Ant Financial’s Great Mobile Payments Race

The most memorable thing that came out of the 1959 movie, A Hole in the Head, was its 1960 Oscar-winning song, “High Hopes,” sung by Frank Sinatra. If the song title doesn’t ring a bell — after all, it was 1960 — perhaps its lyrics might:

“Just what makes that little old ant,
Think he’ll move that rubber tree plant.
Anyone knows an ant can’t
Move that rubber tree plant.
But he’s got high hopes,
He’s got high hopes,
High apple-pie-in-the-sky hopes.”

The song was intended as a metaphor for the many conflicts facing the film’s protagonist (played by Frank Sinatra) and his determination at the end of the movie to overcome them.

These days, it seems an appropriate theme song for Ant Financial, as it works its way around the world, piecing together the assets that could turn it into the largest mobile financial services network in the world.

Why That Not So Little Ant Thinks It Can Move Mobile Payments

Before there was Ant Financial, there was Alipay and the Small and Micro Financial Services Company.

Alipay launched in 2004 as an escrow-based online payment method for Chinese consumers in need of a way to safely pay on Alibaba’s eCommerce sites. It’s become the cornerstone of a massive online financial services ecosystem.

With Alipay, as the service evolved, users could shop on and offline, send money to other people and pay bills. But with more Alipay users came more opportunities to extend the scope of its payments services.

Today, Alipay users can open a money market fund, get a line of credit, build a credit profile via its credit scoring service, purchase and manage their investments, bank via its digital bank, buy insurance and even participate in online equity crowdfunding. Nearly 70 percent of all online buying in China happens via Alipay and in a growing number of offline merchants via QR codes.

That portfolio of services was branded the Small and Micro Financial Services Company and spun out of Alibaba in 2011. Three years later, that spin-off was rebranded Ant Financial.

“The word ‘ant’ embodies the strength of ‘small’ when all working towards a common goal, and the hope that Ant Financial will bring a new future through small and beautiful changes to everybody,” said Lucy Peng, then CEO of Ant Financial in 2014 when the announcement of the rebranding was made.

The “everybody” that Peng was referring to then was the Chinese consumer whose shopping and buying was largely happening inside China.

Today, “everybody” includes the 120 million Chinese consumers who travel outside China to shop, often for luxury goods. Last year, those Chinese consumers spent $215 billion on things purchased on shopping excursions outside of their home country, including 40 percent of the world’s luxury goods.

And, increasingly, the “everybody” also includes people living in just about every other developing market, who, like the Chinese consumer in 2004, may not have ready access to financial services products and who want to transact digitally — and now have mobile phones that can help them do it.

As for small, Ant Financial today is anything but.

At its last capital raise in 2016, Ant’s market cap was pegged at $60 billion; a Hong Kong investment bank recently put it closer to $75 billion. By comparison, the market cap of American Express is $75 billion; Discover is $26 billion; Mastercard is $121 billion; PayPal is $53 billion and Visa is $221 billion.

But it’s Peng’s words — “the strength of small when all working towards a common goal” — which foreshadowed the Ant Financial strategy we now see unfolding on a global scale.

The Alibaba/Ant Financial Playbook

Take a bunch of developing markets with relatively undeveloped online payment and financial services options;

Add to that a critical mass of citizens in those markets with mobile phones, an appetite for transacting online and an interest in conveniently conducting a variety of financial services transactions online;

Then, invest in or acquire outright the leading mobile payments and commerce players in those markets and

Fold in the ability of the Chinese consumer to shop anywhere in the world using the payments credentials she is most familiar with — Ant’s.

That’s the Ant Financial global mobile payments playbook.

In 2015, Alibaba and Ant invested $680 million in Paytm, India’s mobile payments scheme, giving it a 40 percent share at the time. Last month, they poured another $177 million into it, upping its ownership stake to more than 50 percent. Just last week, Softbank — Alibaba’s largest shareholder — was reported to be pondering a $1 billion investment in Paytm, which sources say could allow it to hive off its separately branded Paytm eCommerce marketplace. It’s also been suggested that having a Softbank investment that large in Paytm could assuage regulator concerns over China’s possible lock on the Indian market — Paytm currently has 200 million users in India. In December, a company vice president said that Paytm was doing more transactions — 7 million a day — than all of the combined debit and credit transactions in India.

