Banking & Finance

In the money

Will the BAT troika become the oligarchs in China’s fintech space?

Ant-Financial-w

The world’s most valuable unicorn

Over the past 20 years, three companies have come to define contemporary China. They are the BAT troika of Baidu, Alibaba and Tencent.

They have certainly had some ‘down’ moments over the past couple of decades (just ask Alibaba’s Jack Ma who is retiring, willingly or otherwise, on September 10). But the overall direction has been upwards and at a meteoric speed that even their founders never envisaged when they respectively set up their companies in 2000, 1998 and 1999.

But their success is attracting domestic detractors who are starting to question the extent of the power they wield. In retrospect, such criticisms may prove to be an early warning sign that the BAT troika will end up following the same path as the increasingly embattled US tech giants known as FAANGs: Facebook, Apple, Amazon, Netflix and Google.

Over in the US, the House of Representatives opened antitrust hearings in mid-June to determine whether four of the five FAANGs are stifling competition and penalising consumers. The Department of Justice has launched an investigation into Amazon and Google, while the Federal Trade Commission will examine Apple and Facebook.

The FAANGs’ higher-ranking officials have already tried to play the China card in a bid to avoid being dismantled. In May, Facebook COO, Sheryl Sandberg, told CNBC that “while people are concerned with the size and power of tech companies, there’s also a concern in the United States with the size and power of Chinese companies and the realisation that those companies are not going to be broken up”.

This month, Sundar Pichai, Google’s CEO argued along similar lines to CNN. “There are many countries around the world, which aspire to be the next Silicon Valley,” he commented “And they’re supporting their companies too.”

Yet back in China, the very same arguments about the suffocating effects of monopolies are rearing their head. One important voice has just joined the fray: Weiyangx.com, an influential news portal run by the fintech lab of Tsinghua University’s PBC School of Finance.

In a lengthy article published on June 18, an anonymous columnist complained that the BAT troika behave like oligarchs in the fintech sphere to the long-term detriment of the economy and consumers. The article highlighted how their incredible financial firepower means they can (and do) buy up or invest in just about every promising start-up going.

Indeed Alibaba-backed Ant Financial’s $14 billion financing round in 2018 not only ranked as the world’s second largest fintech deal of the year (after Blackstone’s $17 billion acquisition of Thomson Reuters financial data business), but also boosted its M&A war chest.

In any start-up’s early days, the author acknowledged, such BAT investment is a boon for its targets, but he then argues that the future outcomes for the local fintech industry might prove less healthy. New entrants will increasingly struggle to gain ground against Alibaba and Tencent, in particular – which will either buy them or kill them by imitating their technology, he opined.

“Their investment and M&A strategy is a type of siege, which will lead them to control fintech,” the author pointed out. “They’ll eventually become a bottleneck preventing new entrepreneurs from coming through.”

“These monopolies will depress innovation within the fintech eco-system. Big tech authoritarianism will also impact ordinary consumers. How can there be a fair financial pact in an oligarchic financial system?”

The author references similar arguments from a book about Alibaba’s Ant Financial by Huang Yiping, professor of economics and deputy dean at Peking University. Huang has also argued that new entrants will struggle to replicate Ant Financial’s scale and reach.

Huang points out that the Chinese government let the fintech industry develop unchecked for years before finally clamping down on peer-to-peer (P2P) lending in 2018 (see WiC457). This crackdown has severely impacted the smaller fintech players, but the larger ones remain as powerful as ever.

According to Analysys data, the duopoly of Alipay and WeChat Pay accounted for 92.7% of third party digital payments in China at the end of 2018. Third party payments are now so huge they have eclipsed retail sales spending: Rmb47.2 trillion ($6.8 trillion) compared to Rmb38.1 trillion at the end of last year. As Thomas Friedman pointed out back in 2017, even Chinese beggars use QR codes to plead for funds on the mean streets of Beijing.

Across the border, the Hong Kong Monetary Authority is wary of the impact the duo might have after last year’s liberalisation measures, which created six virtual banks. The new players – which include Alibaba and Tencent-backed consortiums – will be regulated like normal banks. The regulator has also warned the tech giants that they must strike “an appropriate balance between the desire to build market share and the need to earn a reasonable return on assets and equity and not to engage in predatory tactics”.

All three of the BAT companies have tried to pre-empt potential antitrust investigations at home by changing the way they operate across the wider fintech space. It may ultimately prove to be their saving grace. As Fortune China journalist, Derek Zhang, recently wrote, they have stopped trying to disintermediate the banks completely in favour of becoming partners in their digital transformation instead.

Baidu has made the most drastic move. Last year, it sold a majority stake in its financial services arm Du Xiaoman to a consortium including the Agricultural Bank of China, Taikang Insurance and the Carlyle Group.

The Sino-US tech war means that the emerging markets and Europe have become the favoured hunting ground for foraging abroad. Ant Financial learned its lesson the hard way after the Committee on Foreign Investment in the United States blocked its $1.2 billion attempted acquisition of funds transfer firm MoneyGram in early 2018 (see WiC393).

Its attention has switched to the UK, which makes sense given that Accenture recently described London as the fintech capital of Europe. In 2018, the UK attracted 50% of China’s European investments or $3.9 billion in total.

The biggest deal so far this year has been Ant Financial’s acquisition of World First, which the Financial Times pegs at $700 million. The company, founded in 2004, provides foreign exchange and money transfer services. It has serviced 50,000 Chinese exporters, enabling them to collect payments from around the world.

Tencent has just participated in the fifth venture capital fundraising round for TrueLayer. According to S&P Global Market Intelligence it was one of four entities that invested $35 million in TrueLayer, which provides the technology to build financial applications that connect up with bank data, and helps to verify accounts.

Another recent Tencent investment is Argentina’s Bancar Tenologica, which develops mobile banking apps. According to S&P data, Tencent was the sole investor in the group’s fourth venture capital round this April when it invested $44 million.

And then there is Airwallex, which became a unicorn after receiving $100 million of financing in March. Tencent is also one of the investors in the Australian firm, which provides international money transfers that help companies to reduce their FX transfer costs.

Survey after survey shows there is all to play for in the fintech space. EY’s third Biennial Fintech Adoptions Trends survey, published this June, also reveals that China leads the global pack in key areas. Its digital payments adoption rate stands at 87% compared to a 64% global average and just 46% in the US, which ranks 24th.

WeChat Pay continues to become a more pervasive part of everyday life in China and has notched up 900 million monthly active users. The applications keep growing: witness the popularity of its ‘Scan to Order’ mini-program that enables users to scan a QR code on a restaurant menu, order their food via the same Tencent smartphone app and automatically settle the bill via their WeChat Pay account.


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