Bank 4.0 Page 6

  The Zhima Credit score is based on your financial behaviours and trustworthiness with money, and a key part of this is ensuring people payback. Zhima Credit scoring works with the support of intelligent decision-making, and this is a core part of Ant Financial’s operations based upon a well-established creditworthiness evaluation and risk forecasting system that operates in real-time. As a result, farmers without bank statements can obtain loans to buy fertilizer and seeds through MyBank.

  Ant Financial illustrates this through the stories of their partners.

  A key backdrop to the Zhima Credit score, creditworthiness, microloans and inclusiveness is Ant Financial’s continual real-time analytics and risk management. This enables the company to deliver its “3, 1, 0 strategy”: it takes three minutes to apply for a loan; one second to transfer the funds to the applicant’s account; and there is zero manual intervention in the whole process.

  MyBank has helped many blue-collar workers, undergraduate students and migrant workers to embark on a new life. By the end of April 2017, 6.5 million people had borrowed over 800 billion yuan (US$125 billion) in just two years.

  This is bringing a convergence between creditworthiness and wealth to help people from all walks of life to realise their dreams. Creditworthiness is linked not only to wealth, but also to the operation and governance of society. It is closely related to everyone’s daily life. This is why the usage of technology to extend credit to everyone creates a more inclusive economy and a more equal society.

  Ant Financial believe that, in the near future, it is likely that cameras in restaurants, subways and airports will automatically identify your credit status. People will be able to go out without a mobile phone, cash or even an identity card. They can go anywhere using only their face as their authentication system. From your face the cloud, and the big data of creditworthiness behind it, will become everyone’s passport in society. The trustworthy will be welcomed everywhere, while the untrustworthy will be rebuffed at every step.

  That is why creditworthiness is a critical factor driving Ant Financial, Chinese society and the economy forward, with the company regularly acting as a mediator between those who can be trusted and those who cannot. It is why Ant Financial’s Zhima Credit system is working with China’s Supreme People’s Court to punish dishonest credit behaviours. By January 2017, Zhima Credit had assisted the Supreme People’s Court to punish over 730,000 dishonest debtors, almost 50,000 of whom have paid off their debt. This is another key tenet of Ant Financial’s vision, in using creditworthiness to improve social governance and make integrity a highly valued attribute of society.

  People born in the 1990s have grown up in an environment where the concepts and applications of creditworthiness are being popularized. For example, one in four Chinese people born since 1990 use Ant Credit Pay for consumption. Therefore, they have a clearer understanding of creditworthiness, and value it more than the older generations. Statistics on Ant Credit Pay show that the proportion of people born in the 1990s who repay their debt on time is 99 percent. A society that values and upholds integrity is taking shape.

  When I attended the Alibaba partners conference in July 2017, they hosted many of their most successful Taobao businesses in Hangzhou, China. Many of these are young people who are now entrepreneurs. Intriguingly some of these businesses are based in rural villages—because they can be. This is a massive change in society in China and, from a digital age platform, the world. The fact is that anyone, anywhere—even in the most remote villages—can become an entrepreneur if they have an internet connection and, increasingly, everyone has this through their mobile smartphone.

  But it’s not just commerce and society that Ant Financial focuses upon. Equally, it is worth underlining that Ant Financial is not first and foremost a financial firm. They are a technology firm, focussed upon leverage technologies to improve society and the economy. This is illustrated well by their services to government.

  A final element worth mentioning in Ant Financial’s strategy is building a greener planet. This is achieved through their program of gamification, called “Ant Forest”.

  The idea of Ant Forest originates from the carbon emissions account of Alipay, which is by far the largest platform for personal carbon accounts in the world. In the Alipay carbon account, users are educated in using some of the common global practices in energy conservation and emission reduction. It is the first carbon account using a bottom-up approach to reducing carbon emissions. Specifically, Ant Forest encourages users to choose greener lifestyles by taking public transport, paying utility bills digitally and booking tickets online. It is also the first in the world that encourages hundreds of millions of people to lead a low-carbon life voluntarily, rather than forcing this approach top-down.