The story in India gets even more interesting as there’s some speculation that some of that Softbank investment could be used to fund Paytm’s acquisition of Snapdeal, the online marketplace in India that is also said to be exploring a sale to Flipkart. Alibaba, Softbank and Foxconn made a $500 million investment in Snapdeal in 2015.

In 2016, Ant invested an undisclosed amount into Thailand’s Ascend Money, the digital payments method used to make purchases on its parent company’s eCommerce marketplace serving Thailand, Vietnam, Cambodia, the Philippines and Myanmar.

In February of 2017, Ant Financial invested an undisclosed sum into Mynt, giving it a “substantial minority interest” in Gcash, a leading mobile payments player in the Philippines with 3 million users. Like Alipay, Gcash provides an array of services to its users — payments, P2P payments, bill pay, online shopping. Mynt, its owner, also offers loans to people and merchants.

Also in February of this year, Ant invested $200 million in South Korea’s Kakao Pay — a mobile payments player that’s installed on 95 percent of phones there and reports 48 million users. This investment comes as Kakao Pay looks to expand its payments services to a broader portfolio of financial services and to offline merchants.

In early April, Ant bought helloPay, the largest mobile payments network in Southeast Asia, and immediately rebranded all of its mobile payments properties: AliPay Singapore, Alipay Malaysia, Alipay Indonesia, and Alipay Philippines. HelloPay was the dominant payment method inside of the Lazada marketplace, Southeast Asia’s largest eCommerce platform, serving eight million consumers in a region that is home to 600 million consumers.

Lazada made its own news last week when it announced a partnership with Netflix and Uber to compete with Amazon’s entry into the South Asia market, by bundling streaming services and Uber VIP services into their eCommerce platform offering. Alibaba invested $1 billion in Lazada in 2016 to shore up the logistics and operational efficiencies it needed to compete more effectively in the region.

In August of 2016, Alipay and Ant inked a partnership deal with Ingenico to enable offline payments for merchants serving the 10 million Chinese tourists who visit Europe. Ingenico says it’s made it easy for merchants to enable Alipay at the point of sale by embedding Alipay into its payments gateway.

In October of 2016, Verifone and Alipay announced a similar deal, expanding the ability for Alipay to be easily integrated into payment terminals in all of the 150 countries that Verifone serves, including the U.S.

Separately, Alipay has been knocking down merchant deals that align with the Chinese consumer’s shopping habits: acceptance at airport duty-free shops, which are heavily trafficked by Chinese shoppers, and a variety of travel and booking sites.

This is all wrapped around Alipay’s ePass announcement in 2015, which made it less cumbersome for any online merchant to add Alipay to its list of payments options.

And, if Ant secures MoneyGram, it will have access to MoneyGram’s consumer base, digital assets, 350,000 global physical agent network, base and two billion bank accounts that they currently have access to in order to send and deposit remittances. That acquisition, while approved by the MoneyGram Board, still must clear CFIUS and DOJ reviews.

What seems clear, however, is that Ant is organizing an interoperable global mobile financial services network targeted at those living in economies not well served by the existing banking system. Those would be the same 2.5 billion people that the card networks are organizing their assets and infrastructure to serve too. Lucy Peng said as much in a visit to Silicon Valley in December, suggesting that Africa and Latin America are next on their list.

If past is prologue, that will likely mean a partnership or an acquisition with an existing player in the region that can bring them consumers — a baseline — from which to build.

Now What and What’s Next?

When Alipay was a payment method inside Alibaba serving the Chinese consumer shopping on Alibaba, the competition for the Chinese consumer was taking place on a different level — inside China for local merchant acceptance. The global card networks could participate in Alipay only if they could get cards into the hands of Chinese consumers. But until recently, they were flat-out denied participation in China.

Banks had to issue cards on the state-owned China Union Pay network. Some Chinese consumers had Mastercard and Visa cards they could use outside China, but not inside. As a result of a WTO ruling, the market was technically opened two years ago, but the global card networks still don’t have approval to operate. Once they get that, the road is long to get banks to issue the cards and consumers to have and use them.

That means that the global card networks aren’t likely to get much of a slice of transactions in China, including as cards in Alipay wallets, anytime soon.

Which makes the competitive playing field now all of the developing countries where the global networks have little penetration — and everyone is trying to figure out how to ignite mobile payment systems.

Like in India, and like with Paytm.

