Content uploaded by Lerong Lu
Author content
All content in this area was uploaded by Lerong Lu on Mar 20, 2018
Content may be subject to copyright.
How a Little Ant Challenges Giant
Banks? The Rise of Ant Financial
(Alipay)’s Fintech Empire and
Relevant Regulatory Concerns
Lerong Lu*
Electronic banking; Financial regulation; Financial services; Mobile payments
Abstract
This article examines the development, business model, legal and regulatory
aspects of the world’s largest fintech company—Ant Financial Services Group
(Ant Financial or Alipay). It offers an insight into how the buoyant fintech sector
is reshaping the landscape of the financial industry as well as the challenges fintech
has posed to traditional banks. Moreover, it points out certain financial risks
associated with Ant Financial’s innovative services that merit attention from global
financial regulators.
Introduction1
Over the past decade, the world has witnessed the rapid rise of financial technology
(fintech). Fintech refers to the application of internet technology and innovation
in financial activities such as payment, lending, wealth management and insurance.2
In 2016, global investments in fintech companies totalled $24.7 billion across 1076
deals.3Owing to the emergence of internet technologies including big data, cloud
computing, artificial intelligence and Blockchain, the financial industry has been
largely reshaped in relation to both the contents and delivering methods of financial
services. For example, online peer-to-peer lending (P2P lending) platforms enable
lenders and borrowers to conduct lending activities directly without the involvement
of banks, which brings benefits for both sides of lending. Investors on Funding
Circle, a leading P2P lending marketplace in the UK, are able to earn an estimated
annual return of around 7.2%, which can be a good substitute for bank savings.4
On the other hand, some borrowers having limited access to bank lending, such
*Dr Lerong Lu, Teaching Fellow in Financial Law, The Dickson Poon School of Law, King’s College London;
PhD and LLM (University of Leeds); LLB (ECUPL); Attorney-at-Law, PRC. Email at: lerong.lu@kcl.ac.uk.
1For the convenience of international readers, the Chinese currency (yuan or CNY) in this article is accompanied
by a conversion into US dollars (USD or $). The exchange rate between USD and CNY was 1:6.67 on 21 August
2017.
2Lerong Lu, “Financial Technology and Challenger Banks in the UK: Gap Fillers or Real Challengers?” (2017)
32 J.I.B.L.R. 273, 273.
3KPMG, The Pulse of Fintech Q4 2016: Global Analysis of Investment in Fintech (21 February 2017), p.6 available
at: https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/02/pulse-of-fintech-q4-2016.pdf [Accessed 2 November
2017].
4Funding Circle available at: https://www.fundingcircle.com [Accessed 2 November 2017].
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors12
as small businesses, can obtain enough funding via P2P online lending. Another
example of fintech revolution is the proliferation of mobile payment facilities such
as Apple Pay, Alipay and WeChat Pay, which allow consumers to use their
smartphones to pay for goods and services online or in store. It makes payment
faster and safer compared with traditional payment options like cash and bank
cards. According to the prediction of a consulting firm, the volume of mobile retail
payments in the US will surge from $122 billion in 2015 to $319 billion in 2020.5
Clearly, the latest developments of fintech have contributed to increasing
accessibility, affordability and convenience of modern financial services.
Table 1: Top 10 fintech unicorns, ranked by valuation6
FoundedHeadquartersValuationBusiness areaCompanyRanking
2004Hangzhou, China$60 billionMobile payment
and others
Ant Financial1
2011Shanghai, China$18.5 billionP2P lendingLufax2
1998Beijing, China$7 billionOnline financial
services
JD Finance3
2014Beijing, China$5.9 billionOnline electronics
retailer which lets
Qufenqi4
buyers pay in instal-
ments
2010San Francisco, US$5 billionOnline payment
processor
Stripe5
2011San Francisco, US$4 billionP2P student loan re-
financing
SoFi6
2007San Francisco, US$3.5 billionFree online credit
reports
Credit Karma7
2013New York, US$2.7 billionOnline health insur-
ance
Oscar Health8
2005New York, US$2.4 billionMobile payment
and wallet
Mozido9
2006Amsterdam,
Netherlands
$2.3 billionOnline payment
processor
Adyen10
Table 1 lists the top 10 fintech unicorns around the world, which are mainly
dominated by Chinese and American tech firms.7Recently, China has emerged as
the leader in fintech innovation as it accounts for nearly half of the global digital
payment market as well as three-quarters of online lending transactions.8Based
in Hangzhou, Ant Financial Services Group (Ant Financial or Alipay) tops the list
as the world’s most valuable fintech business, which renders it the best example
to illustrate how fintech companies have been rewriting the existing rules of the
financial industry. In 2003, it started as Alipay, which was originally a simple
5P. Rudegeair, “J.P. Morgan Chase Deal Enables Link to PayPal Accounts”, Wall Street Journal, 21 July 2017,
p.B10.