  Embedded banking: understanding not selling

  Ant Financial is the only company worldwide today focussed upon building a global financial inclusion platform. A platform that can support and connect potentially seven-and-a-half billion people in real-time. At the very least, a platform that will include all those who are currently excluded from the financial network, by offering them a connection via the mobile network and simple technologies that are interoperable between operators in all countries.

  Their strategy is based upon finding companies in other countries who offer an e-wallet payments service, and then to invest in those firms and share their technologies with them. Eventually, it is likely that Alipay and Ant Financial’s base technologies would be powering the core infrastructure of e-wallets globally—a sort of globally aggregated wallet service.

  First, they invest in equivalent products and services in similar markets, such as India and Thailand. That is why Ant Financial’s leadership team talks about inclusiveness, as that’s a great strategy with a mobile wallet. Hence, they invested $680 million in India’s Paytm in September 2015, just before demonetisation stimulated Indians to open 200 million wallets on Paytm. In November 2016, Ant partnered with Thailand’s Ascend Money, which also runs a digital wallet service. Under the agreement, Ant Financial will assist Ascend Money to grow its online and offline payments and financial services ecosystem. It is notable that Ascend may be based in Thailand, but also operates in Indonesia, The Philippines, Vietnam, Myanmar and Cambodia.

  In February 2017, they announced a $3 billion debt financing deal to expand their investment portfolio and, interestingly, moved into the US market with a bid to acquire MoneyGram for $880 million. This was followed by a strategic investment in the Korean messaging service Kakao, which offers Kakao Pay; also, in March 2017, they increased their stake in Paytm, so that Ant Financial is now the majority owner of the service.

  Meantime, apart from heading for inclusiveness, Ant Financial has also expanded into the USA and Europe. At the end of 2015, the company signed a deal with Wirecard to give them access to Europe for merchant checkout using their wallet for Chinese tourists. This was followed with a partnership with Ingenico to further enhance their European presence and then a deal with First Data to give them a similar coverage of North America.

  The media positions the Wirecard, Ingenico and First Data moves as being a pure provision of service for Chinese tourists, but it is not as simple as this. This is a fast-moving company that is expanding non-stop in its mission to be the dominant global mobile wallet.

  That is the mission and was articulated by Ant Financial CEO Eric Jing at Davos in January 2017, where he stated: “We have an ambition to be a global company. My vision [is] that we want to serve two billion people in the next ten years by using technology, by working together with partners … to serve those underserved.”

  How Ant Financial thinks is radically different to US and European FinTech firms, because it is automating a market that had nothing before. When Alipay began, there was no e-commerce in China. Alibaba and Alipay created it.

  That’s a radical difference from the American internet giants like Amazon and eBay, who had major bricks-and-mortar competitors also
competing online, and began without any payments integration. Equally, the US giants were serving a developed market, where consumers had sophisticated online needs; Alibaba and Alipay were serving markets that were changing dynamically as Chinese citizens moved from rural, agricultural work to the rapidly expanding cities, where manufacturing offered a rapid uplift from poverty to riches. In fact, Amazon runs a 14-year-old ACH payments system today, showing one of the core differences between Alibaba and the US commerce giant.

  In creating this revolution of commerce in China, both manufacturing and online, Ant has emerged as the leader, and they talk about empowering digital FinLife globally. This is important, since it’s not a payments app or a mobile wallet, but a complete social, commercial and financial systems in one. Imagine Facebook, Amazon and PayPal all integrated into one app. That’s what Ant has got.

  And their business model is fundamentally based upon deep user understanding, not cross-selling.

  This is an abbreviated version of a detailed case study of Ant Financial in Chris Skinner’s new book, Digital Human. The full version includes five interviews covering the past, present and future of Ant Financial, from the person who wrote the first code to the head of strategy building the company’s future.

