Ant Financial - Financial Disrupter

Includes: BABA
by: Kevin Carter


Ant Financial is 33% owned by Alibaba.

Ant's Alipay is the leading digital payments platform in China.

Ant has disrupted the financial services industry in China, allowing consumers to perform traditional banking online.

Ant is rumored to be preparing for an IPO.

Ant Financial is a financial services affiliate of Alibaba (BABA). Ant was carved out of Alibaba in 2014 and operates Alipay, one of China’s leading online payment platforms. The company also has a large consumer and small-business lending operation, oversees the world’s largest money-market mutual fund and runs a fast-growing technology-services business, according to the Wall Street Journal.

With its business model, Ant has been a disrupter in the financial services industry. As such, it has faced criticism from its competitors as well as scrutiny from the Chinese government. In response, Ant is shifting its focus to technology services and away from payments and consumer finance.

While Ant is not a public company, some access to the company is available through Alibaba which has a 33% stake, according to the Financial Times.

Alternatively, investors can purchase shares of EMQQ – the Emerging Markets Internet and Ecommerce ETF. EMQQ held Alibaba as of 7/31/18.

History of Ant Financial

Ant traces its roots back to 2004 when Alibaba created Alipay to facilitate online shopping. As Alipay grew, its executives realized they could push for change in the financial industry. They observed that China’s banks weren’t doing enough to support small businesses, so they stepped in. In 2008, an Alibaba unit began making loans to some small businesses.

In 2010 Ant was carved Alipay out of Alibaba after authorities said the payment operation would need a new license to operate. The company soon found itself holding large amounts of cash in escrow for customers ecommerce accounts. Ant came up with the idea of letting customers stash their idle Alipay money in an online money-market fund to earn income. In 2014 Alipay rebranded itself as Ant Financial.

Industry Disrupter

Ant’s online payments platform completed more than $8 trillion of transactions during 2018, according to the Wall Street Journal article. The article goes on to relate that it has 620 million active users and calculates credit scores on 257 million people. At $219 billion, Ant manages the largest money market mutual fund in the world, according to the Journal article.

Ant is changing the way that people in China handle their finances, driving innovations that let people use their phones for buying insurance as easily as groceries. Ant’s products are essentially enabling a cashless society.

Has Caught the Attention of Regulators

But with such innovation also comes disruption and China’s more traditional banks are feeling it. And they are vocal in expressing their unhappiness. China’s banks complain Ant siphons away their deposits, causing them to pay higher interest rates, and is a factor leading them to close branches and ATMs.

China’s government and regulators are struggling with how to deal with Ant. Earlier in 2018, China’s central bank undermined a years-long effort by Ant to build a national credit-scoring system by effectively preventing Ant’s system from being used by institutions making loans. They have place limits on the types of assets that can be held in large money-market funds. The government is weighing whether to designate Ant a financial holding company and require it to meet bank-style capital requirements.

Recently, the central bank required nonbank payment operators such as Alipay to place escrow funds in non-interest-bearing bank accounts by early 2019. That means they won’t be able to use escrow money to generate interest gains. Ant is also being told to cede control over some of its transaction data to a new, government-owned internet payment system called Wang Lian, which is expected to compete against Ant and could undercut it on fees, according to the Wall Street Journal.

Serving an Underserved Market

However, Ant counters that they are not a company that is acting like a bank without oversight. They say they are merely bringing financial services to people the banks have ignored. The company notes that they do not fund most of the loans that they originate from their balance sheet. Instead, they primarily serve as a platform that makes it easier for banks and others to extend loans and helps them lower risks.

Shift in Focus

In response, Ant is moving away from directly offering financial services and toward providing platforms for traditional institutions to use. It says it wants to be known not as a financial conglomerate but as a technology provider or “lifestyle platform,” with future profits coming mainly from fees from institutions using its technology, according to the Wall Street Journal.

Technology services will make up 65 percent of Ant Financial's revenue, compared with an estimated 34 percent in 2017, according to an article on CNBC. That would involve helping banks and other institutions with services like online risk management and fraud prevention. The shift in focus fits with the company’s strength in technology and the government’s view of how financial companies in China should operate.

Potential IPO

It is widely believed that Ant will go public sometime in 2019. Ant Financial is preparing for a long-awaited initial public offering expected to be in mainland China and Hong Kong in 2019, according to the same CNBC article.

A Financial Times article noted that Alibaba exchanged its profit-sharing arrangement with Ant in favor of a direct 33% equity stake. It is believed that this is in anticipation of a future IPO.


Ant Financial has risen to become a large Chinese financial institution. In the process, it has shaken up the status quo of the financial industry in China. As a result, the company has faced scrutiny and increased regulation from the Chinese government. But it continues to adapt its business to play to its strengths and still more stringent regulatory requirements.

EMQQ – the Emerging Markets Internet and Ecommerce ETF – held Alibaba as of 9/7/18.

Disclosure: I am/we are long BABA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.