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March 2018	Citi GPS: Global Perspectives & Solutions

Chinese BigTech and Financial Services

The presence of Chinese Internet giants Baidu, Alibaba, Tencent, and JD.com (BATJ) in finance is striking if we consider that (1) China’s largest e-commerce platform also runs China’s largest mutual fund (Yu’e Bao by Ant Financial), and (2) the Chinese social messaging app facilitates large volumes of money transfers / payments (WeChat by Tencent).

BATJ have made rapid progress in Internet finance, backed by agile tech platforms and a high degree of service integration (leveraging their ecosystem to offer scenario-based services). Notably, each one of them differed in their initial roots – Alibaba and JD.com started off with an e-commerce platform, Tencent expanded its social media messaging platform, while Baidu built on its online advertising business model as a search engine.

Over the years, these Chinese BigTech firms have established a comprehensive multi-licensed financial ecosystem, including a payments interface, wealth management products, consumer finance, and insurance products, among others. Figure 29 compares their primary financial services offered.

Figure 29. BATJ — Internet Finance Product Offerings

	Baidu	Alibaba	Tencent	JD.com
Internet payment	Baidu Wallet	Alipay (2004)	Tenpay (2005)	JD Payment (2012)
	(2014)		Weixin pay (2014)	JD Wallet (2012)
			WeChat / QQ
			Wallet (2014)
Internet wealth	Baidu Finance	Yuebao, Taobao	Licaitong (2014)	JD XiaoJinKu
management	(2013)	Iicai (2013)		(2014)
	Bai Fa (2013)	Zhaocaibao,		XiaoBai Finance
		Yu'ebao (2014)		(2014)
		Ant Fortune (2015)
Internet insurance	Bai An Insurance	Zhongan (2013)	Zhongan (2013)	JD Insurance
	(2015)			(2014)
Online lending	Baidu loan (2013)	E Dairong with	Tenpay microloan	JingBaoBei (2013)
		CCB (2007)	(2013)	JingXiaoDai (2013)
		Ali micro loan	QQ loan (2015)
		(2010)
		Jie Bei (2015)
Consumer financing	Umoney (2014)	Tmall instalment	Weilidai (2015)	JD BaiTiao (2014)
		(2014)
		Ant check later
		(2014)
Crowdfunding	Baidu Baizhong	iZhongchou (2013,	QQ Gongyi (2014)	JD Crowdfunding
	(2014)	renamed from		(2014)
		Taoxinyuan in
		2014)
Digital-only Bank	Baixin Bank (2015)	MYbank (2015)	WeBank (2015)	—
Credit scoring	—	Sesame Credit	Tencent Xinyong	Xiaobai Xinyong
		(2015)	(2015)	(2015)
Source: Citi Research

We believe BATJ enjoys considerable competitive advantages that help position them favorably when competing with incumbent banks, including (1) a large and captive user base; (2) low online acquisition cost; (3) big data customer insights (helps product pricing and risk management); and (4) Internet banking licenses.

Additionally, Baidu, Alibaba, and Tencent (BAT) have also invested in new online banks that do not need physical branches and have fewer overheads. It is expected that the technological advantage of BAT provides them with a unique advantage to leverage technologies such as big data and cloud computing, which can help tailor user experiences and improve credit assessment procedures.

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40		Citi GPS: Global Perspectives & Solutions			March 2018
		Figure 30. Comparison of Online-only Banks Setup by Internet Giants
			Baixin Bank	MYbank	WeBank
		Shareholding	CITIC Bank (70%)	Alibaba (30%)	Tencent (30%)
			Baidu (30%)	Fosun (25%)	Baiyeyuan (20%)
				Wanxiang (18%)	Others (30%)
				Jinrunzichan (16%)	Liye (20%)
				Others (11%)
		Launch date	Nov. 2015	Jan. 2015	Jun. 2015
		Overview	A unique tie-up of a	Positioned as the bank	Sells financial products for
			search engine giant with	"not for the rich, but for the	other institutions and
			traditional bank.	little guys". The pure	grants small loans to
				online bank offers smaller	consumers
				loans than regular banks
				by leveraging its cloud-
				based model, and does
				not accept applications of
				over RMB5mn.
		Loan offerings	Small personal loans	Focused on offering 3	Small personal loans and
				kinds of loans which	auto loans
				indirectly tie in with
				Alibaba's core business:

(i) for people in rural areas (ii) for Internet start-ups

(iii) for Tmall and Taobao sellers

Source: Citi Research

[A] Ant Financial Builds an Empire of Services

Ant Financial is one of the largest FinTechs in the world. Its strategic vision is based on (1) leveraging the power of the Internet and big data; (2) empowering financial institutions to create an ecosystem; (3) serving both SME and individual customers; and (4) providing inclusive financial services.

