Ant Group is synonymous with the Alipay ‘super app’ that has over one billion individual users, 80 million merchants and over 2,000 partner financial institutions. According to iResearch, it is the largest commercial app in China. As well as supporting payments, and Ant Group’s broader suite of financial products (like investments, insurance and credit), there are over 1,000 daily life services and two million mini-programs that can be accessed via Alipay.
The Alipay e-wallet can make payments via any existing e-wallet balance, linked debit or credit cards, Yu’ebao balance or Huabei credit line. Typical payment use cases include commercial payments to merchants, person-to-person transactions, money transfers and financial transactions. Transaction methods include in-app payments, online payments or QR codes or smart POS terminals.
Alipay in a global context
Ant Group payments volumes are considerably higher than global large-scale payment peers such as Visa, Mastercard and Paypal and its growth has also been stronger over the past couple of years.
However, the revenue Ant generates from these volumes are actually lower than these peers, due to substantially lower pricing and differences in business models.
The Ant Group business model is much more diversified than in the past, such that digital payment and merchant services now account for just over a third of the overall revenue pool (which is lower than the revenues generated by Ant Group’s CreditTech activities). However, Ant’s payments revenues continue to grow nicely, rising 20% pa from 2017-2019, and 13% yoy to H1 20.
Key industry drivers
Convenience, low cost and the high penetration of digital and mobile technology are expected to drive digital payments volumes in China. According to iResearch, 87% of mobile internet users in China also undertook payments transactions in 2019; total digital payments transaction volume this year was RMB201tn (cUSD29tn), implying that Alipay had 55% market share. Note that total non-cash payments volume totalled RMB3,779tn in 2019, primarily via card transactions, credit transfers, electronic bill payments etc, so digital payments still has significant headroom for growth.
The main growth driver of digital payments in the future will be getting existing users to transact more, rather than bringing new users to the format. This growth will be driven both by consumers and businesses, with consumption payments (such as e-commerce) and financial payments (such as the purchase of investment and insurance products) likely to outstrip personal payments (such as peer-to-peer transfers).
The upshot of these growth numbers is that total annual digital payments volume should more than double from 2019-2025 to reach RMB412tn (USD59tn) in the middle of this decade, but with a much more balanced mix in the future.
Digital payments industry success factors
As per the results of our survey of 29 payment fintechs across 7 emerging markets, top success factors for the industry include first-mover advantage, funding access and operational efficiency. We think Ant Group is well-placed in all these areas given that it has been at the forefront of the digital payments revolution in China, funding access had been strong with various equity injections from international players, and its group operating margin has improved considerably, from 20.2% in 2017 to 34.3% in H1 20.
Major reasons for Alipay’s success to date
Reliable infrastructure: On its 11.11 global shopping festival in 2019, Alipay processed a peak of 459,000 transactions per second.
High security: In the 12 months to 30 June 2020, Alipay’s fraud loss rate was below 0.0006bps (ie a total of RMB7mn on a transaction volume of RMB118tn). According to iResearch, this was the lowest fraud loss rate of any large global payments provider.
A multitude of use cases: As of June 2020, the Alipay app had over 2 million mini programs, covering all facets of consumers’ daily needs such as mobility, government services and so on. Over 60% of Alipay users come to the app for these daily life services.
Significant merchant network: 80mn merchants are currently signed up with Alipay, benefitting from the firm’s large customer base, user engagement and insight tools, and marketing aids such as loyalty programmes and mass events. For example, in July 2020, Alibaba launched the 7.17 Shopping Festival in China, a nationwide marketing campaign allowing offline merchants to distribute e-coupons. Approximately 7 million merchants participated in this event. Similarly, merchants can assess consumers’ creditworthiness by accessing Alipay’s Zhima Credit score.
Cross-border capabilities: Via partnerships with trusted merchant acquirers, e-wallets, banks and other service providers in foreign markets, Alipay allows merchants and consumers to receive and send money in over 200 countries. In the year to June 2020, Alipay facilitated RMB622bn of such transactions (equivalent to 0.5% of its domestic transaction volume).
Plotting the road ahead
As per our survey of EM payment fintechs, the top strategic objectives over the next 3 years include increasing technology investment, geographical expansion and introducing new products and services. Ant Group’s strategic objectives broadly match with EM peers, with a strong focus on expanding user base, investing in technology and expanding cross-border payment and merchant services.
Regulation: The payments industry in China is highly regulated by entities such as PBOC and SAFE, and the regulatory framework is in a state of flux. At the same time, the industry itself is continually evolving. The introduction of a digital currency in China is being assessed by the PBOC; if successful, this initiative could have profound implications for payments providers. Standardisation and promotion of interoperability of different payments platforms could also put Alipay’s leadership position at risk.
Transaction economics: Over the past few years, Alipay has paid away between 75-82% of its revenues to other financial institutions. The firm’s gross margin is highly sensitive to the price other institutions charge for their services.