Back to the future

Ant started out as a trusted way for people to buy things on Alibaba, but it’s far bigger than just a payments platform now. Job seekers can use it to find work, and married couples can get wedding licenses with it. But digital payments are still at its core, pulling in users and generating data that can be used for analyzing creditworthiness in real time and making loans. Last year, Alipay handled more than $17 trillion of transactions, which is more than Visa and Mastercard combined.

These days Ant says it’s the biggest provider of online credit for consumers and small- and medium-size businesses, the largest online investment platform, with around $600 billion in assets under management, and the top online insurance platform in China. It partners with hundreds of banks and money management firms to offer these services to the more than 700 million users who log into their Alipay app every month.

Government crackdown

Diversification is important for Ant, because it needs flexibility in the face of regulatory changes that could threaten its profitability. (Heavy financial regulation, incidentally, is almost certainly a key reason why American tech giants like Apple and Google, now under antitrust scrutiny in Washington, haven’t waded deeper into financial services.)

In recent years, the Chinese government cracked down on the financial upstart, requiring it (and rival Tencent, which operates WeChat Pay) to set aside customer payments as a reserve instead of investing the money for a profit. Likewise, officials tightened restrictions on Yu’e Bao, which had ballooned, almost accidentally, into the world’s biggest money market fund. “Arguably the biggest risk factor to consider for Ant’s future is regulation,” Kevin Kwek, an analyst at Bernstein, wrote in a note to clients. “We think Ant has a track record of managing these risks relatively well and are therefore not overly concerned, but nevertheless recommend incorporating them in valuation assumptions.”

Another key concern is whether the People’s Bank of China will disrupt Ant via its digital yuan. As the country becomes increasingly cashless, Chinese officials are designing their own virtual currency, which is being tested in Shenzhen. A digital yuan could help the government maintain its grip over the payment system and give it more insight, through tracking, into transactions than it has ever had.

Kwek says digital yuan disruption is one of the top questions investor have about Ant. He thinks this digital cash is a notable, but surmountable, risk for the company. “We believe Ant’s ecosystem of products with an already large user base would be difficult to replicate and hence allow Ant to largely defend its market share,” he wrote. The “PBOC is not aiming to disrupt third party payment systems like Ant.”

The future of Ant

Ant has expanded abroad mainly through investments in companies like Paytm, the Indian payments upstart, and UK payment group WorldFirst. But revenue from those stakes remains relatively small, and skepticism about Chinese companies has grown. Ant’s scope to invest or expand in the US and even Europe isn’t straightforward. “Ant should be assessed more on its domestic opportunities than overseas,” Bloomberg’s Ling said. “Their key asset is Alipay, which acts as a gateway for their customers to access their other financial services, and also serves as a cheap way of acquiring new customers.”

“They do not have such an equivalent gateway outside of China, so investments seem like the only way to go,” he added.

That suggests Ant’s future growth will mainly come from China, the world’s second-biggest economy with a rapidly growing and digitally savvy middle class. Even there, Ant executives must always look over their shoulders at Tencent, which has a 47% share of the digital payments market, compared with Ant’s 51%, according to Bernstein data.

“Ant is ahead by a big margin despite starting out in the key areas largely within a year or two of each other,” Kwek wrote. “But the gains have been hard-earned and competitive pressure is unlikely to ease, and remaining dominant in the payment space stays critical.”

—With assistance from Jane Li in Hong Kong. 

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