Therefore, this dissertation will now discuss about the most important Chinese online payment platform that provide, in fact, provides not only payment solutions, but also other financial services too: Ant Financial Services Group. Indeed, this company’s online payment service (Alipay 支付宝) will be the main focus of this study, because this is one of the most innovative, disruptive and spread online payment platform in the world.
Ant Financial Services Group is the official name of the company that, since 2014, is responsible for managing all financial services from the Alibaba Group, including, Alipay 支付宝 and Yu’E Bao 余额宝. However, it is necessary to look to the emergence and consolidation of Alibaba’s business model first in order to understand what Ant Financial’s Alipay is and why this is such a disruptive financial service.
The Alibaba Group was founded in 1999 by a group of 19 people. The main purpose of the company was to better connect consumers and sellers within China and facilitate the commerce between Chinese sellers and consumers abroad. The tool chosen to accomplish this goal was e-commerce. By that time, online marketplaces were still beginning to be developed and there were just few online platforms providing this electronic marketplace.1
Taking advantage of the opportunity window to establish an online marketplace in China, Alibaba Group created two shopping websites: alibaba.com and 1688.com. The former’s goal was to create a global wholesale marketplace where Chinese Small and Medium Size Enterprises could sell their products online in an easy and direct way. The later had the same goal, but its focus was the Chinese domestic market.2
In 2000, Alibaba Group raised US$ 20 million from SoftBank and kept investing in the development of technologies that would facilitate and boost this Consumer-to-Consumer (C2C) online marketplace. As a result, TaoBao 淘宝 was officially launched in 2003. This online shopping website was able, then, to connect million of Chinese consumers to small and medium size sellers all over the country by using an easy-to-use interface and delivering the goods rapidly and efficiently.3
Nevertheless, this C2C platform sill lacked trust between buyers and sellers. On one hand, how would a merchant be sure that he or she would be paid by a buyer who he/she had never met physically? On the other hand, how would the buyer be assured that the seller would delivery his/her purchase and that the good acquired online would be what he/she was expecting in terms of quality, size, shape?
Aiming to overcome this mutual distrust, Alibaba Group took two complimentary solutions: i. improvements were made in TaoBao ecosystem; ii. an online payment system – Alipay 支付宝 - was created in 2004 to assure the reliability and security of online transactions and purchases. While TaoBao developed a seller’s reliability rank to help buyers to decide in which shop they would buy a good, Alipay started to act as a safe channel that processed payment transactions between merchants and consumers. In this way, the trust in TaoBao online marketplace began to be strengthened. Buyers could verify sellers’ reliability and their products’ quality by checking TaoBao rank’s score and, in case of fraud or any other problem with the product or its delivery, Alipay would reimburse them. Meanwhile, sellers could be sure that they would receive the money related to the purchase even if the costumer had not paid – Alipay system would also reimburse the merchants. 4
Also in 2004, TaoBao’s number of users skyrocket and this platform became the largest consumer-to-consumer platform in China. In 2008, another online platform was created within Alibaba’s environment: TaoBao Mall (Tmall), a dedicated platform for third-party brands and retailers. This new Business-to-Consumer (B2C) online marketplace kept focusing in the trade between SMEs and individuals, and matched the still growing buyers’ demand for goods made by these companies.5
After one decade, Alibaba Group was already controlling “four-fifths of all China’s e-commerce and was the largest online and mobile commerce company in the world in GMV terms. [By 2013,] there were 279 million active buyers and 8.5 million active sellers using Alibaba’s online services [per] year and 14.5 billion annual orders were made via Alibaba e-platforms.”6
The business model developed by this company allowed TaoBao and Tmall to be used as “middle channel” connecting buyers and sellers in a practical, fast and reliable way. The facilitation of transactions brought by Alibaba was essential to boost e-commerce in China. 7
Entering into the financial arena turned to be a natural consequence of Alibaba’s desire of keeping growing. Besides providing a security way to transfer money, there were still specific financial demands from SMEs and other users not fulfilled. In fact, many financial needs of TaoBao and Tmall’s sellers and consumers were still underserved by the traditional “offline” banking system.
