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How Ant Group turned into the Alibaba of Chinese finance

Alipay has evolved into a virtual mall for insurance, loans, funds and more

HONG KONG -- Ant Group's planned $30 billion initial public offering is set to mark the emergence of the company's Alipay platform as a "super app" comparable to Tencent Holdings' WeChat.

Alipay, originally an online payment service, has evolved into a virtual financial services mall for everything from loans to mutual funds, insurance policies and travel bookings. Most of the financial products are provided by third parties who pay service fees on the sales they get through Ant's platform.

Ant "sees its future in building and operating platform business models," said Guannan Lu, an analyst in Forrester Research in Beijing. "This is not a new strategy, but Ant Group has made strong progress."

Ant's digital financial technology platform accounted for 63.4% of its revenues for the six months to June 30, up from 44.3% for full-year 2017, according to the preliminary prospectus the company filed with stock exchanges in Hong Kong and Shanghai on Tuesday. The company's original digital payment and merchant services business keeps growing, but made up just 35.8% of revenue in the first half of 2020.

It has been a highly profitable shift. In the first half, Ant generated a net profit margin of 30.2% on overall earnings of 21.92 billion yuan ($3.17 billion), twice the peak rate of profitability it recorded for full-year 2019. Ant has only disclosed financial data going back to 2017.

Ant's evolution into the Alibaba of finance has been fueled by a desire to claw back customers who began using WeChat more as it broadened out from a messaging service to an online platform for services of all sorts -- including mobile payments.

Ant, meanwhile, remains intimately intertwined with Alibaba, operator of China's dominant online shopping platforms and one-third owner of Ant. But analysts believe Ant does not earn a significant profit from Alipay's status as the default payment option on Alibaba's Taobao and Tmall platforms, though it bolsters its leading position in China's $29 trillion mobile payments market.

"We have (profit) concerns about Ant's payment business. However, they are offset by prospects of the more profitable financial services business," said Supan Walpola, a stock analyst at LightStream Research, who publishes on the Smartkarma research platform.

More than 90% of Alipay's 1 billion users now access the app for more than just payments. The share paying for at least five financial services on Alipay reached 40% in 2019, up from 10% in 2017, according to Bernstein Research. In wealth management, loans and insurance, Ant is at least twice as big as Tencent, calculates Bernstein's David Dai.

"Ant used its payment service as a user acquisition engine for building broader financial services features... effectively creating a closed loop ecosystem where there is no need for money to leave the wallet ecosystem," Bernstein's Harshita Rawat said in a client call last week.

Ant controlled 55% of China's mobile payment market in the first quarter of the year, while WeChat Pay had a 38.9% share, according to consultancy Analysys International.

The focus on becoming an online marketplace for all things finance should reduce Chinese regulatory pressures on Ant. It previously came under scrutiny for its Yu'E Bao money-market fund, which became the world's largest by providing outsized investment returns from customers' idle Alipay balances.

Ant's partners are now the ones providing most of the financial services it offers app users.

In wealth management, Ant works with over 170 fund managers, recommending their investment products in accordance with customers' risk tolerance and collecting service fees based on the volume of investment products distributed through its platform. As of the end of June, some 4 trillion yuan in investment products had been distributed through Ant.

The situation is similar with microfinancing and consumer lending. Ant originates loans, 98% of which had been underwritten by 100-some partner financial institutions as of the end of June, with Ant collecting service fees. With insurance, Ant's platform generated 52 billion yuan in premium sales for 90 partner companies.

With most Chinese already on its platform, Ant has been working to duplicate its model overseas. It is working with nine startups around Asia including Paytm in India and GCash in the Philippines and plans to deploy part of its IPO proceeds to support its international expansion.

Additional reporting by Nikkei staff writer Coco Liu.

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