that [an e-WTO like Alibaba], from our past experience, he knows that we need to have the financial support for the SMEs across the world. It is natural to that that we probably will also need a private version of the World Bank to address the development issues. For us, we could be like a private enterprise version of the World Bank to serve the SMEs across the world.” Chen Long, Chief Strategy Officer of Ant Financial
Introducing himself as an posible e-WTO or a private enterprise version of the World Bank could be interpreted as a threat for other countries. And a defeat should restrict the market access though the regulatory limits.
Although these are just possibilities in the future fintech landscape and in reality they were the achievement of Ant Financial’s venture with India’s Paytm a statement that its success formula might be readily replicated overseas.
Concluding, the Ant success can be replicated outside of China if the financial regulations and barriers could be bypassed and a strategy is finding partners in each country with the same values as them.
Analyzing the potential impact of FinTech on incumbent financial service providers we could review some excerpts from Jamie Dimon, Chairman and Chief Executive Officer from JPMorgan Chase in his letter for shareholders in 2015.
Worried with the Fintech expansion he addressed some questions as:
“How do you view innovation, technology and FinTech? And have banks been good innovators? Do you have economies of scale, and how are they benefiting your clients?” Jamie Dimon, Chairman and Chief Executive Officer JPMorgan Chase
And he affirms that they are continually innovating to serve our clients better, faster and cheaper — year after year.
Of course JPMorgan Chase was investing in technology, infrastructure and talent recognizing the importance of this for the future. For example they were investing in Consumer digital (delivering differentiated digital experi- ences across our consumer businesses), Digital and global Wealth Management (investing approximately $300 million over the next three years), Digital Commercial Banking (delivers a platform for clients to manage and pull together all their Treasury activities in a single, secure portal), Commercial Term Lending (strive to close commercial real estate loans faster and more efficiently than the industry average).
But, for Small business digital we highlight the partnership as a strategy. In addition to a new brand “Chase for Business” to simplify forms, speed applications and dramatically improve the customer experience, the Chase Business Quick Capital went to work with a FinTech company called OnDeck, to pilot a new working capital product. The process will be entirely digital, with approval and funding generally received within one day vs. the current process that can take up to one month or more. The loans will be Chase branded, retained on our balance sheet, and subject to our pricing and risk parameters.
We know that Fintechs are quicker than big banks to innovate and launch new products, because that Jamie Dimmon was considering collaborating by partnering with Fintech as seen below:
“You can rest assured that we continually and vigorously analyze the marketplace, including FinTech companies. We want to stay up to date and be extremely informed, and we are always looking for ways to improve what we do. We are perfectly willing to compete by building capabilities (we have large capabilities in-house) or to collaborate by partnering.”
Partnership is a key part of innovation in the Financial Industry. In the same time when PatriciaKemp, a partner at Oak HC/FT, said “The largest category of successful Fintech are the ones that are helping the banks get there” Diane Morais, president of consumer and commercial banking products at Ally Bank, told “Financial services is a difficult category in which to create new products,” Tearsheet last month. “There’s not a lot of innovation that happens in the product.”
When FinTechs and TechFin invest in research and development for new products and services, banks have trouble launching new products. On the other hand, banks having a large number of customers is so hard to reach for startups companies. What if we sum this equation? Innovation and customers the result will be reaching the customers goals.
To end this thoughts sharing a Venture Capital argument “Most consumer-facing ntech effectively provides new interfaces for the same old functions. The best fintech bets are the ones that help existing financial institutions innovate”.
We could list the main areas in which FinTech companies operate as banking, payments, credit, real estate and investment. We would concentrate this explanation on mechanisms to promote financial inclusion as credit products for households to explore it in detail for the limited space.
Two newest credit products catched attention: marketplace lending and microcredit.
A large part of the growth over the last few years has come from China, the largest and fastest growing fintech country in the world. However, Chinese MPL growth is slowing, as a number of these marketplace lenders have either failed or have been closed by Chinese authorities. In some cases, the platforms were scams (attempting to show growth to attract new participants with the sole objective of embezzling the money). More recent growth has come from the United States and Europe (excluding the UK). To show the growth rates, the right-hand chart is benchmarked so that 100 is matched with the first quarter of 2016 for all regions.
We may ask whether marketplace lending contributes to financial inclusion. The proportion of credit flowing to households and small businesses — the sectors usually starved for credit — is typically quite large, although the amounts in different sectors differs significantly across countries. Most of the loans in New Zealand, Germany, and the United States are obtained by consumers, but others, like the United Kingdom, split loans among consumers, businesses, trade, and real estate. The predominant sectors for loans in a few countries, like the Netherlands and Singapore, is business lending and invoice trading.
