Is Alipay eating into China’s finance sector?

Mobile payment is increasingly popular in China, and as digital finance companies get a strong foothold in the market the risk that new technology will eventually replace traditional banks is increasing.  

Editorial

According to data from the Chinese central bank, there were 6.317 billion mobile payment transactions in the second quarter of 2016; accounting for spending of ¥29.32 (US $4.4) trillion. This represents an increase of 168.46% and 10.20% from the year before. The gap between one figure and the other is due to a focus by financial institutions on small transactions.

Thanks to this rise in easy-access payments trends also show a decrease in the use of bank cards.  The figures show that 5.828 billion were used in the second quarter, making payments of ¥13.68 (US $2,05) trillion. On average, people spent ¥9,978.08 (US $1,496), a fall of 3.27% from a year ago.

In this environment e-wallets are much more likely to be used to make small payments, eating into the market share historically held by traditional banks. And the banks certainly have a fight on their hands; the fintech companies are pushing deeper to develop their capacity and customer base.

In April, Ant Financial, the parent company of Alipay, announced the completion of a $4.5 billion Series B financing, taking the value of the company to $60 billion. If Ant Financial goes public within two years, it is expected to have the largest IPO since the listing of the Agriculture Bank of China (ABC), one of the four largest banks in China.

Brands that would come to market under that move would include Alipay (the e-wallet app), Ant fortunate (a financial management app), MYBank (a digital bank), Zhima credit (a credit system), and Ant Financial Cloud (a cloud computing service).

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Source: www.antgroup.com

Will traditional banks be replaced?

Although Ant Financial is growing rapidly, it will not replace the traditional banks in the foreseeable future.

Alipay will always need to pay for the banks’ third-party depository services. Moreover, Alipay provides an umbrella under which many banks can process transactions through a single channel. This is the factor that makes mobile payment more convenient than both card or cash payment. At the same time, Alipay is responsible for clearing, much as Visa, MasterCard, and UnionPay are. Don’t count the old players out too soon; the banks behind such payment instruments remain innovative and evolutionary.

Remember also that most of the digital finance companies, Ant Financial included, are not in the same segment of the market as traditional banks. MYBank is a digital bank under Ant Financial and the bank’s president, Yu Shengfa, indicated that the bank targets only small and medium-sized enterprises, individual consumers, and rural users.

As such they are focusing on loans of small amounts, with an upper limit of ¥5 million. (US $759,000). The way MYBank works is highly flexible, offering services to persons and firms who have limited access to loans from big banks. In the “normal” market services for these customers require a time-consuming review, guarantee, or mortgage. As such, big banks are willing to forego this field to prevent risking their portfolios. Could we see a win-win relationship built in the future where the banks fund digital finance companies working in this area?

The bank as a macroeconomic and political tool

Although these new developments are exciting, and almost certainly good for customers, banks play an essential role in the macroeconomic management of nations. They are indispensable in the process of adjusting interest rates, stabilising the supply of money and supporting wider adjustments to a country’s economic structure.

As such, banks are an important political tool wielded by the government to establish and preserve social order. A financially strapped bank would lead to social unrest. To prevent this kind of social instability, the barriers to entry into China’s banking sector are extremely high, ensuring only entities with a huge amount of capital can set up a bank. Furthermore, to alleviate the challenge posed by increasing competition from fintech companies, the Chinese government has stringent rules and regulations to limit what they can do.

What is the future of traditional banks and Internet finance firms?

In the bigger picture, the fast-growing fintech industry is pushing banks to up their game. The traditional banks prefer to have everything under their control instead of outsourcing. For instance, they have created their own databases, instead of using those available through working with technology companies. They have also employed a great number of people to develop their software, system, channels, and services.

However, this mode of operation is inflexible and antiquated. Therefore, the banks are likely to abandon many of these current modes and establish an end-to-end value chain in the near future. In that model, Ant Financial Cloud will provide the database, while Alipay will become the front-end of the bank. Traditional banks will then only be responsible for a single element of the service, such as products or distributions, or perhaps a single segment of the market, such as the provision of large loans.