Ant Financial’ s competitive advantages include a large user base; an incubator for vital, innovative financial products; and a world-class financial cloud technology platform. In addition, it is a pioneer in the DT Era, employing data to drive innovation.

Figure 31. Ant Financial Ecosystem

		DINING		GAMING
PUBLIC					ONLINE
WELFARE
					SHOPPING

FINANCIAL

SERVICES

CAMPUS

MEDICAL

SERVICES

Ant Financial Has Penetrated Into More

Consumption Scenarios in Daily Life

Transactions from Alibaba China retail marketplaces in 2015 take up less and less TPV of Ant Financial

RETAIL
STORES						CREDIT
				RED PACKET/
		DAILY HOUSEHOLD
		SERVICES		MONEY TRANSFER

TRANSPORTATION

MOBILE

TOP-UP

Source: Citi Research

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March 2018	Citi GPS: Global Perspectives & Solutions

Driving Platform Effects with comprehensive products

–Sesame Credit – launched January 2015, in 11 months to >100m cumulative users

–Yu’e Bao – launched June 2013, in 20 months to >100m cumulative users;

–Insurance – launched November 2010, in 31 months to >100m cumulative users

Yu’e Bao: convenient cash management service – This money market fund provides convenient cash management service for users and provides a foundation for other wealth management services. Yu’e Bao is the largest in the world, with assets of ~RMB1.5 trillion (~$230bn) and a cumulative user base of about 330 million, which translates to an average c.RMB4,500 ($710) per user. Yu’e Bao’s real advantage is its strong technology edge, which enables highfrequency usage owing to great user experience and ever-expanding user scenarios. The platform also benefits from Big Data, which helps in liquidity risk management, such as analysis of future redemption ratios.

Zhao Cai Bao: P2P lending platform – Started in 2014, the platform lets small businesses and individual borrowers directly raise loans from investors provided that a financial institution has guaranteed the loan and made sure money will be paid back (each loan is divided across a maximum of 200 investors). Average loan sizes are ~RMB70,000 ($11k), with durations of 3-12 months and annualized interest rates of 3-5%.

Hua Bei (Ant Check later) – Launched in December 2014, Hua Bei is an online consumer loan product offered to Alipay users for purchase of goods or services approved by Ant Financial (usually at Taobao or Tmall). The maximum lending amount is up to Rmb30k ($4,750), with an interest-free period of 50 days, and average loan size is ~RMB3,000 ($475) per borrower. Huabei has achieved good synergy with Ali’s e-commerce platforms by effectively promoting one’s consumption. As of the first half of 2017, the outstanding loan balance of Hua Bei reached Rmb160 billion ($25bn). Meanwhile, the big data derived from the transactions via Hua Bei also allows Ant Financial to provide more customized financial services to its customers.

Jie Bei – Jie Bei is an online cash loan product launched by Ant Financial in 2015. The loan applications are made on the Alipay platform, with loans being directly transferred to the borrower’s Alipay account. The credit line ranges from Rmb1k to Rmb50k (~$150-$8k), with typical loan duration of up to 12 months, depending on the borrowers’ Sesame Credit Score, and average loan size is c.RMB700 ($110) per borrower. As of mid-2017, the outstanding loan balance of Jie Bei had reached ~Rmb100 billion ($16bn). However, Ant Financial suspended the Jie Bei service for certain users in early 2018 as a result of regulatory tightening on cash loan products and imposed a leverage cap for online micro credit companies (MCCs) by including all loans financed via off-balance sheet ABS (leverage of Ant Financial’s MCC subsidiaries – i.e., the lending entities for Huabei and Jiabei – reached ~70x as of 1H17, compared to the regulatory cap of 2.3x).

MYbank – Launched in January 2015, MYbank offers three kinds of loans that tie in with Alibaba’s core businesses: (1) for people in rural areas; (2) for Internet start-ups, and (3) for Tmall/Taobao sellers. MYbank strictly operates small/midsized ticket loans and does not accept any loan application over RMB5 million. The bank offers no physical branches and operates entirely on a cloud

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computing platform using Big Data to compute loan amounts and terms, thus saving significantly on operational costs. Loan application processes are quick (usually lasting just three minutes), following which, if approved, the loan amounts are wired to the individual’s bank account. As of June 2017, the bank funded loans of RMB115 billion in value, with an average loan size of ~RMB17,000 (~$2,700).

