Q&A With CEIBS Associate Professor of Strategy Chen Weiru
Q: It seems that some of China’s traditional banks, which have always competed with payment platforms and newer market entrants, are now working with Alibaba’s Ant Financial. Why?
The traditional banking industry targets corporate clients along with high-wealth and high-income individuals, and can get these people’s financial data. Alipay’s customer base is mostly composed of low-end individuals and SMEs, many of whom have no credit history. So that’s why traditional banks are cooperating with Ant Group – because they need Internet financial players’ data and knowledge to get a foothold in the low end of the market. By working with Ant Group, traditional banks can access this data and then turn that into business opportunities.
But competition comes after cooperation. So banks are also keeping an eye out for Ant Group’s ambitions of expanding upwards into higher markets which have long belonged to traditional banking players. So far, we haven’t seen any banks in the top list work with Ant Group. If, for example, Ant Group initiates a discussion with the traditional banks, only the mid-range and low-end players respond because they are not as strong as the big name banks and thus, need Ant Group’s help.
Q: Why don’t banks themselves go after the lower end of the market?
There are several reasons. First, the cost is too high. Big banks like Citic and HBC always set conditions related to client’s financial stability. If applicants cannot satisfy these conditions they will be rejected or charged extra fees. Banks are selective in terms of customers. Ant Group has two major advantages: the use of IT technology allows them to significantly decrease their costs in terms of client data acquisition and operation. For example, thanks to Taobao and Tmall which belong to the same group, Alibaba, Ant Group can access a rich database with all transactions, sales and inventory figures of all vendors on these two platforms, and can predict their financial situation. The other advantage is big data. These two things that the banks do not possess give Ant Group a strong competitive edge.
Q: Can Alipay’s competitors, like WeChat Wallet and Apple Pay challenge Ant Group’s position?
In terms of big data, Alipay gets data generated from its 300 million users through transactions done in Alibaba’s e-commerce mall. WeChat gets data from its huge user pool of 600 million monthly active users. People spend a lot of time on SNSs (social networking sites) but not many are doing shopping online all the time. It’s an untapped market; that is why Alibaba is so eager to enter the SNS field. In terms of the quality of big data, Alipay possesses solid consumer data such as how much they spend monthly. WeChat has mostly social data like what people are talking about. This WeChat data, compared to what Alipay has, is less valuable and less transformable to real commercial intelligence. Tencent or WeChat has to come up with a service or product that can be applicable in certain commercial contexts in order to get more customised big data that will help them compete against Ant Group.
Q: Why is Alipay so successful in mainland China today?
First, 12 years ago when Alipay was launched, only 0.2% of Chinese citizens had credit cards or cheque books, unlike in the US where people were already used to using cheque books. Second, before China had a credit rating system for individuals, Alipay played the role of facilitator: it worked only on Taobao, and it worked perfectly. Alipay gets the buyer’s money and holds it till the shipment is done. After the buyer confirms he has received what he ordered, then Alipay is authorised to transfer the money to the vendor. So Alipay was playing the role of an intermediary in online transactions on Taobao.
I think this kind of service should be widely promoted in developed markets, where many people are still sceptical about online shopping. I believe the e-commerce industry in such countries will see healthy development if a product similar to Alipay is launched there.
Third, compared to traditional banks which have long been offering unsatisfactory payment services, Ant Group, as an important Internet player, has always considered user experience to be of crucial importance. So they keep improving users’ payment journey: they launched and keep updating their mobile App, they keep encouraging users to use Alipay offline by offering them generous subsidies. This is kind of a tri-win business: consumers are happy, vendors are also happy because they see more customers coming, thanks to Alipay, and Alipay is happy.
Q: Do you think Alipay will launch traditional banking services?
At the very beginning Alipay only did payment, which is not the main income source for banks, so there was no competition. But looking at the Alipay of today, if I had to point out one thing that is avant-garde, it would be its strong convergence of a variety of functions. Alipay has successfully pushed a pure payment tool from the back end to the front end of the value chain. If you open Alipay on your smartphone, on its homepage you can see functions similar to Yelp! or Groupon, allowing you to discover tasty food nearby or buy cheaper coupons. It even helps users grab a taxi, the same service Uber offers.
In fact, Alipay has become a driver of customer flow; it helps provide information to customers, and guides them to spend their money at restaurants and cinemas. So naturally, Alipay is getting interested in fields where traditional banking players have long had a presence, such as financing and investment. This may mean potential competition between traditional and Internet financial companies. But as I said before, Alipay still focuses on the customers that banks don’t want. So probably, after several years of development and expansion, Ant Group will maintain a “frenemy” relationship with its traditional counterparts.
Q: What’s next for Alipay in ten, twenty years?
I don’t think that’s easy to predict. The first questions we need to ask are whether Alipay and Ant Group can maintain their un-duplicable competitive edge and whether they can establish a credit system through the use of big data. Second, can they remain at the forefront of IT and technological investment? For example, Alibaba’s big data processing capability is at the very forefront worldwide: they can process 120,000 orders within a second. So if Alibaba can maintain its edge in big data, we can expect them to resolve two difficulties in the financial sector: credit and cost.
But can traditional banking players change the game? China’s traditional banking industry came with regulatory protections from the outset. If this sector becomes marketised, combined with these new players’ abundant resources and capital, I think they can become game changers, theoretically. So in terms of competition, the question of who will win is determined by the added value which each side can eventually bring to customers.
In the US, there is a very sophisticated third-party credit monitoring system that covers almost all American citizens. But in China, the government’s credit system does not yet cover all citizens. Even now, in some rural areas, many choose to hide their cash in holes in the ground or wardrobes rather than put it in the bank, so these kinds of people won’t be covered by the government’s system and won’t build any financial connection with any banking institutions. Furthermore, in China many people earn money without paying taxes, I believe. So it may be said that in China there are many people who don’t deal with banks on a regular basis. But there are very few people who don’t buy things on Taobao. That is why Alibaba’s Zhima Credit, China’s first credit rating system for individuals, works. It processes big data from people’s transactions on Taobao: the money spent, the shopping frequency, etc.
From the big data, Zhima Credit can sketch out the users’ financial portraits. So through Zhima Credit, Alipay’s ambition is to build a China-specific credit system. That system will be used to decide how much to loan to each customer according to how much he/she usually spends or sells on Taobao. Behind the process, it’s all big data.
Chen Weiru is also Programme Director of Business Innovation & Transformation Programme at CEIBS. This is an edited version of an interview he did with SRF Swiss Radio.