Chinas ntech champion

On the march

The blockbuster listing of Ant Group shows how ntech is revolutionising nance

 

 


 

Oct 8th 2020 | words 1127

 

 

 

IN 1300 OR so Marco Polo, a Venetian merchant, introduced Europeans to a monetary marvel witnessed in China. The emperor, he wrote, causes the bark of trees, made into something like paper, to pass for money all over his country. Eventually the West also adopted paper money, some six centuries after China invented it. More recent foreign travellers to China have come back agog at the next big step for money: the total disappearance of paper, replaced by pixels on phone screens.

 

Chinas pre-eminence in digital money is likely to be on display in the next few weeks with the monster listing of Ant Group, its largest fintech firm, in Hong Kong and Shanghai. Measured by cash raised, it will probably be the biggest initial public offering in history, beating Saudi Aramcos last year. Once listed, Ant, which was formed in 2004, could have a similar value to JPMorgan Chase, the worlds biggest bank, which traces its roots to 1799. Ants rise worries hawks in the White House and enthralls global investors. It portends a bigger transformation of how the financial system worksnot just in China but around the world.

 

Jamie Dimon, JPMorgans boss, and others have kept a wary and admiring eye on Ant for years. Spun off from Alibaba, an e-commerce firm, it has over 1bn users, mostly in China, and its payments network carried $16trn of transactions last year, connecting 80m merchants (see Briefing). Payments are just the appetiser. Users can borrow money, choose from 6,000 investment products, and buy health insurance. Imagine if main-street banks, Wall Streets brokers, Bostons asset managers and Connecticuts insurers were all shrunk to fit into a single app designed in Silicon Valley that almost everyone used. Other Chinese firms, notably Tencent, which owns the WeChat app, also operate cutting-edge fintech arms.

 

China is not alone. The pandemic has supercharged activity elsewhere (see article). Alongside the surge in global e-commerce and remote working there has been an accompanying boom in digital payments, which have jumped by 52% at Venmo, an American network, compared with last year, and by 142% at Mercado Pago, a Latin American fintech. Parisian farmers markets, pizza firms and Singaporean hawkers have upgraded their systems so they can be paid instantly without physical contact or cash. Investors sense a tectonic shift, like the one that shook retailing. Conventional banks now account for only 72% of the stockmarket value of the global banking and payments industry, down from 96% in 2010.

 

If the surge in digital finance is universal, the business models behind it are not. In Latin America look out for digital banks and e-commerce pioneers such as Nubank and MercadoLibre, owner of Mercado Pago. In South-East Asia Grab and Gojek, two ride-hailing services, are becoming super-apps with financial arms. Fintech firms now provide the majority of consumer loans in Sweden. In America credit-card firms such as Visa (the worlds most valuable financial firm), digital-finance giants such as PayPal (the sixth) and the big banks both co-operate and compete. Tech giants such as Apple and Alphabet are dipping their toes in, tempted by the financial industrys $1.5trn global pool of profits.

 

There is much to be excited about. At its best, fintech offers big gains in efficiency. If the worlds listed banks cut expenses by a third, the saving would be worth $80 a year for every person on Earth. Ant makes razor-thin margins on payments and takes minutes to grant a loan. Gone are the days of getting gouged by money-changers in airports. Firms such as TransferWise and Airwallex offer exchange services that are cheaper and faster.

 

Digitisation also promises to broaden the spread of finance. Reaching customers will be easier and data will make loan underwriting more accurate. Firms like Square and Stripe help small businesses connect to the digital economy. In India and Africa digital finance can free people from dodgy moneylenders and decrepit banks. By creating their own digital currencies, governments may be able to bypass the conventional banking system and tax, take deposits from, and make payments to citizens at the touch of a button. Compare that with the palaver of Uncle Sam posting stimulus cheques this year.

 

Yet the fintech conquest also brings two risks. The first is that it could destabilise the financial system. Fintech firms swarm to the most profitable parts of the industry, often leaving less profit and most of the risk with traditional lenders. Fully 98% of loans issued through Ant in China ultimately sit on the books of banks, which pay it a fee. Ant is eventually expected to capture a tenth or more of Chinese bankings profits. Lumbering lenders in the rich world are already crushed by low interest rates, legacy IT systems and huge compliance costs. If they are destabilised it could spell trouble, because banks still perform crucial economic functions, including holding peoples deposits and transforming these short-term liabilities into long-term loans for others.

 

The second danger is that the state and fintech platform firms could grab more power from individuals. Network effects are integral to the fintech modelthe more people use a platform the more useful it is and likely that others feel drawn to it. So the industry is prone towards monopoly. And if fintech gives even more data to governments and platforms, the potential for surveillance, manipulation and cyber-hacks will rise. In China Ant is a cog in the Communist Partys apparatus of controlone reason it is often unwelcome abroad. When Facebook, a firm not known for its ethical conduct, launched a digital currency, Libra, last year, it caused a global backlash.

 

As the fintech surge continues, governments should take a holistic view of financial risk that includes banks and fintech firmsChinese regulators rightly snuffed out Ants booming business in loan securitisation, which had echoes of the subprime fiasco. Governments should also lower barriers to entry so as to boost competition. Singapore and India have cheap, open, bank-to-bank payment systems which America could learn from. Europe has flexible banking that lets customers switch accounts easily. Last, the rise of fintech must be tied to a renewed effort to protect peoples privacy from giant companies and the state. So long as fintech can be made safer, open and respectful of individual rights, then a monetary innovation led by China will once again change the world for the better.









