How Does Alipay Make Money?

I almost started a post on How Does Paypal Makes Money, but it would bore me to tears. Paypal is simple: they take 3% of YOUR money VIA the guy selling the stuff.

Security is not the killer growth hack of Paypal, it is convenience.

People don’t want to type out 16-digit card numbers, 4-digit expiry dates and 3-digit security codes just to buy an iPad. The fact that security on information molded in plastic is minus 100% is just gravy.

If you’ve never heard of Alipay, that’s because you are outside of China. Alipay is Paypal but better.

How does Alipay Make Money?

Image: The Financialist

Don’t believe me? It’s not proof, but let’s start with the only up to date number I have: Paypal’s market cap is $48bn. Ant Financial, which is the holding company for Alipay, is already valued privately at $60bn.

How Alipay is Yahoo biggest embarrassment

Even worse than having had their ass handed to them by Google.

Alipay is the payment vehicle for Alibaba. You can check out my blog on Alibaba versus Amazon for background info.

Yahoo used to own 40% of Alibaba, the world’s largest ecommerce platform. That business contained Alipay, arguably worth a third of the total. The relationship started promisingly, with a big US Multinational throwing its support behind an up and coming internet platform that ran Yahoo China. But it quickly soured after one of Yahoo’s innumerable changes of personnel.

Jack Ma, dropping his nice guy image, shifted Alipay out of Yahoo in 2011. Like that, he picked Yahoo’s pockets of billions. Don’t laugh too much though, if you ever invest in money China, this could happen to you to. When the good guys steal your money, imagine what the crooks do.

poor yahoo no alipay

Image: Josh Hallett

Using the excuse of the regulator requiring all payments firms to be domestic, Alibaba implied that its hands were tied. Yahoo, moving in an unfavourable legal environment, negotiated the liquidation of its stake in Alibaba as slowly as possible. The prices agreed were mostly fair for the slice of pie they were selling, but Alibaba had already eaten their fill.

Preparing for a listing

Was Jack Ma’s excuse legitimate? Possibly.

In 2014 Alipay was rebranded as Ant Financial. It has raised capital privately twice. Most recently $4.5bn in April 2016 – which is where the $60bn valuation comes from. The firm is hinting at an IPO.

If it lists domestically in China, a volatile and restricted market, then Jack Ma was telling the truth. There’s no reason to list in China only except regulation. If it lists in New York or London, then the only thing to do is call bullshit.

Most likely it will list in China and Hong Kong and we will never really know the truth.

How Big is Alipay?

All my numbers are out of date. You’ll get new data during an investor day Alibaba is planning in June, which I’ll try add a link to then. Back in 2014, Alipay claimed 700m accounts, 350m users, 80m daily transactions and annual purchase volume of $778 billion. iResearch reported that they had 49% share of Chinese online payment services.

Alipay market share

Image: iResearch

The unfortunate thing about Chinese data is it is generally not trusted. China estimated its total internet users in 2014 at under 700m and the number of people buying online as only a little over 360m. As you can see Alibaba and Alipay generally declare user numbers that appear to be 90-110% of the total out there. This may simply reflect corporate data that is more up to date.

The only fresh reference I have seen since then is that Alipay now has over 450m users.

How Does Alipay Work?

One of the top ways to pay in China is cash on delivery. So you order your toaster, a guy brings it to your door and you pay the delivery guy cash.

This is an economy with a deficit of trust.

Alipay offers an online escrow system. Your money is held by Alipay until you have received the product. The merchant has confidence the cash is there before despatch, and receives payment if you do not complain within 7 days of delivery. Alipay goes as far as checking your tracking information.

Also unlike PayPal, Alipay is free for smaller users of its platform. As your total monthly transaction value rises, then so does the charge. But even at its maximum, its less than half what PayPal charges, around 1.2%.

PayPal versus Alipay is a great example of profits versus market growth. PayPal charges the maximum the system can tolerate because it’s a powerful and hard to displace online payments network. Alipay, currently run by Alibaba, is operating as a facilitator. Its effectively subsidising smaller users because it is costing THEM money to move YOUR money. Once Ant Financial is separate, we may see the rates it charges rise significantly.

