Bank 4.0 Page 5

  Jack visited the United States in early 1995, as the first roots of search engines and trade were emerging, and this was when Jack discovered the internet. He was inspired and it changed the path of his life, creating his first business, a “Yellow Pages” for China, upon his return. The business failed but Jack was undeterred and, in 1999, Alibaba was formed. Alibaba is based upon Amazon, but it is different because it is Chinese. For example, Amazon emerged from a Western economy that had moved from mom-and-pop stores to large malls, grocery stores and urban shopping centres. As a result, the retail model replicated the offers of these centralised centres and replaced them on margin over time.

  China didn’t have that structure. China in the 1990s just had the mom-and-pop stores, and no large shopping centres and malls. So, Alibaba’s original idea was to create a global marketplace, connecting small Chinese businesses with the world’s buyers. It was described as being an online tradeshow for Chinese businesses to demonstrate what they could do for the rest of the world, and Jack Ma sold it to Chinese firms that way. Alibaba in 1999 was building a massive Expo for Chinese business to engage with the world’s manufacturers. That was the original idea, and it went well. So well that Jack Ma and his team saw an opportunity to provide a service connecting people, called Taobao. Taobao was launched in 2003, and aimed to emulate the eBay success in America, but in a different way. After all, Chinese consumers didn’t buy collectables at that time, as there really wasn’t anything worth collecting, or so they thought. The only thing Chinese people had that was collectable in the early 2000s was Chairman Mao’s Red Book, and most people were trying to get rid of those.

  This is why Taobao, which means “digging for treasure”, focussed upon connecting small Chinese businesses and sole traders—the mom-and-pop stores, as there weren’t many big firms—to Chinese citizens. It worked, but not before being exposed and made potentially vulnerable to the entry of eBay into the Chinese markets.

  ebay is a shark in the ocean.

  We are a crocodile in the Yangtze River.

  If we fight in the ocean, we will lose.

  But if we fight in the river, we will win.

  —Jack Ma, CEO, Alibaba Group

  eBay entered China by buying heavily into its Chinese equivalent, EachNet. Jack Ma knew that eBay could eradicate Alibaba, and determined that the US auction service was not right for China. But Alibaba at the time was tiny compared to the mighty eBay, which had millions of dollars to invest in the Chinese market. However, eBay was not Chinese and did not understand Chinese markets like Jack Ma and his team at Alibaba. For example, eBay cut back on features that Chinese consumers liked, such as emoticons and animations.

  Taobao ramped up these features to be a far more social commerce model, as well as adding the sprinkler of being free. eBay did not offer a free version to compete and made other mistakes, eventually pulling out of China completely, having lost millions of dollars.

  At this point Alibaba had won and began to diversify into other areas. For example, Alipay was launched in 2004 as an escrow account service to allow consumers to hold funds until they were happy with the goods they received. This was key to Taobao’s growth, as China had very poor consumer protection laws. In 2008, they launched Tmall, a B2C site for the sale of key branded goods and services as an offshoot of Taobao.

  In 2013, Alibaba’s money fund Yu’e Bao (“leftover treasure”) was launched and marketed to users of Alipay. They then expanded into banking in 2015, launching MyBank during the summer and, in an audacious move, opened their bank capabilities to other Chinese banks through an open marketplace of apps and APIs.

  All of these financial activities—Alipay, MyBank, Yu’e Bao, open banking—are consolidated into the brand Ant Financial. Ants are a good metaphor for the business, as ants are weak individually but together are strong. That’s the message Ant Financial wanted to send to Chinese citizens and it seems to be working as Ant Financial was worth $45 billion in 2015, $60 billion in 2016 and looks likely to top $100 billion by the time of its IPO in early 2019.

  Just to put this in context: what Alibaba with Taobao, Tmall, Alipay, Yu’e Bao and more of its affiliates have put in place, is like an Amazon, Facebook, Netflix, PayPal and more, all in one ecosystem. For example, a vision for Alibaba is that:

  •you can advertise movie concepts and ask customers to crowdfund the movie ideas they like, all channelled through Alibaba Pictures;

  •once a movie is funded and gets made, you can buy tickets to see the movie through Taobao;

  •when you see the movie, you might want to watch the digital release at home on Youku, Alibaba’s version of Netflix;

  •if you like the movie that much, you can buy branded memorabilia on Tmall;

  •all of it is paid for and funded through your Ant Financial accounts.

  In other words, it offers a digital marketplace that manages the complete process of digital creation from start to finish. The banking stuff is simply embedded in this ecosystem. This concept is nicely summarised by Jack in his presentation to the Taobao annual partners meeting, nicknamed “Netrepeneurs: Made in Internet” in 2017. I attended this meeting in Hangzhou, and it was an immersive experience. A mixture of online teenage celebrities streaming their ideas to entrepreneurial Taobao businesses talking about their business models and dreams, it was all very Chinese.

  The meeting concluded with an interview with Jack, and here are my main notes and takeaways from what he said:

  •“It is impossible to do business today offline as everything has to have something online, which is why we need more netrepreneurs. The whole supply chain will be impacted by the internet. I talk about these challenges at many conferences and people don’t believe me, but I’m used to this. It’s like climbing a mountain. What you see at the foot of the hill is very different to what you see when you’re halfway up. What’s at the top of the mountain are those who change their mindsets and, in the next three decades, the world will change more than you can ever imagine.”