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Economist | Ant Group and fintech come of age

 

 

Chinas ntech champion

On the march

The blockbuster listing of Ant Group shows how ntech is revolutionising nance

 

 


 

Oct 8th 2020 | words 1127

 

 

 

IN 1300 OR so Marco Polo, a Venetian merchant, introduced Europeans to a monetary marvel witnessed in China. The emperor, he wrote, causes the bark of trees, made into something like paper, to pass for money all over his country. Eventually the West also adopted paper money, some six centuries after China invented it. More recent foreign travellers to China have come back agog at the next big step for money: the total disappearance of paper, replaced by pixels on phone screens.

 

Chinas pre-eminence in digital money is likely to be on display in the next few weeks with the monster listing of Ant Group, its largest fintech firm, in Hong Kong and Shanghai. Measured by cash raised, it will probably be the biggest initial public offering in history, beating Saudi Aramcos last year. Once listed, Ant, which was formed in 2004, could have a similar value to JPMorgan Chase, the worlds biggest bank, which traces its roots to 1799. Ants rise worries hawks in the White House and enthralls global investors. It portends a bigger transformation of how the financial system worksnot just in China but around the world.

 

Jamie Dimon, JPMorgans boss, and others have kept a wary and admiring eye on Ant for years. Spun off from Alibaba, an e-commerce firm, it has over 1bn users, mostly in China, and its payments network carried $16trn of transactions last year, connecting 80m merchants (see Briefing). Payments are just the appetiser. Users can borrow money, choose from 6,000 investment products, and buy health insurance. Imagine if main-street banks, Wall Streets brokers, Bostons asset managers and Connecticuts insurers were all shrunk to fit into a single app designed in Silicon Valley that almost everyone used. Other Chinese firms, notably Tencent, which owns the WeChat app, also operate cutting-edge fintech arms.

 

China is not alone. The pandemic has supercharged activity elsewhere (see article). Alongside the surge in global e-commerce and remote working there has been an accompanying boom in digital payments, which have jumped by 52% at Venmo, an American network, compared with last year, and by 142% at Mercado Pago, a Latin American fintech. Parisian farmers markets, pizza firms and Singaporean hawkers have upgraded their systems so they can be paid instantly without physical contact or cash. Investors sense a tectonic shift, like the one that shook retailing. Conventional banks now account for only 72% of the stockmarket value of the global banking and payments industry, down from 96% in 2010.

 

If the surge in digital finance is universal, the business models behind it are not. In Latin America look out for digital banks and e-commerce pioneers such as Nubank and MercadoLibre, owner of Mercado Pago. In South-East Asia Grab and Gojek, two ride-hailing services, are becoming super-apps with financial arms. Fintech firms now provide the majority of consumer loans in Sweden. In America credit-card firms such as Visa (the worlds most valuable financial firm), digital-finance giants such as PayPal (the sixth) and the big banks both co-operate and compete. Tech giants such as Apple and Alphabet are dipping their toes in, tempted by the financial industrys $1.5trn global pool of profits.

 

There is much to be excited about. At its best, fintech offers big gains in efficiency. If the worlds listed banks cut expenses by a third, the saving would be worth $80 a year for every person on Earth. Ant makes razor-thin margins on payments and takes minutes to grant a loan. Gone are the days of getting gouged by money-changers in airports. Firms such as TransferWise and Airwallex offer exchange services that are cheaper and faster.

 

Digitisation also promises to broaden the spread of finance. Reaching customers will be easier and data will make loan underwriting more accurate. Firms like Square and Stripe help small businesses connect to the digital economy. In India and Africa digital finance can free people from dodgy moneylenders and decrepit banks. By creating their own digital currencies, governments may be able to bypass the conventional banking system and tax, take deposits from, and make payments to citizens at the touch of a button. Compare that with the palaver of Uncle Sam posting stimulus cheques this year.

 

Yet the fintech conquest also brings two risks. The first is that it could destabilise the financial system. Fintech firms swarm to the most profitable parts of the industry, often leaving less profit and most of the risk with traditional lenders. Fully 98% of loans issued through Ant in China ultimately sit on the books of banks, which pay it a fee. Ant is eventually expected to capture a tenth or more of Chinese bankings profits. Lumbering lenders in the rich world are already crushed by low interest rates, legacy IT systems and huge compliance costs. If they are destabilised it could spell trouble, because banks still perform crucial economic functions, including holding peoples deposits and transforming these short-term liabilities into long-term loans for others.

 

The second danger is that the state and fintech platform firms could grab more power from individuals. Network effects are integral to the fintech modelthe more people use a platform the more useful it is and likely that others feel drawn to it. So the industry is prone towards monopoly. And if fintech gives even more data to governments and platforms, the potential for surveillance, manipulation and cyber-hacks will rise. In China Ant is a cog in the Communist Partys apparatus of controlone reason it is often unwelcome abroad. When Facebook, a firm not known for its ethical conduct, launched a digital currency, Libra, last year, it caused a global backlash.

 

As the fintech surge continues, governments should take a holistic view of financial risk that includes banks and fintech firmsChinese regulators rightly snuffed out Ants booming business in loan securitisation, which had echoes of the subprime fiasco. Governments should also lower barriers to entry so as to boost competition. Singapore and India have cheap, open, bank-to-bank payment systems which America could learn from. Europe has flexible banking that lets customers switch accounts easily. Last, the rise of fintech must be tied to a renewed effort to protect peoples privacy from giant companies and the state. So long as fintech can be made safer, open and respectful of individual rights, then a monetary innovation led by China will once again change the world for the better.









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