  Endnotes

  1See https://www.finextra.com/resources/feature.aspx?featureid=845.

  2Read more in Chris’ latest book Digital Human.

  3Many of the facts and statements made in this section draw on Ant Financial’s 2016 Sustainability Report https://os.alipayobjects.com/rmsportal/omkAQCxPyHDDqtqBDnlh.pdf.

  2 The Regulator’s Dilemma

  By Brett King & Jo Ann Barefoot

  One can see an emerging requirement for a body that will carry out the functions of a kind of “central world bank” that regulates the flow and system of monetary exchanges, as do the national central banks.

  —Vatican’s Pontifical Council for Justice and Peace, paper 2011

  If there’s one area that is going to need a total, first principles rethink, it is regulation. Presently, we are in the vernacular of the software industry, madly adding “patches” to the system, trying to retrofit decades-old regulations and core systems for all these new channels, behaviours and technologies that are emerging. But the more we try to add fixes into the system, the more we get a sort of conflated banking spaghetti code—a system that threatens to lose its coherence at any time, with legacy system and platform limitations that are already decades out of date. Developed countries, in particular, have elaborate and rigid regulatory systems built in an analog era where everything was paper-based, when data was scarce and computing power was also scarce and extremely expensive. Now, both data and computing are ubiquitous and cheap, and paper is increasingly viewed as hard-to-remove friction. We need to create a whole new model for the digital age, in order both to regulate digital markets and to deploy new technology in the regulatory process.

  What’s needed is digitally-native regulation. It should be designed from scratch, planted beside the old system and replacing it gradually. It needs to incorporate small-scale testing. And, as discussed below, it should build on a breakthrough experiment conducted in late 2017 by the UK Financial Conduct Authority on “machine-executable regulation”—rules issued not as words, but as computer code, self-implementing.

  Change won’t be easy. Regulators face a diabolical version of the Innovators’ Dilemma made famous by Harvard University’s Clayton Christensen. In his landmark 1997 book,1 Christensen argued that successful companies become captive to legacy products and practices that are working too well to abandon, and so are vulnerable to displacement by superior disruptive technologies. Regulators face this risk too, holding to traditions built on long histories of painfully-learned lessons. The regulators’ challenge is compounded by the risky and constrained frameworks in which they operate. Even more so than banks, regulators are simply not built for rapid change.

  One can debate how well regulatory systems have worked in the past, but they have been intentionally designed to have features that make them ill-suited to today’s challenges. Financial regulatory frameworks are, and are supposed to be, risk-averse, deliberate (read, slow) and clear (read, rigid). While some agencies have mandates to promote goals like competition and financial inclusion, most regulators have as their primary mission to detect and address risk to the financial system and its customers. They are not meant to spearhead or promote particular kinds of market changes. They are not meant to spot hot new products and services that deserve a regulatory boost or regulatory relief—a process that could eventually put regulators, not innovators, in the lead in designing financial products by making some safer than others to offer.

  Ironically, the very traits that have made regulators effective have suddenly become top contributors to new risks, as a gulf widens between the velocity of market and regulatory change. Regulators must rapidly address new technologies they don’t understand and which are rapidly exposing current regulatory moulds. Regulators are left walking a knife-edge between neither blocking emerging benefits nor allowing new risks to proliferate. The chance of this all going smoothly with minimal failures is, honestly, zero. In fact, the most likely thing to go wrong in the Bank 4.0 model is that we will regulate it badly, or that we fail to future proof the sector so our institutions remain globally competitive.

  The obstacles to regulatory innovation are numerous, massive and intertwined. They include structures and domains (many are built on foundations dating from the 19th century and even earlier), organisational cultures, incentive systems, external and internal politics, skill sets, legal frameworks, cumbersome procedures, slow pace, constraints on communication and collaboration, pre-digital age leaders, regulatory “capture” by incumbent industries threatened by change, and of course, existing laws and regulations themselves.