  •“In the next ten years all industries will change due to AI, big data and cloud. Industries will be turned on their head. This means that, in the future, there will be no “made in”, as in “Made in China” or “Made in India”. You will just have designed, ideated, printed and made it in the internet. Equally, everything can now be customized. It’s expensive to customize today but, if you can’t do it tomorrow, your company will fail.”

  •“Alibaba doesn’t do e-commerce. We only provide the platform. So, the more success our partners have, the more successful are we.”

  •“Three years ago, we bet that cloud and big data would be key. Most critical is data and computing. We put all of our resources into data, computing and data services. But still what we do is just a fraction of the total. Soon we will have IoT and all these devices will create data, and this is why we are panicked. There will be a huge amount of data to deal with.”

  •“In the age of data, we can no longer have this idea of controlling everything. A monopoly is an idea of the industrial era. We just want to help people, not be a monopoly. We want to connect everyone.”

  •“We provide payments and logistics and shipping. We can deliver anywhere in China within 24 hours. That’s too slow for Beijing and Shanghai but, for the villages, we want to build that infrastructure across all China. We will never be a logistics company, however. We partner with others for this. So, we focus on the things that others cannot do or are not willing to do. We focus on things SMEs cannot do. We only want to compete with companies that won’t share or partner with others.”

  •“If you are having a difficult time as a startup, we were like that, but we had a dream and now we have got there. Now we are a huge company, but if we stay there and don’t share those riches, then everyone will hate us. So, we have to make everyone richer. If you are the only rich person in a village of paupers, the paupers will kill you.”

  •“Alibaba is a tool for everyone that should benefit everyone,
especially young people. Remember I was a teacher—and any company will diminish ultimately. I want people to say Alibaba is great, not because we sell a lot of product, but because we helped young people and our society.”

  •“Management. The word is there for regular companies. At Alibaba, we treat it more like governing an economy, as we have to manage so many companies’ dependent upon us as partners. Any SME with an idea now has a way to realize that idea. Alibaba marketplace can find you buyers and sellers; we can provide you with computing through cloud; we can distribute and deliver your products. By 2036 we will have built an economy that can support 100 million businesses for billions of users. We won’t own that economy. We will just govern it.”

  •“Having great, smart experiences will be the keywords for our next decade.”

  •“FinTech is there to empower the financial sector. I want to do that for consumers so they have equal access to finance. I don’t want people to be waiting for money or for pity. I want to empower them through access and inclusion, and get things to people a lot faster and easier.”

  •“This year is very different to five years ago. This year we focus upon ‘Made in Internet’. Your business model is to redefine your consumers, supply chain and financing methods for the Made in Internet age. I tell all retailers and manufacturers and banks to do this urgently as I’ve been saying it for over a decade. You don’t have so much time left.”

  Figure 2: Jack Ma at the M@de in Internet Alibaba event in China.

  Finally, here are the top 10 messages that Jack gives people for business:

  1.On chasing dreams: dream big, really big

  2.Remember: the bigger the problem, the greater the opportunity

  3.Today is tough, but the day after tomorrow is beautiful

  4.Focus on the customer and the rest will follow

  5.Learn from competitors, but never copy them

  6.It’s more important to be best than first

  7.Find opportunity in crisis

  8.Use your competitors’ strength against them

  9.Don’t dwell on mistakes

  10.The team should work for the goal, not for the boss

  Driving Alipay’s Innovation?

  When it began, as an escrow system, the exchange of information was based upon fax messaging. Fax messages to and from the bank and seller via Alibaba allowed Taobao orders to be fulfilled. Roll on five years, and that had changed.

  In the summer of 2011, China’s Alipay developed a QR-code payment system to support payments, and this was the revolution that turbo-charged a payments transformation in China. This is because China had few credit and debit cards in the hands of the population, but everyone had a mobile phone. At the time using the phone for payments wasn’t easy. Then the roll-out of the QR-code system changed all that. Similar to the Starbucks app that had made Starbucks become a payments phenomenon in America, Alipay did the same thing, generating a unique QR-code at checkout that merchants can scan with a barcode reader or their own smartphone camera. The system draws funds from a user’s credit card or a prepaid Alipay account.

  This move also led to some problems though, as Jack Ma made the controversial decision to spin out Alipay as a separate company, without approval from Yahoo or Softbank, who owned 40 percent and 30 percent of Alibaba at the time. The move needed to be made because the firm could not continue to act as a payments processor without a third-party payments license from the government. This license would not be issued unless Alipay was set up as a dedicated payments processor. The controversy was settled by agreeing that a certain percentage of Alipay’s revenues would flow back through Alibaba, but it did cause a bad taste in the investor’s mouths.

  Figure 3: Alipay’s Singles’ Day is the world’s largest single day of commerce. Visa averages 1,750 tps and scales to 24,000 tps; during Singles’ Day Alipay beats that handsomely, with transaction volumes exceeding 300,000 tps.

