Li Xian, who works at a publishing company in Shanghai, says the Chinese mobile-payments app Alipay is indispensable. Over the past week she’s used it to order and pay for dinner through a delivery service, buy movie tickets, pay her utility bills, and rent a bike. “It’s my lifeline,” Li says. “I can’t remember the last time I used cash.”
She is far from an outlier. More than 711 million people and 80 million merchants use the Alipay app each month, generating RMB118 trillion ($17.4 trillion) in payments over the 12 months ending June 30. Alipay has helped make cash almost obsolete in big Chinese cities, with even the smallest shops, restaurants, and market stalls accepting payment via QR codes shown and scanned at the point of sale.
Alipay also offers a bewildering number of features built around payments. In many restaurants, for instance, you can scan a QR code to bring up the menu, then order food from Alipay without ever seeing a server. You can hail a taxi, send packages, add minutes of service to a cell phone plan, even set up a video consultation with a doctor, without leaving the app. Alipay offers deals from Taotao, a sister ecommerce site, tailored to an individual’s tastes and habits. “I think Alipay tries to cover every bit of our lives,” Li says.
Ant Group, the company behind Alipay, is now headed for perhaps the biggest initial public offering of 2020. The IPO will highlight China’s strides in combining money and technology, and efforts to export that approach across the world. Around 65 percent of all Chinese use digital wallets, more than anywhere else in the world; Alipay accounts for 55 percent of them.
Western companies are following Ant’s lead. Apple Pay, Google Pay, PayPal, and others provide smartphone payments via near-field communications and QR codes. Startups such as Affirm and LendUp offer loans in the US based on social media and other personal information.
Maximilian Friedrich, an analyst with ARK Invest who studies innovation in payments and finance, says Square’s Cash App seems to borrow from Ant’s model, offering banking and investments as well as mobile payments. But nothing rivals Ant’s scale and reach, its integration with Chinese ecommerce giant Alibaba, or how it leverages artificial intelligence.
But Ant also faces some big questions. In China, it is the subject of government scrutiny for its broad reach and competition with government-run banks. Its approach to mining personal data, and perceived ties to the Chinese government, may raise privacy concerns, especially as it expands overseas. And Ant’s success and footprint abroad could run into an increasingly hostile US policy toward China. Ant declined to comment for this article.
Beneath Alipay’s convenience is a strategy that uses artificial intelligence and troves of personal information. When renting a bike or a car with Alipay, for instance, the app may assess whether you need to pay a deposit by analyzing both a conventional credit score and some unconventional signals, including your friends, what apps you’ve installed, even how often you recharge your battery.
“AI technologies are everywhere in Ant’s business,” says Hui Chen, a professor at MIT who has worked with the company on research projects.
Chen points to MYbank, an Ant subsidiary that offers small business loans through Alipay. The unit uses a risk management model with over 3,000 variables, some of which are updated in real time, he says. The system uses computer vision, voice recognition, natural language processing, and financial forecasting, Chen says. “They can make loan decisions within minutes and with zero involvement of human bankers.”
Alipay was launched in 2004 by Alibaba, the Chinese ecommerce giant founded by Jack Ma, to hold funds until transactions are finalized. At a time when few people owned credit cards and cash was still commonplace, this helped encourage ecommerce to take off. Alipay also became a way to verify a seller’s trustworthiness.
Alipay launched a digital wallet for smartphones in 2009. Thanks to a scarcity of credit cards but an abundance of smartphones, it grew rapidly; users grew to 150 million, from 100 million, in its first six months. In 2011, Alibaba made Alipay its own company, which was renamed Ant Financial in 2014, and then Ant Group this year.
Since becoming independent, Ant has diversified its payment business into a vast and growing web of financial interests. Now, less than half of Ant’s revenue comes from digital payments and merchant services. The majority comes from lending and wealth management, through more than a dozen subsidiaries offering a range of financial services. As of January, Ant’s money market fund, Yu’e Bao, managed $157 billion in assets, making it the world’s third largest such fund after JPMorgan and Fidelity.
The sheer scale of Ant’s business makes it a target for regulation in China. The People’s Bank of China, the central bank, confirmed this month that the company would be subject to new financial regulations first proposed in 2019. China’s central bank is also developing its own digital currency and new standards for QR codes that might affect its business in unexpected ways.
William Kirby, a professor at Harvard who studies Chinese business, says Ant is far more innovative and more useful than China’s state-owned banks, allowing it to undercut them. “The limits to Ant’s expansion at home are the insecurities of Chinese state banks and the government generally,” he says
So far, the company’s growth has not been checked. Ant says its profit in 2019 was $2.5 billion. It says it was affected by a drop in consumer spending due to the Covid-19 pandemic but it appears to have weathered the storm well enough, with revenue growing 38 percent in the first half of 2020.
Ant plans to offer between 10 and 15 percent of its shares in a listing split between the Hong Kong Stock Exchange and Shanghai’s new tech-centric STAR market. It is expected to value the company at around $200 billion, placing it among the world’s largest financial services businesses. By comparison, PayPal is worth $206 billion and Mastercard is valued at $335 billion.
The Hong Kong and Shanghai listings reflect unease over deteriorating relations between Washington and Beijing. When former parent Alibaba went public in 2014, it listed its shares on the New York Stock Exchange.
Ant has also pursued an ambitious international expansion plan through investments and acquisitions. It has acquired businesses in Singapore, Hong Kong, the UK, and the US. In November 2019 Ant invested $1 billion in Paytm, a major payments company in India.
In January 2018, however, the US government blocked Ant’s planned acquisition of MoneyGram, a US money transfer firm, on national security grounds. Ant had acquired EyeVerify, a Kansas-based maker of eye-verification technology in 2016. Since then, US-China relations have worsened, and recently the US government has gone after successful Chinese-owned apps operating within its borders. On Friday, the Trump administration said it would ban the popular video app, TikTok, as well as WeChat, a communications app that is used by many Chinese in the US.
“The danger [for Ant] is that the US government could, in its wisdom, decide not to allow merchants all over the United States to take Alipay from Chinese customers,” Kirby says.
Ant’s growth overseas may be affected by concerns over its use of personal data, as well as perceived links to the Chinese government. The company’s technology has been tied to a Chinese government plan to track and evaluate citizens. But the ties, if any, remain unclear, as do the details of the government scheme.
If Ant can navigate these challenges, it may be well placed to take advantage of the spread of AI-driven fintech worldwide. The company says in its filing that it plans to spend 40 percent of the proceeds from its IPO, potentially around $12 billion, on research and development.
Ant “has its hands all around the world in different markets,” says Friedrich of ARK Invest. “Every country and market or economy around the world will see those digital wallets rise up sooner or later.”
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