Figure 32. Plans to Evolve into a Global FinTech Company

PAYMENTS		WEALTH MANAGEMENT		FINANCING

ALIPAY ANT FORTUNE

520mn	330mn	17%
Annual Active Users(1)	Cumulative	YoY AUM per
	Users (1)	active user
PayPal 2	Charles Schwab 3
203mn active users	10.2mn active users

ANT CHECK LATER

ANT MICRO LOANS

100mn	73%
Annual	use Ant
Active	Credit Pay 6+
Users (1)	times in 1 yr.
China Merchants Banks 3
46mn cards in circulations

INSURANCE			CREDIT REFERENCE
			SESAME CREDIT
392mn	43%		257mn	95%
Annual	YoY premium		Activated Users (1)	YoY growth
Active Users (1)	growth
	per user
Ping An 3			FICO Score U.S. Credit Accounts (3)
131mn active users			~250mn

(1)During the 12 months ended March 31, 2017, or by the end of March 31, 2017

(2)During the 12 months ended March 31, 2017; Source: Form 10-Q

(3)As of fiscal year ended December 31, 2016

Source: Annual Reports, IR websites, Company Reports, Citi Research

Ant Financial’s growth strategy can briefly be summarized as follows: (1) capture urbanization trends, serve rural areas, drive financial inclusion; (2) collaborate with local partners through technology transfer, make financial services more accessible;

(3) generate dynamic data from the business, in turn feeding the business ecosystem. The aim is to serve 2 billion customers globally in ten years.

[B] Tencent's WeChat Is China's App for Everything

Weixin (WeChat) Pay – Tencent owns and operates Tenpay, which allows users to transfer money through WeChat, a social messaging app. With 980 million monthly active user accounts as of September 2017 (+16% YoY), Tencent’s Weixin mobile messaging app has become a powerful multi-function platform, including for integrating third-party services, including payments and financial services. Weixin Pay and QQ Wallet are consumer-facing mobile payment solutions that expand use cases for social (red envelop gifting and money transfers), Online to Offline (O2O) services, and online finance. Based on a Tencent survey, about 70% of respondents spend more than RMB100 ($15) per month in payments and transfers, with the most popular function being digital red envelope money (85% of respondents), followed by payments (58%) and money transfer to contacts (57%). WeChat credit card (payment processed via scanning QR code) was used by 20% of respondents, and 14% used Weixin Pay to pay off credit cards.

WeBank – In 2015, Tencent launched WeBank, China’s first online-only bank, based in Shenzhen. WeBank is essentially a “connector” of individuals and small enterprises to banks and financial institutions. Key services include offering investment products, such as money market funds, and granting loans to small and medium-sized companies, farmers, and individuals. In May 2015, WeBank launched its first loan product, Weilidai, providing microcredit to users amounts up to RMB200k ($30k) without the need for guarantee or collateral, at a daily interest rate of 0.05% (approximately 20% annually). WeBank promotes its services on WeChat and QQ, its dominant social media apps. As of June 2017, WeBank extended total loans of RMB200 billion ($30bn) in value with an average loan size of RMB8,000 ($1,250).

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March 2018	Citi GPS: Global Perspectives & Solutions
Figure 33. Weixin Pay and QQ Wallet
Medical Insurance	Mobile in-store	Q Coin	Restaurant
Payment	Payment	Top-up	Booking
		Micro
		Credit Card
		Repayment
		QQ VAS
	Go-Dutch
	Weixin	QQ
	Pay	Wallet

Source: Company Reports, Citi Research

Figure 34. Tencent Ecosystem

	Hardware Manufacture				Startups
	•	WeChat hardware			•	Open platform
					• Co-working space
	Agriculture				AI
	•	Agriculture customization			•	Smart device
	•	Authentic verification system			•	AI software
	Business promotion
	•	Smart mall
	•	WeChat credit card	Industry		Innovation
			improvement		service
				WECHAT
			E-commerce		Community
			/ financial		service
	Financial Service		industry
							Communication Service
	•	WeChat Payment					WeChat life
	•	WeChat Bank					• Government service
	E-commerce				Transportation
	•	JD.com			•	Didi Dache
	•	Weidian			•	Ticket service

• Cross-border shops

Source: Company Reports, Citi Research

Figure 35. WeChat Stats and Trends

Daily Logged in Users:	17%
902,000,000
Daily Logged in Users (Sep-17)	YoY Growth

WeChat Usage Time:

90 mins.

50% of users use WeChat for at least 90 minutes a day

Red Packets Sent Daily:

2,350,000,000

Lunar New	Valentine’s Women’s		520	Qixi	Mid-Autumn Typical
Year’s Eve	Day	Day	Day	Festival	Festival	Day

Monthly Avg. Spent on Red Packets Per Person

¥370	¥580	¥380
Youth Users	Typical Users	Senior Users

Source: Company Reports, Citi Research

© 2018 Citigroup