  Singles’ Day is just one of several events created to promote the use of mobile payments in China, finding its source in the battle between Alipay and WeChat Pay over the red envelope day to celebrate Chinese New Year.

  The idea began in 2014, when Tencent promoted its 400 million WeChat users to send each other virtual red envelopes, which would be deposited into their mobile payment accounts. The gimmick became a big hit with 40 million virtual envelopes being exchanged, worth a record 400 million yuan ($64 million). Jack Ma called it a “Pearl Harbor moment” for his company, and ramped up the game in 2015 by announcing it would give away more than 600 million yuan ($96 million) to its 190 million users as “lucky money” gifts if they used its red envelope messaging system. Tencent responded within hours by saying it would also gift 800 million yuan ($125 million) to users of its virtual red envelopes service, and blocked Alipay users from their WeChat friends. Tencent’s WeChat won that battle, with over one billion virtual red envelopes sent on 18 February, compared with 240 million sent through the Alipay Wallet—and, as can be seen, the rivalry between the two firms is intense.

  Meanwhile, Alipay extended its tentacles into other areas, such as creating a savings fund for customers to store their balances when not using Alipay. Called Yu’e Bao (“leftover treasure”, as mentioned earlier), it acts as a method of moving prepaid funds from a balance on Alipay to an amount that can gain interest on Yu’e Bao. Western media call it a “money market fund”, but Ant Financial take exception to this, as they see it as just a way of gaining interest on unused funds—a behavioural savings feature.

  Another move occurred in 2014, when China’s regulators offered private companies the opportunity to apply for banking licenses, resulting in Ant Financial launching a bank in 2015 called MyBank. Ant Financial hold a 30 percent stake in MyBank alongside other main shareholders, including Fosun Industrial, Wanxiang Sannong, and Ningbo Jinrun—three Chinese conglomerates with investments in agriculture, insurance, machinery, and other industries. The founders’ initial investment is four billion yuan (about $644 million). MyBank’s most important partner is Alibaba, however, as the main offering of loans is based upon user’s transaction history in Taobao and Tmall.

  MyBank focusses upon supporting small businesses on Taobao, which supports over five million merchants. At its launch Eric Jing, MyBank’s executive chairman, said that their mission is “answering to the needs of those who have limited access to financial services in China” and “is here to give affordable loans for small and micro enterprises”.

  A good example of such a service is a Taobao-subscribed shop owner who sells beef jerky. Each time they receive an order, they can immediately turn that order into cash through a short-term MyBank microloan. This particular store owner has had 3,795 such loans in the last five years, an average of two loans a day, with the amounts varying from three yuan (half a dollar) to 56,000 yuan (US$8,000).

  The learning Alibaba gained through MyBank enabled the company to open its services to other Chinese banks to use when, in 2013, Alibaba verticalized their cloud with the announcement of Ali Cloud for Financial Services, or the Ali Finance Cloud for short.

  The development of the Ali Finance Cloud was part of a perfect storm for Ant Financial. They had applied for their MyBank license and obviously needed to have a future-proofed, core-banking system. Rather than look to an external provider, they decided to develop it internally.

  A bank developing its core banking system internally is not unique in China, but Ant Financial went one step further by deciding to sell the cloud-based solution to other banks in China. The breadth of the solution is extensive, including risk management, lending, deposits, mobile apps, infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), know-your-customer (KYC) and more.

  It is difficult to overstate the potential impact of Ali Finance Cloud on the Chinese banking industry, or the potential implications globally. Adoption and usage of the Ali Finance Cloud in China has been swift, with around 40 organisations using the service, including banks, payment providers and eve
n peer-to-peer (P2P) platforms.

  Ant Financial: Building a better China

  One of the big things about Ant Financial is its principles and mission, which is all about using technology to improve society and the economy. Here is the opening statement from their 2016 Sustainability Report.3

  The evolutionary and civilized history of the human being, in the simplest way, can be seen as a progressive history where a marginal species climbed rapidly to the top of the ecological chain by developing cognition, agriculture, industry, science and technology. At present, human beings are in a golden age of the so-called third industrial revolution.

  As a tech company, what we want to do and are currently doing is to use technology to bring society back to the origin of human beings: simple, equal and free. For example, our daily errands, can we handle them easily without queuing, begging people or even going out? This is the simple principle. Can a grandmother and a bank president enjoy the same quality and equally convenient financial services? This is the equal principle. Can we say goodbye to complicated passwords, cash or even ID cards and passports, paying bills easily with a face and the credit data behind it?

  Technology is at the heart of this vision and, more importantly, it is at the heart of this business. For example, the company states openly that creditworthiness is the passport to a better society. Creditworthiness has been difficult historically, as you need some form of credit history to evaluate people; without data, that is hard.

  This is all changed today, thanks to the development of cloud computing, machine learning and big data. Creditworthiness, which used to be regarded as a moral evaluation, is now becoming direct and quantitative and can be analysed as well as utilised in real time. Ant Financial therefore created a brand new credit evaluation system called Zhima Credit, which enables more people to enjoy convenience in finance, life and other sectors.