6This table is compiled by the author by referencing O. Williams-Grut, “The 27 fintech unicorns from around the
world, ranked by value” (1 August 2016), Business Insider UK available at: http://uk.businessinsider.com/fintech
-unicorns-ranked-by-value-2016-7 [Accessed 2 November 2017].
7“Unicorn” refers to a start-up company which has a valuation over $1 billion.
8“The age of the appacus: Fintech in China”, The Economist, 25 Feb 2017, p.65.
The Rise of Alipay’s Fintech Empire and Relevant Regulatory Concerns 13
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
online payment tool attached to Taobao.com, the online shopping website operated
by the e-commerce giant Alibaba. Over 14 years, Alipay has gradually developed
into a fully fledged fintech business empire covering online and mobile payment,
online-based banking, wealth management and credit rating. According to one
estimate, Ant Financial is worth $75 billion, which is more than the market
capitalisation of Goldman Sachs.9Thus, it is considered as the most influential
disrupter of traditional financial institutions. Alipay’s mobile payment business
controls over 50% of the Chinese market, where it contests fiercely with rivals
including Tencent’s WeChat Pay, UnionPay, Apple and Samsung.10
This article aims to explore the world’s most successful fintech company, Ant
Financial Services Group, from both economic and regulatory perspectives. It will
examine how its fintech empire challenges the businesses of existing financial
institutions as well as relevant legal and regulatory issues. It is of particular interest
to legal practitioners and researchers in the area of banking and finance. This article
proceeds as follows. The first section traces the historical development and
expansion of Ant Financial over the past 14 years, while the second section provides
an in-depth analysis of the current business model of Ant Financial’s fintech empire,
which includes four pillars: mobile payment, wealth management, online-based
banking and credit rating. The third section continues to examine Ant Financial’s
competitive yet complementary relationship with existing lenders. The fourth
section focuses on regulatory issues relating to novel fintech products and services,
which will draw attention from regulatory authorities. Finally, a conclusion will
be drawn.
The evolution of Ant Financial (2003–17)
In 2003, Alipay was launched by Alibaba as a payment tool to support the operation
of its online shopping platform, Taobao.com.11 In the early 2000s, e-commerce
and online shopping first gained popularity in China but there existed a problem
in terms of the lack of trust between online sellers and shoppers who did not know
each other, which was considered as the biggest hurdle of the industry. Accordingly,
Alibaba invented Alipay to enable guaranteed transactions and thus increased the
safety of online purchases. When consumers buy goods on Taobao.com, they are
required to transfer their money to Alipay. Alipay, after receiving the money, will
instruct the online sellers to dispatch the goods. As consumers receive the goods
and send confirmation to Taobao.com, Alipay will release the payments to the
sellers. Serving as a payment middleman between e-sellers and their customers,
Alipay has solved the long-term trust issue in China’s thriving online shopping
industry, contributing to the explosive growth of Taobao.com in the following
years. Alipay was said to help Taobao.com defeat eBay in the Chinese market.12
At this stage, Alipay was only an integrated payment tool of Taobao.com.
9L.Y. Chen, “Jack Ma’s Finance Business may be Worth more than Goldman Sachs” (20 September 2016),
Bloomberg available at: https://www.bloomberg.com/news/articles/2016-09-20/jack-ma-s-finance-business-may-be
-worth-more-than-goldman-sachs [Accessed 2 November 2017].
10 “Ant Financial: consider its ways”, Financial Times, 12 March 2016, p.18.
11 Alipay available at: https://ab.alipay.com/i/dashiji.htm [Accessed 2 November 2017].
12 M. Green et al, “The case study: How Taobao bested eBay in China: Dealing with a powerful new rival”,
Financial Times, 13 March 2012, p.10.
