Universidad del Pacífico

Departamento de Economía y Finanzas

Sección: A
2022 – II

Ant Financial Case

Team Assignment # 1

Team 5:

Sebastián Zapata

Gerald Campos

Lorena Tacunan

Maricielo Oscanoa

Luis Mendoza

Mariska van Erkelens

Teacher:

Fanny Mariana Díaz Galindo

Sem. Fintech

September, 2022
1. What factors contributed to the diversification of Ant Financial (Ant) into many
product lines? (Success Factors key to the growth of Ant’s products). What pain points
Ant’s products try to solve and what capabilities Ant leverages or builds in addressing
these pain points

To begin with, it is important to understand China's contemporary context in which Ant

Financial has been developing. First, the majority of China’s banks were owned by the state,
and capital flows out to the large state-owned enterprises. Also, because of the high overhead
and personnel expenses, traditional banks tended to focus only on market segments offering
the highest margins.

Second, problems in the financial sector were further compounded by the lack of an
appropriate credit-profiling system, which would form the basis for banks to properly manage
moral hazard and adverse selection externalities to handle a healthy economy. This is, the
search of inclusiveness is the ideal to reach Pareto and distributive efficiencies. According to
Chen, 2 billion people do not belong to the banking system in developing countries around
the world. Furthermore, only 10% of the population in developing countries have credit cards
and 21% among those with financing needs were able to obtain loans.

Under this situation, there was a significant group of companies and clients willing to receive
credit from non-traditional sources. Given the rise of the internet industry, Fintechs are one of
the main drivers for connecting funds to these unattended majorities. Some reasons
contributed to the rapid developments of the fintech industry, including advances in
technology, proliferation of digital and smart devices, growth in the number of fintech service
providers, and the enactment of policies and regulations that were conducive to the growth of
digital finance.

Ant Financial managed to establish 3 kinds of products: Alipay (China’s answer to PayPal),
MYbank (an online banking system), and Yu’e Bao (a money market fund). Each of these
were designed to fulfill specific needs that together represent a new kind of lifestyle. Given
these services, Ant Financial present some main advantages:

- Scenario Based Prototyping: Ant Financial made extensive use of “scenarios” which
refere to use cases for applications and software—in developing, testing, and refining
fintech solutions, thereby attracting users for the technology to gradually become
mainstream.
- Breakthroughs in Credit Profiling: Develop innovative, efficient and scalabel credit
profiling such that inclusive finance is reached. With low population coverage, the
current credit profiling system in China was far from perfect. Ant Financial’s Zhima
Credit was dedicated to the development of a complete credit system in China.
- Processing Capabilities and Risk Management: Ant Financial used new breakthroughs
in data analytics and artificial intelligence in order to provide “intelligent” customer
service under timely efficient systems.

In this sense, the innovative perspective and the search of inclusive finance work as fuel to
success: new data analysis perspectives, credit profiling strategies and processing
management allows them to fill the aforementioned gap in China’s financial market.
2. What regulatory challenges did Ant face in China? What are the regulators'
concerns?

First, as the development of fintech in China lagged behind other countries, therefore, the
regulatory framework for this relatively new sector was in its early stage of development and
some sub-sectors remained poorly regulated. This caused the quality of industry professionals
to decline and questionable transactions to arise. Also, since the banks were mostly state-
owned and traditional, the laws implemented for online banking were established mainly for
these traditional banks. The priority given to traditional banks and the lack of risk-
mangament expertise meant that regulations for the fintech sector lagged behind industry
advances.

Therefore, the fintech regulatory framework was an uncertain landscape for Ant Financial.
Indeed, as said by Hang Jia, Senior Director of Ant Financial’s International Business
Division, when they were communicating with regulators about what could be done versus
what could not, the regulators might not give them a clear answer, which added to the
uncertainties involved in the regulatory front.

On the other hand, another concern was the deregulation of the RMB where the Chinese
currency was devaluing, which could cause chaos in the foreign exchange market. Finally,
due to the innovations in credit-profiling techniques driven by data analytics, Ant Face could
have dealt with issues in regard of data privacy. For this reason, the company sought to
strictly adhere to the regulatory standards with these measures: i) in order not to violate data
security, they ask the explicit consent from users for the use of personal data to protect the
consumers; ii) to safeguard users’ data and information, they established solid data security
standards and procedures enhanced by data analytics; and iii) to overall security, they
established a robust technical support for data security with data classification,
desensitization, encryption, anti-tempering, auditing and risk evaluation.

3. What are the challenges and opportunities of Ant’s globalization strategy?

First, it's important to note that as of 2020, overseas operations still account for less than 5
percent of Ant's revenue. Fintech has struggled to realize its international ambitions, with
investments in markets from the UK to India and south-east Asia. But like many other
companies that have succeeded in the vast Chinese market without international competitors,
it represents a great challenge to replicate that national success in a globalized world where
competition is much broader. Therefore, a key strategy would be to take advantage of large e-
commerce companies to invite and facilitate their customers to use Alipay (Financial Times,
2020).

Ant Financial has 7,000 employees worldwide, of which 1,500 are involved in risk
management. The company's Alipay division lost less than 0.001% of its capital (which was
significantly lower than that of its rivals and other payment companies), but maintaining
those numbers along with global growth may be the company's biggest challenge. One of Ant
Financial's areas of focus is Chinese tourists, who spent an estimated $215 billion in 2015,
and Ant Financial has partnered with Alipay to open up local wallets in the local economy for
peer-to-peer transactions.

There are a lot of regulations and if they want it to happen they have to have partnerships
with local companies, but that's probably not possible in many countries. Tencent is the local
wallets in Hong Kong and South Africa. In South Africa, since Naspers is the most important
investor in the gener, they have the opportunity to do so. The same is true for Hong Kong due
to its proximity to China, but they are challenged to provide this service to all other countries.

The group's current approach is to partner with other fintech organizations around the world
to legalize currency changes transferred online to the Alipay online wallet, a strategy that will
suffice until regulators ban the group because it plays a crucial role in the country's monetary
policy.

According to Ant Financial, the best way to increase or continue growth is to invest in
developing/emerging countries such as India, Thailand or South Korea, where the
organization has established strategic partners. The strategy is in line with Ant Financial's
globalization, but that could all change if regulators pass a law that can control how the
organization operates. Organizations should consider alternative strategies that should be
maintained and implemented immediately if regulators anticipate any legislation requiring a
shutdown. We also believe that the company should build a stronger local team in
international countries in order to have greater acceptance.

References:

Zhu, Feng, Ying Zhang, Krishna G. Palepu, Anthony K. Woo, and Nancy Hua Dai. "Ant
Financial (A)." Harvard Business School Case 617-060, March 2017.

Financial Time (2020). “Ant faces challenges in reviving global expansion”.