Figure 6.1 Alibaba Group’s business model evolution. Source: author based on information gathered from Alibaba Group’s official website.8
Once again, there was a window of opportunity opened: it was time to invest in Alipay, to expand the services offered by this platform, and to adapt it to new regulations governing online payment platforms in China.9
Because of the rapid growth of this platform, the implementation of new rules regulating online payment transactions, and other managerial issues, it has been decided that it was necessary to spun Alipay out from Alibaba Group. If this were properly done, Alibaba Group10 would still influence Alipay’s business model and would be able to indirectly control its operations, expansions and all decisions concerning the platform. Additionally, this would mean that Alibaba Group11 could go public in the New York Stocks Exchange and Hong Kong Stocks Exchange, for example, without making Alipay public. Strategically, it would provide more capital through the IPO, but would allow Alibaba Group and its main owners to keep their exclusivity in one of the most rentable services provided by the group.
Although Alipay was formally “separated” from Alibaba Group, it kept as the platform responsible for all transactions made in that marketplace. 12 After establishing a partnership with the Zhejiang Ant Small and Micro Financial Services Company Ltd., all Alipay’s financial became to be operated by this company. In October, 2014, Zhejiang Ant was renamed and rebranded – Ant Financial Services Group, from that moment on13. Despite this renaming, Jack Ma, Alibaba’s CEO, founder and main shareholder, acquired a substantial amount of stocks from the former Zhejinag Ant Small Company. This, thus, allowed Mr. Ma to keep controlling Alipay’s business model and services.14
Although Alipay is still one of the most important services offered by Ant Financial, other five15 financial products/platforms were also developed by the company and, now, integrate Alipay’s ecosystem. While Alipay is the largest mobile payment platform in the world since 2013, Alipay Wallet is a digital wallet integrated with many types of e-commerce and other online services’ platforms such as TaoBao, Tmall, Eleme, Ofo, Mobike, and Public Services’ providers. Ant Micro is a microloan provider, ZhaoCai Bao is a third-party financial services platform, Yu’E Bao is a revolutionary money market fund whose focus are SMEs and individual investors, and MY Bank is one of the first totally online banks in China.16
Ant Financial timeline can be observed in figure 6.2 below.
Alipay, as mentioned previously, is Alibaba’s third-party payment platform created to process and to secure money transactions between seller and buyers inside TaoBao’s ecosystem. In 2010, Alipay reached the number of 300 transactions per second. On May 26th, 2011, Alipay was able to expand its services after being granted a Payment Business Permit by the People’s Bank of China. Since then, intra-users payment transactions were allowed as well as payment to mobile phone companies (mobile top-up), purchase of prepaid cards, and payment of municipal services – water, heat, and electricity bills and other services’ fees. This permission, in addition to the implementation of proprietary cloud-computing technology, made the number of transaction reaches a new peak of 15,000 per second.17 By 2013, Alipay was already the world’s largest mobile payment platform and was dealing with more than 85,000 transactions per second as it can be observed on figure 6.1.1 below.18
Years later, Alipay registered an amount of more than 450 million active users, and more than 200,000 offline retail stores in Mainland China accepting it as a payment method in 2017. One of the reasons for this impressive growth was Alipay’s transactions-security assured to its users. According to UnionPay, “in 2015, the rate of fraud in China’s bankcard industry was about 0.02 percent, and for debit cards the rate is 0.01 percent; both numbers are much lower than the industry average in the world. In comparison, Alipay’s fraud rate is under 0.001 percent.”19 Because of this low fraud rate, the platform has gained many adepts.
Additionally, Alipay is considered a cheap mechanism for money transactions and payment. While transaction fess are applied for both credit/debit cards’ users and merchants, Alipay presents a system that does not charge consumers and that only applies a small transaction fees for its merchants. In fact, the average transaction fee applied for merchants is 0.6% while the highest – no more than 1.2% – is applied only to specific industries such as gaming, computing and lottery.20
If any problem happens during the purchase process described above, Alibaba (via Alipay) guarantees the money reimbursement to the buyer and/or to the merchant according with the type of problem or fraud faced. Also, a purchase record is generated and added to the buyer’s credit and buying historic. The same happens with the seller, generating, then, a purchase historic and a reliability score for both costumers and merchants.