As regards consumer loans, usages also vary. Within advanced economies’ households, money is often used to refinance existing debt, including paying off credit card debt, which tend to have very high interest rates. Other uses include home improvements, automobile purchases, major appliance purchases, or consumer durables. Borrowing for education is also prominent in the United States, where higher education costs are high. MPL is so popular in the United States that, as of end 2017, fintech credit accounted for about 36 percent of all unsecured personal loans extended, and some 8–12 percent of mortgage origination.
In the area of business loans, major uses include working capital (e.g., salaries and short-term inventory financing) and investment projects. Financing can also support “invoice trading,” a practice in which the lender provides a small business with funding for inventory until it receives payment for the goods (lending against receivables). In the U.K., fintech credit accounts for about 15 percent of the lending flow of comparable bank credit to small- and medium-sized enterprises in 2016 (CCAF, 2017).
Another type of product, Microcredit is the offering of loans to poor households in small quantities. Microfinance includes microcredit (largest component), as well as savings and insurance. In this module, we will be focusing on microcredit. As there is a great deal of variation, it is challenging to paint a precise picture of what a microfinance institution looks like. MFIs come in many forms: nonprofit or for-profit., private or public, those that offer joint or individual liability loans, those that target microenterprises or SMEs., those that offer consumer or investment loans, those that do or do not take deposits.
Microfinance’s potential benefits stem from the economic situations of poor people in developing countries. Economic environments for poor people across developing countries share several common characteristics: risky environments, high returns on small investments, and seasonal income.
It is difficult to lend profitably to the poor for two reasons: First, the poor borrow small amounts. It is hard to cover operating costs by making small loans unless the lender charges very high fees and interest rates. The necessary fees and rates would make the loans unaffordable or impractical for the poor. Second, the poor have few assets for collateral, which banks use to solve principal-agent problems. Because of these difficulties, banks often do not open branches in impoverished areas. Government interventions designed to fill in the gaps are often unsuccessful because they suffer from high nonpayment rates.
Since the above problems should also apply to microcredit, it is surprising that, on average, MFIs have very low delinquency rates. There are several theories as to why this is the case, but the evidence in support of them is not clear cut. Three prominent explanations for microcredit’s low delinquency rates are i) the use of lending groups; ii) frequent repayment requirements; and iii) dynamic incentives.
From the Fintech Company of the Day presentation that caught my attention, SoFi is an online marketplace lender.
SoFi connects borrowers and investors on an online marketplace. SoFi screens loan applicants, and provides a credit score for each loan. Investors can choose the loans that they want to invest in. It was initially known for student loans. Later diversified into mortgages and personal loans. Recently started offering cash management accounts and brokerage services.
SoFi makes money reselling the originated loan at a higher spread to investors. They do not disclose how much. It is like an origination fee, but without disclosing how much. They also get payments for order flow for their brokerage services.
SoFi lowers some financial frictions as Unit costs when no loan officers, search costs when matches borrowers and investors, asymmetric information (credit rating algorithm), convenience (fast, online).
One of the most interesting cases was that of MiMacro, from Banco Macro, in Argentina. With the branches completely closed, the bank corrected that many people do not fix the traditional app because of limitations in cell phones. The strategy then was to create a simpler application, with larger icons and consuming less memory and bandwidth.
“We developed the app in a few months, in the midst of a pandemic, with teams working remotely and using Agile technology,” said Milagro Medrano in an interview with Ray Ruga. MiMacro,
Macro is one of the largest banks in the country, with more than 500 branches and 3.5 million customers.
Powered by a Technisys (a TechFin company), with their digital banking platform, which has helped to accelerate financial inclusion in Argentina during the pandemic, MiMacro has used their platform to design their process flow to offer microcredit on day-to-day operations.
Because it is a simple mobile-app, lighter, simpler the customer could run just some tasks such as: become a client, check the movements of your account, withdraw money from the ATM without a Debit Card, unlock the Debit Card password, make transfers without going to the ATM, pay services and the Credit Card.
Specially for payment services could be offered the microcredit as a solution for households when selecting the item to go to recharge (Transport, cell phone or Direct TV) or when choosing the type of service to go to pay (electricity, gas, water or telephony)
The Fintech landscape gives us a variety of opportunities. Observing the case of the company Ant Financial we learned how to apply our own mission and vision to solve the customer’s frictions proving created technologies as a platform, reducing unit cost, to finally spread and archiving this commitment to improve financial inclusion. In the opportunities of the credit area we picked-up MPL and Microcredit as a choice to as the same time increase in the Fintech space and contribute to the financial inclusion.
- Date of publication:
- Mon, 10/11/2021 - 20:11
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