An Observation of Chinese E-Commerce Giant Alibaba in Alternative Finance

By Wei Wu on 19th February 2015

P2P/Marketplace Lending

Jack Ma, the Chairman of Alibaba Group, launched its financial initiative in the US by providing credit to local SMEs through a partnership with Lending Club. The loan size is from 5,000 USD to 300,000 USD which goes around from 1-6 month without collaterals. The website indicates that these loans charge 0.5%-2.4% per month which equals to 6%-28.8% APR for local SMEs. The highlight of the business is every loan application is estimated to be completed in 5 minutes by taking advantage of suppliers’ transaction data generated on Alibaba’s platform.

An Observation of Chinese E-Commerce Giant Alibaba in Alternative Finance

Alibaba as a group has a legendary history in the Chinese Internet commerce sector. From nothing to a $25 billion IPO, Alibaba and its founder Jack Ma is a famous example in China of how a layman merchant became influential in a state dominated economy. Although it is the rumoured that Alibaba received investment from State families before IPO, it is evident that Alibaba and its online shopping service has huge popularity in China, starting from younger generation to their parents, for having 6 billion GBP sales in 24 hours on its B2C and C2C sites. Half of my friends in China are both buyers and sellers in Alibaba’s platform. It is evident that Alibaba is not only successful in being an e-agent, but has also accumulated vast amounts of historical data through transactions on its platform. 

Interestingly, the lending activities are only planned within the territory of the US and are originated via the purchase from Chinese sellers. With Chinese sellers it is easy to understand that Alibaba is utilizing transaction data to analyse lending risks. This is the first time that Alibaba has partnered with a foreign intermediary in financial activities.  It could be a sign that Alibaba might start to work with more partners overseas out of China to expend its financial network. Before partnering with the US lending intermediary, Alibaba started overseas projects in Australia, Brazil, Russia and India.  It is conceivable that a future plan in the EU might materialize as well, if suitable service providers can be identified.

There have been six units in Ant Finance, the financial arm of Alibaba, which was valued at $25 billion USD in Alibaba’s IPO filing, after Alibaba was approved to set up a privately owned bank towards the end of 2014. It was the first time that a private sector company might formally own a bank in the traditional sector. Apart from banking services, Alibaba already built successful financial instruments on its platform such as payment, wealth management, micro-lending, credit bureau and insurance tools. At the end of 2014, 230 billion RMB transactions had been facilitated via its payment facility calls Alipay. In addition, up to June 2014, Alibaba’s fund Tian Hong had 550 billion RMB in assets under management. In 2011, Alibaba set up two micro-lending companies in China and disbursed 200 billion RMB loans within 4 years. Then Alibaba created its quasi-securitization through financial derivative vehicles for 50 billion RMB which was not popular until its launch. Separately, Alibaba and Goldman Sachs have jointly launched a 500 million RMB loan program exclusively for female entrepreneurs through its 10,000 Women initiative to support female entrepreneurs in China.

Alibaba started its data management operation in 2002, which grew dramatically along with its marketplace business in the coming 10 years. Between 2007 and 2010, Alibaba had been working with Chinese banks in giving online MSME loans through its credit scoring system. Those partnerships ended with the establishment of micro-loan companies by Alibaba in 2010. As reported by Chinese media, Ali loans run for 123 days in average at 12-18% APR for loans below 1 million RMB which may be applied for throughout the day and night. A report from ICBC reveals that Alibaba has more than 60 million active users on its B2B websites, 2 million individual sellers and 700 million Alipay users. In transaction, Alibaba requires personal identity proof, custom and bank statements, customer’s comments, sales record, electricity and utility bills and even marriage status to be uploaded. That information has subsequently become an invaluable resource for credit reference data in lending. With its bulk of historical and panel data, Alibaba has been consulted by State Council and National Statistics Bureau for data reference. Weeks ago in the middle of January, Alibaba was granted a permit to run credit bureau services as a private company which is the first time in China this type of service has been permitted for any group except People’s Bank of China. It is estimated that Ant Finance is to be listed in China in the near future. Lei Peng, CEO of Ant Finance in Alibaba Group, highlighted its strategy as “an additional player” in financial sector. On the contrary, in an earlier speech Jack Ma described Alibaba as a “reformer” in financial service provision to banks. Regardless of how strongly they demonstrate their ambitions, Alibaba is expanding geographically in both global and Chinese sub-urban areas with its commerce and finance arms. On one hand, in October 2013, Alibaba announced 10,000 county programmes which aim to invest 10 billion RMB in 5 years building services hubs in 100,000 villages within 1,000 selected counties. On the other hand, in 5th February, Ant Finance purchased 25% equity of One97 Communications, which is the leading online payment provider in India. In addition, at the end of 2013, Alibaba and Apple claimed a discussion had started around implementing Applepay in China, where payment services are highly regulated. All those movements aptly demonstrate that it is Alibaba’s ambition to expand.  

Alibaba has provided a few hints around its initiative in Europe on trade and intellectual property protection. In 2007 Alibaba built its first EU office in Geneva before setting up an office at Level 39, Canary Wharf, London, at the end of 2013. In a meeting with PM Cameron and other UK officials, Jack Ma mentioned potential cooperation with British brands like Thorntons, Walkers and Typhoo. During its IPO roadshow in London, senior officers of Alibaba expressed their interest in buying minority stakes in local companies as a first step to entering new markets. There are strong prospects for Alibaba becoming an investor in the FinTech or alternative finance sectors in UK in the near future.

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