14 International Company and Commercial Law Review
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
In December 2004, Alipay was spun off from Taobao.com and operated by
Zhejiang Alipay Internet Technology Company.13 Alipay’s website (http://www
.alipay.com) went online, which marked its transition from an online shopping
guarantee tool to an independent payment system. After that, Alipay started to
provide payment services for other online retailors outside the Alibaba Group. In
2005, China experienced fast expansion of its e-commence industry as the annual
transaction volume surged to CNY 620 billion ($92.94 billion) from CNY 440
billion ($65.96 billion) in 2004.14 Alibaba’s chairman, Jack Ma, when attending
the 2015 World Economic Forum at Davos, Switzerland, commented that, owing
to the wide use of Alipay, China’s e-commerce industry had entered a safe payment
era.15 Evidently, the robust growth of e-commerce cannot be achieved without the
existence of a secure and efficient online payment system. In the same year, Alipay
established co-operative relationships with mainstream payment service providers
including Visa and other major banks.
After Alipay assumed its independent status, users on Taobao.com were still
Alipay’s major source of customers for a long time. However, Alipay began to
work with a large number of online businesses, including gaming platforms (e.g.
the Nasdaq-listed The 9 Limited which operated the World of Warcraft), airline
and hotel booking websites as well as other business-to-consumer (B2C) shopping
websites. At the end of 2006, there were more than 300,000 merchants accepting
Alipay as a payment method.16 People started to recognise Alipay as an independent
payment network similar to Visa, MasterCard and UnionPay. As of September
2007, over 50 million people registered their Alipay accounts.17 The annual
transaction amount through Alipay reached CNY 47.6 billion ($7.14 billion),
representing 47.6% of the online payment market in China.
In 2008, Zhejiang Alipay Internet Technology Co Ltd was renamed as Alipay
(China) Internet Technology Co Ltd and it formed partnerships with hundreds of
foreign merchants from Japan, Singapore, the US, Canada, Australia, New Zealand
and South Korea.18 Together with China Construction Bank, Alipay announced
credit services for online sellers at Taobao.com who could borrow money up to
CNY 100,000 ($14,990.93). This means that Alipay tapped into financial services
outside payment. In August 2008, the user number of Alipay increased to 100
million, with a 2 million average daily number of transactions.19 In the same year,
Alipay started to offer one-stop payment services for utility companies to allow
their customers to pay for water, electricity, gas and telecommunication bills. It
also provided payment supports for popular B2C shopping websites such as
Amazon and JD.com. Owing to the fast expansion, the annual transactions through
Alipay surpassed CNY 130 billion ($19.49 billion).20 In 2009, Alipay increased
13 Alipay available at: https://ab.alipay.com/i/dashiji.htm [Accessed 2 November 2017].
14 “2005: A Key Year for China’s E-Commerce Industry” (7 May 2005), Oriental Morning Post available at: http:
//tech.sina.com.cn/i/2005-05-07/0948600190.shtml [Accessed 2 November 2017].
15 “2005: A Key Year for China’s E-Commerce Industry” (7 May 2005), Oriental Morning Post available at: http:
//tech.sina.com.cn/i/2005-05-07/0948600190.shtml [Accessed 2 November 2017].
16 “Over 300,000 businesses accepted Alipay” (1 February 2007), Beijing Times available at: http://tech.sina.com
.cn/i/2007-02-01/03591363850.shtml [Accessed 2 November 2017].
17 Alipay available at: https://ab.alipay.com/i/dashiji.htm [Accessed 2 November 2017].
18 Alipay available at: https://ab.alipay.com/i/dashiji.htm [Accessed 2 November 2017].
19 Alipay available at: https://ab.alipay.com/i/dashiji.htm [Accessed 2 November 2017].
20 “Taobao to see transactions top 100b yuan in 2008” (16 June 2008), China Daily available at: http://www
.chinadaily.com.cn/bizchina/2008-06/16/content_6764882.htm [Accessed 2 November 2017].
The Rise of Alipay’s Fintech Empire and Relevant Regulatory Concerns 15
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
its presence in China’s online travel booking industry by working with three leading
travel agencies (Ctrip, Elong and Mango). It also co-operated with YouBang
Insurance to become involved in the online insurance sector. In July 2009, the
users of Alipay exceeded 200 million, doubled in one year.21 As of December 2009,
the number of external businesses (outside Alibaba Group) that accepted Alipay
reached 460,000. Moreover, the total annual transaction amount peaked at CNY
287.1 billion ($43.04 billion) or 49.8% of the total market share.