Because of the reliability and security ensured by its business model, Alipay conquered both offline sellers and services providers’ trust. Consequently, there are more than 200,000 merchants using Alipay as a payment platform in their businesses and shops in a daily basis. Indeed, Alipay’s evolution has only been possible because of the development and the implementation of low cost digital technologies such as Quick Response Codes (QR Codes).21
6.2.1 Alipay versus Credit and Debit Cards
By using Alipay, both merchants and costumers save money, energy and time. According to data released by the People’s Bank of China (PBOC), China has a low credit card penetration rate - there were 0.29 credit cards per capita in circulation by the end of 2015 and 0.34 cards per capita by the end of 2014.
In fact, the low number of credit cards being used in the country posed some barriers to goods and services’ purchases. Costumers had to either have credit cards or carry enough cash to purchase them. Additionally, online shopping was quite restricted to those that were able to pay online via their bankcards or Internet banking systems. However, due to the emergence of Alipay, more people were able to buy online and offline without having to rely on the traditional Chinese banking system – as mentioned previously, it did not reach all the Chinese consumers, leaving behind million of citizens unserved or underserved. By using this new platform, merchants did not have to pay big transaction fees for their banks and/or credit card companies – Alipay’s fees were much lower.
Moreover, buyers also did not have to go through all the bank’s bureaucratic procedure in order to apply for having a credit card or access to Internet banking. The information required to create an Alipay account was much simpler and realistic, the bureaucracy was reduced to only the necessary, middlemen were cut off from the account’s creation, digital technologies were applied to faster the process and to assure the security of the account and to protect the users’ personal information. In a few seconds, the account was created, the user could both pay and be paid through Alipay mobile app, invest money, pay for municipality services, access wealth management services and transfer money to friends and acquaintances.
Because of the easy-to-use interfaces in the app, its low entry-barriers standards, its reliability and safeness, Alipay system spread fast and effectively throughout the country. Especially in the major urban areas, it has been used as a payment method by taxi drivers, shop sellers, services’ providers and even by the local/municipal governments.
6.2.2 Using Alipay in different cities, contexts and situations
In some cities such as Guangzhou, Alipay has been used to purchase subway and bus tickets. Without using coins or bills, the user approaches the machine; chooses the destination; confirms the number of tickets the he/she wants to purchases; clicks on Alipay’s logo; uses the mobile app to scan the QR Code; puts his/her password or fingerprint; and receives the ticket. This seven-steps process can be observed in the pictures presented later on in the appendix to this chapter.
Actually, people no longer even need to add money physically to their transportation cards. In fact, they can use Alipay’s “city card service”. By clicking in this button, they can use their Alipay mobile app to scan the transportation card via NFC technology and, then, add money to the card scanned via their Alipay’s account. In this way, Alipay’s users can easily top-up their transportation card in a convenient and efficient way, avoiding waiting in lines or wasting time for recharging money to their cards. This process can be observed later in the chapter’s appendix.
Nevertheless, if they do not want to recharge their transportation cards, they can use the NFC technology via Alipay mobile app to pay for their ticket directly in the exit of the subway or bus ride. They just have to scan their own phones at the subway’s entrance machine and do it again in the exit one. The trip cost/ticket will be directly deducted from their Alipay account after receiving the NFC signal. Guangzhou’s subway’s machines that have this function can be seen in the pictures shown in this appendix A.22
6.2.3 A symbiosis between Alipay and Sharing Economy
Besides the ticket purchasing machine, it is possible to find many other machines and services integrated to Alipay inside the subway station. For instance, at Guangzhou Botanical Garden Subway Station, it is possible to rent an umbrella before leaving the place. In one of its entrances, there is a machine that allow people to rent umbrella23 in case it is raining outside and the person has forgotten to bring his/her own. After scanning the QR code through Alipay App, the user pays an initial deposit fee of 30 CNY and, based on the GPS location and Alipay account’s information, the machine opens one of its lockers and allows the costumer to take one umbrella. After using it, the person can either return it in the same machine or in another one located in different locations such as hotels, shopping malls, and other subway stations. After scanning the machine’s QR code again, the locker is opened and the umbrella can be placed there. If the user does not return it, his/her Alipay account can be charged an extra time.