  These last are not only difficult to alter but are also notoriously complex and intertwined. Reforming any part of them is like trying to remove one strand of a spider web without moving anything else. There is a reason why the US Dodd-Frank Act weighed in at 2,300 pages and spawned tens of thousands more pages of rules (a count that is still rising, ten years later). Regulatory change is extremely complicated. It is also hideously expensive, which means that even companies that wish for reform often oppose actual efforts to undertake it because of the cost. They know that, once started, reform efforts can go awry, making things worse rather than better or yielding only marginal improvements that are not worth the massive costs of implementing them.

  The financial crisis and the iPhone both arrived in 2007. Ever since, policymakers have been consumed with rearview mirror mandates arising from the crisis, even as the whole world has been changing around them.

  The risk of regulation that inhibits innovation

  The current nature of innovation is very much policy and process-based. Government sets policy, which is implemented into law, or with the creation of new regulatory bodies and modes of conduct. Rules and standards are published, and examiners are mobilized to ensure compliance with those rules. Breaches of the rules are documented and dealt with and where policies or rules are found to be unworkable or fall out of favour, feedback to the policymakers results in slow changes as acts of parliament or congress are drafted and executed, before the cycle starts again.

  Figure 1: Typical regulatory structure at a market level.

  Changes in regulation require both an identification of a system change or emerging market risk, and often, changes in law or operational structure to implement. Such changes take years, in typical terms, to be effected. Policy is often the purview of the current government administration, and can change when there is a change at the government level. These ebbs and flows work counter to the way the market we see is innovating today. With few exceptions, regulators are not innovators, and respond to innovation as a risk to the market—a virus that must be killed off by the regulatory immune response.

  Here are some examples of rapi
dly emerging technologies that could be seen as undermining our current regulatory environment, and that illustrate well the risks of restricting regulatory innovation:

  Bitcoin—Alt-currency, Ponzi scheme bubble or monetary evolution?

  From a purely regulatory perspective how do we classify Bitcoin? Is it a currency? Is it a marketplace, an exchange? Is it a payments network? Is it a new asset class? Is it a tool for money laundering? Is it a tool to circumvent taxation or cross-border currency controls? Is it a threat to central banks and the concept of fiat currency?

  Depending on which regulatory body is looking at Bitcoin, at a specific point in time or via specific actors, it could exhibit any one of, or all of these different characteristics. The decentralised nature of Bitcoin, a lack of a clear internal oversight (as opposed to consensus) and the appearance of anonymity, makes regulation of Bitcoin difficult. There are countries that over time have issued decrees making Bitcoin technically illegal, and there are further countries that have put significant restrictions and licensing on Bitcoin exchanges, the platforms that allow for the exchange of fiat currency into the digital cryptocurrency.

  However, even if exchanging US dollars for Bitcoin was made permanently illegal in the US, for illustrative purposes, it would remain almost impossible for the US government to actually stop people trading in or mining new Bitcoins. In fact, the US government would have to shut down the internet to make Bitcoin completely inaccessible, and even then people could still meet up and trade Bitcoin in person. It’s how it was done before Bitcoin was legal in the first place.

  Any regulator that thinks they can successfully regulate Bitcoin almost certainly doesn’t understand the phenomenon. You can’t stop Bitcoin any more than you can stop the internet from working today2. As such, Bitcoin presents a significant problem for governments and central banks, which tend towards control. While Bitcoin is extremely unlikely to bring down the banking system (as some of the purists contend or maybe hope for), if Bitcoin achieves a high enough level of utility and becomes a stable form of value exchange, it could actually be more effective for cross-border commerce than even the most popular forms of fiat currency. As the world moves towards globalised online commerce, there’s really no advantage in a geographical-based currency on the IP-layer, and as such a popular digital cryptocurrency could easily start to compete with traditional fiat currencies based purely on utility. It’s easy to see why central banks might want to attempt to ban, or at a minimum inhibit, Bitcoin.