In the 2010s, Alipay embarked on an exponential trajectory as online shopping
continued to grow at a rapid pace. In 2010, Taobao.com occupied 80% of China’s
e-commerce market with 170 million registered shoppers and a revenue of over
CNY 20 billion ($3 billion) that mainly came from online advertising and other
fee-paying services.22 Alipay, therefore, enjoyed steady growth as nearly all
shopping money on Taobao.com were settled through its platform. However, at
this juncture, Alipay decided to transform itself again into a comprehensive financial
services provider. It aimed to cover every aspect of the life of Chinese people such
as utility bill payments, credit card repayments, administrative fine payments,
tuition fees payments and online charity donations. As of December 2010, Alipay’s
user numbers surpassed 550 million. At the same time, Alipay and UnionPay
released a pioneering payment service called “Instant Pay”, which allows credit
card holders to make online payments without opening online banking accounts.23
In May 2010, the People’s Bank of China (the central bank) announced the first
group of internet finance companies that were granted third-party online payment
licences.24 Alipay, along withother 26 payment companies, acquired licences from
the central bank, meaning the official endorsement of its fintech business.
In 2011, Alipay expanded its payment services from online to offline.25 It released
the “Barcode Pay” service to allow shoppers to use their smartphones installed
with the Alipay app to make payments in store. Retailers are able to receive money
by scanning the barcode generated by their customers’ Alipay app. They could
either scan the digital barcodes by smartphones or, more professionally, by a
specially designed barcode-reading gun attached to the cash register. Clearly, the
launch of Barcode Pay greatly benefits retailers and consumers by offering a
convenient and low-cost payment option. The barcodes automatically generated
by the Alipay app are one-off, namely they change constantly to improve the
security level. The users have to set up a passcode for activating the service each
time and, more recently, Alipay started to allow shoppers to use fingerprint or
facial recognition to verify their identities before paying money. Shoppers can
access the money in their Alipay accounts or connect the app with their credit or
debit cards. The arrival of Barcode Pay marked the new mobile payment era.
On 11 November 2011 (the online shopping festival in China which is widely
known as the Single Day or Double Eleven), Alipay broke the world record as it
21 Alipay available at: https://ab.alipay.com/i/dashiji.htm [Accessed 2 November 2017].
22 Green et al, “The case study: How Taobao bested eBay in China”, Financial Times, 13 March 2012, p.10.
23 “Online payment entered into instant pay age” (28 July 2011), Xinhua available at: http://news.xinhuanet.com
/newmedia/2011-07/28/c_121733865.htm [Accessed 2 November 2017].
24 H. Lovells, “Third Party Payment Licences in China—Are they within the Grasp of Foreign Investors?” (June
2014) available at: http://www.hoganlovells.com/files/Uploads/Documents/14.06_Corporate_China_Alert_-_Third
_Party_Payment_Licences_in_China_-_Are_They_within_The_Grasp_of_Foreign_Investors_SHALIB01_1093411
.pdf [Accessed 2 November 2017].
25 S. Millward, “AliPay Invades China’s High Streets with Mobile Barcode Payments” (1 July 2011), Tech in Asia
available at: https://www.techinasia.com/alipay-mobile-payments [Accessed 2 November 2017].
16 International Company and Commercial Law Review
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
processed 33.69 million transactions within 24 hours, as the total transaction
volume at the T-mall shopping platform (a member of the Alibaba Group) amounted
to CNY 3.36 billion ($500 million).26 Accordingly, Alipay was ranked the largest
online payment system exceeding its American rival, Paypal.
Figure 1: Sales volume of Double Eleven shopping festival on Taobao (Unit:
CNY million)27
In May 2012, Alipay obtained a special payment licence for serving investment
fund companies.28 There are 50 fund companies accepting payments by Alipay,
covering 70% of the market share. In June 2013, Alipay released its mobile wealth
management platform called Yu’E Bao or Left-over Treasure, becoming an
immediate success. Within six months of its launch, more than 30 million people
signed up to Yu’E Bao.29 It was viewed by many Chinese, in particular the younger
generation, as an excellent substitute for bank deposits. Subscribers of Yu’E Bao
enjoyed 5% annualised return in 2013, while they could withdraw the funds at
anytime or use the money to pay for online purchases. The money put into Yu’E
Bao is invested in money-market funds managed by Tianhong Asset Management
Company, in which Alibaba Group owns a stake.
In September 2014, Alipay obtained a licence from the China Banking
Regulatory Commission (CBRC) to operate its new banking business called
MyBank.30 It is an online-only bank with no brick-and-mortar presence.31 On 16
October 2014, Ant Financial Services Group was established to replace Alipay
26 Alipay available at: https://ab.alipay.com/i/dashiji.htm [Accessed 2 November 2017].
27 The figure is compiled by the author based on the data derived from the websites available at: http://www.taobao
.com and http://www.alipay.com [Both accessed 2 November 2017].