Another impressive example of sharing economy being boosted by the use of Alipay is the following one: bike sharing. During the last 2 years, a couple of bike sharing companies such as Ofo 小黄车, 小蓝单车 XiaoLanDanche, and 永安行 Yong’an xing have emerged and they have been spread all over the country. Indeed, during the past months, some companies have even reached other countries such as the United States, and United Kingdom.
Without having Alipay, however, it would be impossible to use those bikes. In order to create an Ofo or XiaoLanDanche account, for example, the person has to provide personal information, take a picture of her/his ID, Passport or Student ID Card and pay an initial deposit – in case he/she breaks the bike, steals it or damages it somehow. This initial deposit – between 100 and 200 CNY in general – is paid via Alipay mobile app. Relying not only in the information provided by the person, but also on the guarantees and security brought via Alipay’s use, the bike sharing companies were able to manage the risk involved in lending bikes to people they would never meet personally. Alipay was used, then, as both a payment method and a final guarantor of the physical lending. Putting it another way, Alipay securitized a high-risk physical loan, allowing the whole bike-sharing ecosystem to flourish.
The example of how mobile payment apps such as Alipay have created an economic environment where sharing-economy based companies could flourish strengthens the argument that FinTechs in China are disrupting not only the country’s economy, but also its cities24, and its citizens’ mobility and access to formal economy. Without Alipay, for instance, the bike-sharing companies would not be able to spread to so many locations and cities, their users would have to pay physically for the rental, etc. Only because of the existence of this mobile payment platform, those companies could emerge and consolidate themselves in a short time – less than 3 years – and could become an integrated and essential part of the “Smart Cities” that are emerging in the country.
Although the shared-bikes unblocked via Alipay are catching people’s attention in the streets of Chinese Cities, there are also other situations involving payment through this app that are impressing both foreigners and locals. Purchasing via Alipay’s QR code became so common that newspaper stands, street food vendors, and charity organizations use their own personal Alipay QR code to receive money. Some pictures showing those examples can be found in the appendix to this chapter.
Because of its unprecedented characteristic, it is interesting to explain how charity organizations or even beggars are taking advantage of Alipay app to collect some donations around the city. It is not that unusual to see some beggars with their Alipay’s QR codes – in general printed in a piece of paper, but sometimes, in their own smartphones – asking for financial help and telling people that they can donate via Alipay in case they don’t have money with themselves. In this way, beggars were able to overcome the standard excuse made by those who did not want to give them any money: “sorry, I do not have any money/cash/coins with me right now”. Through Alipay or, sometimes, WeChat QR code, beggars could collect money in a more technological and, perhaps, effective way.
In fact, the utilization of Alipay by beggars confirm the fact that this online payment system has reached not-accessed and unserved segments of Chinese society that were left behind by the traditional banking system. Actually, this example also proves that new technologies can be used to improve the economy’s inclusiveness too, giving access to new ways to transact and store money that are not necessarily via bank accounts for instance.
Another curious example of how people are intensively using Alipay even in the remote areas is this one: an old lady whose work was to make bamboo rice in the middle of the mountains in the Guilin rice terraces had Alipay account and used it to charge her costumers. Despite not having toilet in her home, she had Alipay and used it constantly as a way to receive payments, manage her income and make purchases online. Once again, Alipay was used to integrate to the formal economy a person who was left behind by the traditional banking system or was underserved by it. In fact, this old lady did not have to look for a bank agency in the nearest city, she could just invest and manage her money through her own smartphone. She just needed to have an account in the app and access to Internet. Everything else could be easily done via Alipay and she, suddenly, was not in the margin of formal economy anymore.
