Emerging markets paramount to Ant Financial's global expansion

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Chinese internet giant Alibaba has been trying to go global for years. Yet its core e-commerce business - made in and for China - remains dependent on its home market. The key revenue generators, the online shopping platforms Taobao and Tmall, barely have a footprint outside of Greater China.

Rather than take those platforms overseas, Alibaba hopes to become dominant in China's near abroad by acquiring stakes in local e-commerce champions, like Singapore's Lazada and Indonesia's Tokopedia. Alibaba wants to replicate the ecosystem that has worked so well in its home market of an e-commerce platform, logistics and of course, digital banking.

Banking, however, has a higher barrier to entry than e-commerce. Alibaba's finance arm Ant Financial can't take a stake in a Singapore bank - or almost any bank, for that matter - as easily it can Lazada. Even the most progressive financial regulators are cautious by nature.

The exception to this rule has been in Ant Financial's home market. Keen to boost financial inclusion and efficiency in the banking system, the People's Bank of China (PBOC) gave Ant broad leeway to experiment with fintech. The normally brittle Chinese financial sector showed surprising flexibility, allowing Ant to develop not only a digital wallet, but also micro-lending and wealth-management services.

The PBOC even issued Ant a banking license so that it could set up the virtual bank MyBank in 2015. The results have been impressive: As of October 2018, MyBank had accrued assets of 78.2 billion yuan, had 446.8 billion yuan in loans on its books and recorded a net profit of 404 million yuan, according to data compiled by Yicai. MyBank's NPL ratio was just 1.23%.

Beijing has shown great tolerance for tech firms acting as banks. The challenge Ant now faces is twofold: The company must convince other regulators to be equally unprejudiced, while girding itself for intense competition. Outside of China, Ant cannot count on being insulated from every competitor but Tencent's WeChat Pay.

Ant Financial's abortive attempt to acquire MoneyGram in the U.S. and its successful acquisition of WorldFirst in the UK have dominated headlines about its global expansion, but the company's forays into the developing world are ultimately more important. In the U.S. or Europe, consumers can do without Ant's services. They have credit and debit cards, as well as options to link them to a digital wallet. Consumers keen for digital-first banking are spoiled for choice in the UK, where local challenger banks are ascendant.

Emerging markets are a different story. While competition is intense in some of them, conditions across Asia's developing countries are in many ways optimal for Ant Financial: Incumbents have weak digital capabilities; financial inclusion is low; smartphone penetration is rising fast, and the people are more receptive to digital finance - perhaps out of necessity - than in the world's rich countries. Some of these countries are among the world's largest by population. Indonesia has a population of 265 million, Pakistan almost 211 million and Bangladesh 167 million.

"With China now at the forefront of global fintech innovation, many countries show a strong will to cooperate with Chinese enterprises," wrote Huang Yiping, director of the Institute of Digital Finance at Peking University, in a March commentary published in the state-run newspaper China Daily. "Many financial technologies applied in China are more suitable for developing countries," he added.

Aligning with BRI

In line with Beijing's Belt and Road Initiative (BRI), a massive infrastructure investment plan that aims to strengthen China's global presence, Ant Financial is expanding to some overlooked emerging markets, such as Pakistan and Bangladesh. Pakistan has a reputation for political instability, while Bangladesh is known for extreme poverty - although the situation has improved markedly in recent years. Under the BRI, Beijing has offered to beef up infrastructure in both countries. A big fintech like Ant allows China to expand the plan to include digital banking.

Ant's expansion into those two countries is unique in that the company is not targeting Chinese tourist business. Neither country is popular with Chinese tourists. Ant usually expands to countries that attract lots of Chinese visitors, such as Thailand, Indonesia and Vietnam.

While some BRI projects are of dubious value, Ant's push into South Asia makes sense from a business perspective. Both Bangladesh and Pakistan are populous, connected, young and underbanked. The challenging nature of both markets could make financial regulators more amiable to fintech solutions than in more advanced countries. Ant could well gain a first mover's advantage in both nations' nascent digital banking systems. The Asian Development Bank (ADB) forecasts the Pakistan economy will grow at a modest 3.9% this year. Bangladesh could grow at an impressive 8%, ADB says.