28 Alipay available at: https://ab.alipay.com/i/dashiji.htm [Accessed 2 November 2017].
29 S. Rabinovitch, “Alibaba’s treasure draws in depositors”, Financial Times, 21 December 2013, p.14.
30 G. Wildau, “China’s First Online-only Lender Launched”, Financial Times, 6 January 2015), p.16.
31 L. Lu, “Private Banks in China: Origin, Challenges and Regulatory Implications” (2016) 31 Banking and Finance
Law Review 585, 592.
The Rise of Alipay’s Fintech Empire and Relevant Regulatory Concerns 17
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
(China) Co Ltd.32 It resulted in the formation of the largest global fintech company
and Alipay has become a segment of Ant Financial’s business realm. In the same
year, the daily number of transactions via Alipay exceeded 80 million and Alipay
had 190 million active users. In early 2015, Sesame Credit (or Zhima Credit) was
launched by Ant Financial; it is a big data credit rating system which allocates
consumers and small businesses a credit rating score based on their transactional
data on Alibaba’s shopping platforms as well as their Alipay’s payment history.33
Sesame Credit is of particular help for small businesses which have limited access
to bank loans due to the lack of trading data, as now they can use Sesame Credit
score to apply loans from various financial institutions.
The bright business prospect of Ant Financial enables it to perform well in the
capital market. In July 2015, Ant Financial Services Group finished the A-round
equity financing as it attracted billions of dollars from China’s National Social
Security Fund, Guokai Finance, four major insurance companies, Primavera Capital
and Shanghai GP Capital.34 It put Ant Financial at a valuation of $45 billion, similar
to that of other successful tech companies such as Uber or Xiaomi. In April 2016,
Ant Financial closed its B-Round private equity financing by raising $4.5 billion
and its valuation increased to $60 billion.35 Most recently, it completed a $3.5
billion debt round to fund the company’s international expansion, including the
acquisition of MoneyGram, a cross-border payment service company based in
Texas, for $1.2 billion.36 Currently, Ant Financial is planning an initial public
offering as early as late 2018, depending upon regulatory approvals.37
The business model of Ant Financial
As Alipay was converted into Ant Financial Services Group, it expanded its
business scope from online payment to other financial services ranging from
banking to credit rating. Equipped with the internet technology and innovative
business model, Ant Financial possesses obvious competitive advantages and has
quickly become a major player in the industry. In China alone, Alipay dominates
the country’s $5.5 trillion mobile payment sector (54% of the total market share).38
It has been a strong contender to rival payment operators such as UnionPay, Visa,
MasterCard and Paypal. Moreover, the money-market fund behind Ant Financial’s
Yu’E Bao holds assets worth $165.6 billion, exceeding JP Morgan’s US government
money-market fund ($150 billion), which used to be the largest investment fund.39
Obviously, Ant Financial has built up a fintech ecosystem not only replicating
most functions of traditional banks but also providing novel financial services with
32 Alipay available at: https://ab.alipay.com/i/dashiji.htm [Accessed 2 November 2017].
33 G. Wildau, “Alibaba eyes small business loans”, Financial Times, 29 January 2015, p.17.
34 S. Finance, “Ant Financial Completed A-Round Finance with Valuation over $45bn” (6 July 2015) available at:
http://finance.sina.com.cn/roll/20150706/030722596271.shtml [Accessed 2 November 2017].
35 G. Wildau, “Ant Financial raises $4.5bn in record fintech private placement” (26 April 2016), Financial Times
available at: https://www.ft.com/content/366490b4-0b7d-11e6-9cd4-2be898308be3 [Accessed 2 November 2017].
36 A. Kharpal, “Exclusive: Ant Financial close to closing a bigger-than-expected $3.5 billion debt round for
international expansion” (17 May 2017), CNBC available at: http://www.cnbc.com/2017/05/17/ant-financial-debt
-financing-round.html [Accessed 2 November 2017].
37 L. Lucas and D. Weinland, “Alibaba’s $60bn payments arm stalls planned IPO” (16 May 2017), Financial Times
available at: https://www.ft.com/content/25780a7c-3702-11e7-bce4-9023f8c0fd2e [Accessed 2 November 2017].