Indeed, Alipay is getting bigger and popular not only within China, but also abroad. During the past years, Ant Financial has invested in the internationalization and expansion of its third-party online payment platform. In countries such as Vietnam, Philippines and Australia, Ant Financial is establishing partnerships with local banks25 in order to export Alipay to these markets.26 The current strategy is to allow mostly Chinese tourists to use their Chinese Alipay account via its partner local banks in order to pay for goods in services in those places. After this partnership gets consolidated, both the local banks and Alipay start to work together so the local customers can create Alipay accounts and, then, use it to purchase on Alibaba Group’s online marketplaces like AliExpress – TaoBao’s international version. Lately, the idea is to allow the local customers to pay for goods and services in local – both physical and online – shops as it is done in China by using Alipay’s QR code for instance.
Besides the partnership between Alipay and local banks, Ant Financial is also investing in making alliances with other third-part payment platforms in other to access new markets and reach new users. In July 2017, an alliance between Alipay and Stripe was launched.27 A couple of months before, however, another big alliance has been forged in order to get into the payment U.S. market. In May, Alipay inked a deal with First Data, an American payment processor firm. This joint venture enabled Alipay to be used as the payment method at point-of-sale in more than four million retail partners in the country.28
6.2.4 Credit scores and assessment of loans’ risks
After a couple of transactions, Ant Financial is able to draw its users’ financial profile by analyzing their preferences, purchases’ historic, loans’ payments among other information. The big data collected can – and will – be used later to determine people and SME’s credit. These scores are, then, showed by the Zhima Credit platform (one of the wealth management services offered by Ant Financial Services), and are used to determine whether Ant Micro – another Ant Financial service – should provide loans to certain Alipay users (both consumers and merchants) or not.
Indeed, after analyzing a borrower’s credit scores and financial behavior, Ant Financial is able to determine not only the creditworthiness of the person requesting a loan, but also the probability of receiving the loan’s money back. In this way, the company is able to better determine the interest rate of each loan in accordance with more accurate risk assessments and other financial predictions. In other words, this big data usage and creditworthiness scores have been used as a way to fight against information asymmetry and its negative externalities. As consequence, big data and credit profiles have been responsible for pushing down interest rates and other transaction costs that previously had been used as a way for compensating the risk and the incertitude related to lending issuance and information asymmetry.
6.3 Alipay and its contributions to economic inclusiveness
Because of being considered safe, efficient, fast, reliable and easy-to-use, Alipay’s mobile app is one of the most frequently used apps in China and it is ranked as the most used online payment method in the country. While WeChat, Chinese messaging and social network app, is the most accessed app, Alipay counts with 14.4% of total access and TaoBao counts with 24.1% of them according to the CNNIC Report (2017). As a remind, it is important to notice that the frequency of usage of online payment platforms is much lower than the time spent for the use of social network and messaging apps. Putting another way, the amount of time and the number of access Alipay receives every single day in China is impressive.
Indeed, Alipay has contributed to economic inclusiveness in China once it has spread the access to formal financial and banking services such as payment platforms and microloans. All over China, there already more than 490 million people using Alipay to pay for goods and services, receive payments, manage wealth and invest, etc. Many merchants were able to accept online payments and to access credit via Ant Financial ecosystem (Ant Micro, Zhima Credit’s scores) for the very first time. Before Alipay, millions of sellers would accept payment only by cash and could not provide proof of their credit worthiness in order to contract a loan/credit. Now, they are integrated not only to a formal online payment system, but also to other financial and bank-related activities such as wealth management services, investment funds and credit.
The digital financial inclusion lead by Alipay has reached even the most remote Chinese locations. Provinces and municipalities that did not have any physical bank agency/office are, now, directly integrated to the rest of the country via online payment platforms and digital financial services provided by the company. Instead of having to travel to other cities or regions to access basic banking services, costumers and merchants can pay bills, receive payments, invest money and manage their savings all via Alipay. All they have to have is a smartphone connected to the Internet.
Although some could argue that financial technologies can be exclusionary29 once they require a certain degree of knowledge and basic digital skills from users, Alipay and Ant Financial are considered inclusive technologies, because they have developed easy-to-use interfaces and solutions that can be used even for those people that had never accessed Internet or used computers before using the company’s app. Indeed, the mobile app layout is quite simple, intuitive, full of illustrations and stepby- step explanations of each function. As consequence, the lack of knowledge and digital skills expected natural entry barriers are intentionally reduced by the app’s interface and layout.
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