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Ant Financial seen becoming world's top consumer bank

Biggest obstacle for Alibaba affiliate is strict regulation abroad

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Alipay is widely accepted in China, such as at this store in Shanghai.   © Reuters

HONG KONG -- In a world that embraces disruptive technology, China's most prominent financial technology company, Ant Financial Services Group, would probably have no problems morphing into a bank, even without licenses.

Beginning as an online payment processor called Alipay supporting Alibaba Group Holding's flagship e-commerce platform Taobao, Ant Financial has expanded into wealth management and microfinancing. Alipay now controls 70% of China's mobile payment market, while Yu'e Bao, which serves as a repository for cash leftover from online spending, emerged as the world's largest money market fund this year with $165.6 billion of assets under management.

Founded in October 2014, the unicorn, formerly known as Zhejiang Ant Small and Micro Financial Services Group, has been valued at $60 billion since last April, on a par with the Swiss bank UBS.

"They are expanding their services from single payment to every aspect of your financial life, so [it's] definitely going to be the largest consumer bank in China," said Linda Wong, CEO of Neo Financial, a Shenzhen-based financial services provider. "Because China, by definition, is the largest consumer market, that means the largest consumer bank in the world." Wong runs the online wealth management platform 

Speaking at a conference sponsored by The Economist in Hong Kong on Friday, Wong noted that Chinese fintech companies were leading the way by virtue of attracting half of the world's public or venture capital, while creating huge economic value, enabling some $12 trillion yuan ($1.8 trillion) in transactions in 2015.

More importantly, Chinese fintech firms are exporting their models to other markets by way of serving the growing ranks of travelers going abroad. "Because of its success, [China] will inspire the rest of the world," said Wong. Upon announcing its partnership with Thai conglomerate Charoen Pokphand Group's fintech unit Ascent Money last November, Ant Financial vowed to command a worldwide user base of 2 billion within a decade. The figure amounts to about a fourth of the globe's population in 2030.

Last month the company struck a deal with Atlanta-based credit card processing service First Data to enable Chinese tourists to use Alipay's mobile wallets across about 4 million stores in the U.S.

If only Amazon had bought PayPal

"I think Ant Financial will be the most successful bank in the world," said Edith Yeung, partner at 500 Startups Greater China, a venture capital seed fund headquartered in Silicon Valley. "I really wish that PayPal had been bought by Amazon instead of eBay, otherwise we could have had an Ant Financial version in the U.S. But unfortunately, it didn't happen," said Yeung. "Sooner than not, the nonbank bank would actually happen in China first."

But not everyone is equally sanguine about the prospect of Ant Financial conquering the world. Vinayak HV, who leads McKinsey's digital banking practice in the Asia-Pacific, doubts if the young company, when trying to go global, could transcend the uniquely Chinese model that has thus far been insulated from external competition.

"The Chinese model is not replicable anywhere else the world," said HV, alluding to the fact that Ant Financial will not have the same advantaged position abroad as at home. "Each of these companies are essentially tech first, and fin later," said HV, referring to Alibaba and its peers Tencent Holdings and Baidu. "So they have had the advantage of co-ecosystem businesses" with a huge customer base that can be easily tapped by their fledgling financial arms.

He also suggested that the company, if it does become a bank of sorts, would be under greater pressure to deal with the more stringent financial regulations implemented internationally in the aftermath of the 2008-09 global financial crisis.

"Can you imagine Ant Financial dealing with Basel IV? Can you imagine Ant Financial dealing with 'too-big-to-fail' regulations?" said HV.

HV's view was not uncommon among skeptics who believe China's fintech players owe much of their success to a lax regulatory environment. One prominent example would be allowing an operator of an app access its users' contact lists on mobile devices.

Dismissing this argument, Fang Yihan, CEO of New York-listed Yirendai, the consumer finance arm of Beijing-based peer-to-peer lender CreditEase, argued that it is basic demand for financial services from a huge population that is driving China's fintech industry.

"It's really the market opportunity, the need -- the need is huge," said Fang, noting that fintech has yet to penetrate beyond cities in the top two tiers. "The demand is much bigger than the competition."

Risk management still a concern

But she emphasized that more mature regulations would help the market grow faster as better transparency tends to attract more stable institutional money.

Commenting on the latest regulatory developments over peer-to-peer lending in China, she said the issues of information disclosure and bank custodians are largely resolved along with the new rules this year. Yet risk management, which Fang identified as the most important issue, remains a concern.

According to the Financial Times, Ant Financial is delaying its initial public offering -- till as late as the first half of 2019 -- due to regulatory complications. Under the new regulations, Alipay might need to obtain a payment license to operate in China should it become a foreign-held entity listed overseas.

On Wednesday its wealth management platform Yu'e Bao lowered the requirement for individual accounts to 250,000 yuan from 1 million yuan. While the company said the move is in line with its effort to manage smaller amounts of cash for individuals, some suggest it was prompted by an unofficial request from the country's central bank looking to rein in shadow banking.

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