JOHN MASON: Ant Financial - The Disrupter
Ant Financial - The Disrupter
- Ant Financial Services Group, the Chinese originated "biggest financial-technology firm in the world," may be the catalyst for major changes in the US banking system.
- Ant, like Amazon and Apple and others, is a new "modern corporation" that focuses on the intangibles of an industry and thrives off of scale economies.
- With the exception of four or five banks, the United States banking system is not really ready for the disruption Ant might bring.
Many of us have been looking for a vision of the future of the banking system, given the growth in computer technology and the spread of information.
It has been argued that the banking industry is a natural to be swallowed up in the information age because finance is basically nothing more than information.
Well, I now have one version of how this future might work itself out. And this version includes the idea that there will be one primary “disrupter” that breaks down the barriers and that all the other major players in the industry will have to follow suit.
Now we have that disrupter: Ant Financial Services Group, founded by Chinese billionaire Jack Ma.
Ant, according to Stella Yifan Xie of the Wall Street Journal, “has become the world’s biggest financial-technology firm, driving innovations that let people use their phones for buying insurance as easily as groceries, enabling millions to go weeks at a time without using physical cash.”
As a consequence, Ant “handled more payments last year than Mastercard, controls the world’s largest money-market fund and has made loans to tens of millions of people. Its online payments platform completed more than $8 trillion of transactions last year — the equivalent of more than twice Germany’s gross domestic product.”
Playing that kind of a role in world financial markets raises many concerns. One of the major ones is that Ant is not regulated like a bank. This allows Ant to get away with all sorts of things, while other organizations must face regulatory scrutiny that keeps them seriously contained.
Ant’s response is “We are not a bank and don’t want to become a bank.”
“Ant executives reject the notion their company is acting like a bank without oversight. They say they are simply bringing financial services to people the banks have ignored.”
Ant “says it wants to be known not as a financial conglomerate but as a technology provider or 'lifestyle platform' with future profits coming mainly from fees from institutions using its technology.”
Whoa… this sounds like something else we have heard from some other “technology providers.”
In fact, I have been writing a lot about these “technology providers” and how they are shaping up what I have called the new "modern corporation."
These new “modern corporations” create their new organizations focused upon two things: intangibles and financial engineering. All the rest of the institutions fold into these differentiators.
The “intangibles” part of this, of course, refers primarily to intellectual capital applied in networks and platforms that are remarkable in their ability to generate substantial scale economies.
For example, Ms. Xie tells us that more than 620 million people use Alipay, Ant’s payments platform. And, this is just for starters, because 620 million people is just a small number of the people the system can ultimately serve, and at marginal costs close to zero. That is what scale does for you.
And, Ms. Xie goes on, “Once people’s money moves from conventional bank accounts into their virtual wallets, much of it doesn’t return.”
As we have seen over and over again, once people get comfortable with operating online, they don’t return to former technologies.
Furthermore, as Amazon (NASDAQ:AMZN) and others have shown, the networks created produce network relationships that can be drawn on for other products and services… even if the products and services have very little in common with one another.
In this version of the future, this is what the major United States banks are going to have to face up to when it comes to FinTech. And the reality of the situation is, that this world is already here… we just have to work out the details.
Let me extend this version of the future into the current US banking scene.
Alistair Gray writes in the Financial Times that “US regional bankers face rising shareholder disapproval over dealmaking in the sector, clouding the prospects for further consolidation between the country’s 5,600 lenders.”
“While Washington is removing regulatory barriers to deals and the boost to profits from lower taxes is giving managers more financial firepower to pursue them, shareholders are far from convinced.”
In my “hypothetical” version of the future, this situation may be arising due to a separation in the goals of “regional bankers” and their shareholders.
The regional bankers realize that scale is going to be extremely important in the future of banking… especially if they are going to stay relevant… and feel the need to enlarge their organizations in the fastest way possible… through mergers & acquisitions.
Thus, using the new tools being provided to them by Washington, these bankers are looking for deals and pushing for deals that will increase their base so that they can be more competitive in the world of the new “modern corporation.”
The “push” is producing deals that are not as rich as the shareholders would like and, as a consequence, the efforts of bank executives are not getting the response that they would like. The stock prices for acquiring banks are declining as deals are announced.
“To see a stock market reaction like that is bad for bank M&A,” quotes Mr. Gray.
But it may be the case that the shareholders are not seeing what the bank managements are seeing concerning the future. I fear that investors are not really ready to start “betting” on which banking institutions will achieve the scale that is needed to remain a competitor in the vision of the world that I am presenting.
And why should they if even the press is failing to see what an “Ant” dominated future of computer technology and information platforms might mean for these banks? The ironic thing about Mr. Gray’s article, at least in the print version, is that the picture accompanying the article shows an ATM - an electronic substitute for conventional branch banking. Oh, well!
I have just presented one version of the future of banking in the Internet Age. However, Ant Financial Services Group is real and Mr. Jack Ma is not one to back off pushing the limits of banking to their extreme. Here, as in other technological areas, China may be on the cutting edge of where commercial banking and financial transactions are going.