Then again you may not. Apple Pay charges the Western credit card companies a fifth of a percent (0.2%), but operates in China at less than half that (0.07%). When you operate in China, unless you are an absolute monopoly, you are going for volume, not margins.

In terms of bricks and mortar retail, Alipay let’s users pay for their KFC chicken or dry cleaning with a quick scan of a QR code, the square bar codes that predate NFC. Doesn’t sound overly secure to me, but hey probably about on a par with swiping a credit card.

Ant Financial

How does Ant Financial make money?

Image: Ant Financial

There is more to Ant Financial than Alipay. I’m going to list seven of its business units:

  • Alipay
  • Alipay Wallet
  • YueBao – a money market vehicle
  • Zhao Cai Bao – a financial services platform
  • Sesame credit – imagine a Chinese FICO
  • Ant Micro – a micro loan provider
  • MYBank – a private bank

Government Mandated Pots of Gold

You don’t need me telling you there is money in financial services. The biggest markets anywhere are in money. So if you can get a cut of it, you are sitting pretty, like a toll bridge on the yellow brick road. The room for disruption is also enormous. Existing providers are nearly always operating like PayPal and trying to take as big a bite as they can get away with. Financial services enjoy a flywheel effect similar to Uber and its drivers – the company with the most liquidity offers the best prices and wins the most volume.

China is a particularly special sort of opportunity.

The local currency, the Renminbi or Yuan, is not convertible into dollars. So what did people do when they wanted to get their money out? They bought dollar denominated copper or coal and moved that around instead. Part of the trouble with Chinese corporates is that historically there was so much money to be made buying say, Aluminum in a warehouse in Rotterdam, that they were quite happy to pretend to run a highly unprofitable coal plant or plastic factory on the side.

Imagine, the plastic factory gave you an excuse to buy and sell raw materials outside of China i.e. a right to buy and sell foreign currency.

Alipay coal train

Image: Peter van Den Bossche

The government have cracked down on these fun and games, leaving many junky companies and bad debts.

However, one game still in play is the way that it sets deposit and lending rates for the banks.

Let me repeat that. The government decides, within narrow bands, what the Chinese banks are going to pay on deposits and what they can charge on loans. And the gap isn’t small, last I saw the benchmark one-year lending rate was 4.35% and the deposit rate was 1.5%. Only last October did it scrap the cap on the deposit rate.

The Chinese government decides the profits its banks get to make. This led to other quirks such as say, a bank is allowed to lend $10bn in June, therefore they lent every cent of it on 1 June to maximize their revenue!

Back when deposit rates were 3%, it was quite easy for a non bank intermediary to step in, buy money market paper and offer 6% interest to its customers.

That is precisely where YueBao, Chinese for leftover treasure, came in.

Bubble & Squeak

Formed in 2013, Yuebao picked up 250 billion yuan in deposits and 49 million users in six months. In 2015 this had exceeded half a trillion yuan, or over 90 billion USD. How could it not really? It offered customers double the return the banks offered wrapped up in a slick little app and backed by one of the strongest brands in China.

Slowly China is reforming its financial system, but don’t hold your breath. They are masters at announcing nothing and then changing all the rules on a Sunday after you have asphyxiated.

How Does Alipay Make Money?

  1. It dominates the Chinese online payment system. Some suggest that not accepting Alipay is why Uber is #2 in China, a payment failure Uber have only been able to correct earlier this year.
  2. Alipay resolves trust issues through the use of escrow.
  3. They have wrapped themselves around the consumer, online, offline, savings and loans.
  4. It offers its services free to small users of the platform and makes its revenues on larger users.
  5. Alibaba disclosed that in the March 2016 quarter Ant Financial lost money due to a step up in marketing investments – so it is not yet making any profits.

Yet is the critical word here. When you dominate a market of this size, making money is no more difficult than turning on the tap. Though perhaps a tap wrapped in barbed wire is a better analogy – people will scream. Expect to hear more from Ant Financial. It is already leveraging its ecosystem in China to expand overseas.

You know ETrade, but did you know they sell your trades to a third party? Yep  go here to find out more about ETrade and how Robinhood makes money.

Or maybe you are considering starting up a restaurant or food start up – if you are check out how food makes money.

Yuen Lo

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