In March 2018, Ant announced it would take a 45% stake of $US184.5 million in Norway's Telenor Microfinance Bank (TMB), which has been present in Pakistan for about a decade. The two companies will work to develop Pakistan's mobile payments ecosystem. TMB's Easypaisa mobile-banking platform offers the most comprehensive branchless bank service in Pakistan measured by agent network, active accounts and transaction value, according to Pakistan's State Bank.

The tie-up will "provide inclusive financial services in a transparent, safe, low cost and efficient way to the unbanked and underbanked population in Pakistan,” Eric Jing, CEO of Ant Financial, said in a statement.

In April 2018, Ant and bKash, Bangladesh's top digital wallet startup, announced they would cooperate to build a local version of Alipay. In a country of 167 million, bKash has 30 million users and 180,000 affiliated retail partners. The two companies did not disclose terms of the deal but Bangladeshi media reported that Ant would take a 20% stake in bKash.

Financial inclusion is the name of the game, according to a statement published on bKash's website. "We are confident that we can bring highly secure and inclusive financial services to address the needs of local people and small business here," Eric Jing, Ant's chairman and chief executive officer of Ant, said in the statement.

"This investment opens many new opportunities for bKash and demonstrates the confidence a world-class player is placing in Bangladesh,” Kamal Quadir, chief executive officer of bKash, said in the statement.

Ant stepped up its presence in South Asia in January when it announced its blockchain technology would support a cross-border remittance service to Malaysia from Pakistan operated by Valyou, a Malaysia-based remittance service provider.

An uphill climb in Asean's 10 countries

In Southeast Asia, Ant Financial is pursuing its conventional two-pronged strategy that targets both Chinese tourists and local business. In these markets, Ant is enjoying varying degrees of success. Destinations popular with Chinese tourists tend to correlate with higher use of the Alipay digital wallet. Data from Alipay show that Thailand was the No. 2 market after Hong Kong in terms of Chinese tourists' spending volume during the October 2018 Golden Week holiday.

Unlike in Pakistan or Bangladesh, Ant faces strong competition in most Asean markets. That includes its arch-rival WeChat Pay as well as regional players like Boost in Malaysia, DBS's PayLah! in Singapore, Momo in Vietnam and state-owned LinkAja (an alliance of local banks and telecoms) in Indonesia.

Even if mobile wallets consolidate fast - by no means a sure thing - in Southeast Asia, Ant Financial is unlikely to gain the type of commanding market share it enjoys in China. Consider the challenges the company faces in Indonesia, Asean's largest market. Indonesian regulators have told Alipay to work with local banks to ensure its business is legal, but they have not moved quickly to approve any related partnerships. The Indonesian banks BRI, BCA and CIMB Niaga are reportedly eager to cooperate with Alipay, but none has received the green light so far. BRI signed an MOU with Alipay in late 2018.

At the same time, Jakarta is barring foreign digital wallets from the local market. "All global players can bring their payment instruments to Indonesia, but they are only allowed to target transactions of foreign tourists,” Onny Widjanarko, Bank of Indonesia's payment system policy department head, said in December.

In a May interview with Euromoney, Ruben Lai, head of Grab's financial arm, notes that “regulation is extremely tough in Southeast Asia.” The report points out that Grab has to work with regulators in 10 different countries across the region, compared to "Chinese fintechs that deal with one regulator."

Lai's point is salient. Some media reports depict Ant Financial in a heated battle with WeChat Pay for dominance of an ostensibly monolithic Southeast Asian market, as if competing in those different countries were analogous to the Chinese internet giants' celebrated rivalry in China. The comparison misses the mark: Every Southeast Asian market is unique, and no Southeast Asian regulator with the exception of perhaps the Philippines' Bangko Sentral is as eager to elevate tech companies to a leading role in banking as the PBOC was. Ant Financial will ultimately have to work much harder than it did in China to gain market share in each of Southeast Asia's markets.