Who’s Really Gonna Move Those Rubber Tree Plants?

Ant’s multi-billion dollar investments outside China could help it leapfrog the global card networks by creating an interoperable mobile financial services network that enables consumers to pay merchants — and merchants to be paid — without globally branded plastic cards and POS devices. And to provide all of the services that Ant Financial offers its Chinese consumers today — credit, banking, and investing — to those players inside those countries, while leveraging the massive base of 450 million users it has amassed inside the protected walls of China.

But that doesn’t make success, for Ant, a slam dunk.

First, there’s been many a Chinese company with the same global ambitions but pretty much zero success outside their domestic market — see Xiaomi, Tencent and Baidu as Exhibits A, B and C — as well as Alibaba’s investment in ShopRunner and eCommerce marketplace 11 Main, which closed a year after it opened.

The largest and most successful Chinese companies are state-owned and controlled by the government — which makes the government their largest shareholder. With that kind of control comes unfettered access to capital and a funding engine that both fuels their growth and keeps competition at bay inside China. But what is Advantage China inside China doesn’t necessarily translate outside its borders.

Interbrand’s research reports that consumers living outside China remain skeptical of “Brand China,” given its reputation for cheaply produced and sometimes dangerous products of lower quality, as well as a general lack of strategic understanding of what consumers outside China need and want.

Avoiding those mistakes seems top of mind for the Ant Financial team.

The Alibaba IPO gave them cash to invest outside China, and their balance sheet gives them assets to borrow against to get more. Ant’s IPO this year will only add more money to the pot.

To avoid the “made in China” syndrome, Ant’s decided to acquire native brands in the countries they’re targeting, whose brand reputations and customer footprints they can leverage — and burnish.

Before Ant invested in Paytm, it had considered setting up their own shop — a decision they later squashed. It’s also one of the reasons the MoneyGram acquisition is so appealing. MoneyGram would give them a global asset with a globally recognized brand that can be leveraged for other purposes. If the deal goes through, I doubt they’ll rebrand MoneyGram — or at least not for a while.

But Ant’s success — and its ability to operate at scale on a global basis — will also hinge on one other very important thing: the economic viability of the developing economies that they are entering and how long it will take those countries to generate any meaningful transaction volume.

Which makes the place to watch the future of Ant Financial as a global mobile payments and financial service challenger unfold is India: a market where we’re all watching the emergence of a mobile payments and financial services economy in real time, thanks to the Prime Minister’s demonetization efforts last November.

The Place to Be — and Be Seen: India

Paytm and Ant Financial are betting big on the Indian market. But so are the card networks who’ve invested in and launched an interoperable QR code solution — BharatQR — that will streamline offline merchant acceptance and person-to-person money transfer for RuPay, Mastercard, Visa and American Express payments credentials.

Once a consumer downloads the mobile banking app, a payment can be made by scanning a QR code at the merchant. The money is transferred from the consumer’s bank account to the merchant account without the need for a card swiping terminal — or a plastic card. There are 14 banks now set to enable BharatQR and a steady stream of banks to follow in the next several months.

At the same time, Paytm is plowing millions into its own QR code-based system, one that is incompatible with BharatQR. Paytm says that its QR code platform will soon reach 1 million merchants and is putting feet on the street to sign them up — some 10,000 of them, it’s been reported. Paytm’s strategy seems to be a ground game to get merchants on board who may feel less compelled to adopt BharatQR if their customers already have and use a Paytm account — and vice versa.

Clearly, the stakes are high for the global networks — whose lives would be a whole lot easier in the absence of Paytm’s deep Ant Financial/Alibaba pockets.

They’re also pretty high for the one that’s betting the farm on becoming one.

Ant’s new CEO, Eric Jing, said in November of 2016 that Ant is building an open ecosystem to provide financial services to over two billion users in 10 years.

As we watch the situation in India take shape, it will be fascinating to see how partnerships are formed — and with whom. Does “open” include the card networks whose account credentials could reasonably be stored in an Alipay/Paytm wallet? Or PayPal? And what about Amazon, who’s said to be investing close to a billion dollars a year to become the dominant marketplace in India? Then there’s Facebook and Messenger and the various commerce opportunities that both are pursuing.

In addition to watching a greenfield mobile payments system develop and scale, looks like we’ll all have a bird’s-eye seat to view how the competitive playing field there — and globally — develops too.