38 L. Lucas, “Tencent grabs mobile pay share from Alibaba”, Financial Times, 2 May 2017, p.14.
39 L. Lucas, “Chinese money market fund becomes world’s biggest” (26 April 2017), Financial Times available
at: https://www.ft.com/content/28d4e100-2a6d-11e7-bc4b-5528796fe35c [Accessed 2 November 2017].
18 International Company and Commercial Law Review
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
high quality, lower cost and greater accessibility. This section focuses on four
pillars of Ant Financial’s fintech businesses: Alipay (mobile payment system),
Ant Fortune (online wealth management), MyBank (online-based challenger bank)
and Sesame Credit (credit rating service). The analysis pays attention to how Ant
Financial has disrupted conventional financial services and occupied significant
market shares.
Alipay—mobile payment system
Alipay is still at the core of Ant Financial Services Group. Apart from serving as
a major online payment processing tool for e-commerce, Alipay has become a
common payment method for Chinese shoppers in store. The rapid shift to digital
payment is mostly due to the popularisation of smartphones, as nowadays 95% of
internet users in China go online via mobile equipment.40 Most physical stores
including supermarkets, restaurants and clothes shops, as well as online-to-offline
services such as taxi hailing and food delivering apps, accept mobile payments
offered by Alipay and WeChat Pay.41 Both Alibaba and Tencent (the parent
company of WeChat Pay) have signed up with millions of retailers in China and
beyond to accelerate the transition to the cashless society. For example, the US
coffee chain Starbucks now accepts WeChat Pay at all of its 2,600 shops across
China, with the exception of one café at the Alibaba’s headquarters office in
Hangzhou.42 Outside China, Alipay’s mobile wallet can be used in several countries
including the US, the UK, Japan, South Korea and Australia. In the UK, a number
of department stores including Harrods and Selfridges already accept Alipay.43
Using mobile payment has become a trendy lifestyle for many people, in particular
the millennials, whether they live in metropolises or small towns. It has even
become common for beggars on the streets to present a QR code to receive mobile
payment donations instead of receiving notes and coins.44 Clearly, mobile payment
has been a vital element and the gateway to the entire fintech ecosystem as other
fintech services are offered within Alipay’s or WeChat Pay’s E-wallet apps.
According to one estimate, the market scale of China’s mobile payment sector
was around CNY 38 trillion ($5.7 trillion) in 2016, which was 50 times larger than
that of the US ($112 billion).45 This is partly due to the limited non-cash payment
options at Chinese retailers as credit cards are not as popular as they are in the US.
In contrast, China’s mobile payment system has become extremely streamlined
and convenient, allowing millions of businesses and consumers to complete
transactions in a few seconds. Moreover, during the Chinese New Year, people
have the tradition of giving each other red envelopes with some lucky money
inside. In recent years, red envelopes have been digitalised as people now tend to
40 “The age of the appacus: Fintech in China”, The Economist, 25 February 2017, p.65.
41 L. Hook and G. Wildau, “China mobile payments soar as US clings to plastic”, Financial Times, 14 February
2017, p.12.
42 Lucas, “Tencent grabs mobile pay share from Alibaba”, Financial Times, 2 May 2017, p.14.
43 J. Crabtree, “How Alipay is helping London stores cash in on China’s Golden Week” (6 October 2016), CNBC
available at: http://www.cnbc.com/2016/10/06/how-alipay-is-helping-london-stores-cash-in-on-chinas-golden-week
.html [Accessed 2 November 2017].
44 G. Kai, “China’s mobile payment era: Costs and benefits” (11 May 2017), China Daily available at: http://www
.chinadaily.com.cn/china/2017-05/11/content_29295024.htm [Accessed 1 August 2017].
45 Hook and Wildau, “China mobile payments soar as US clings to plastic”, Financial Times, 14 February 2017,
p.12.
The Rise of Alipay’s Fintech Empire and Relevant Regulatory Concerns 19
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
send virtual red envelopes, a built-in function of Alipay or WeChat Pay apps,
rather than traditional red paper envelopes.46 Around the world, mobile payment
takes place in a variety of forms, including near-field communication (NFC or
contactless), QR codes and cloud-based pay, depending on different technologies
adopted. In Europe, mobile payment services usually embrace the NFC technology,
which means shoppers swiping their smartphones over a chip reader.47 In contrast,
most mobile payment transactions in China have been conducted through QR
codes generated by mobile payment apps. Consumers use their Alipay app to
generate a one-off QR code and then retailers will hold a special reading gun to
scan the QR code and complete the transaction (see fig.2 below). Alternatively,
some retailers print out their Alipay’s accounts (presented as QR codes) near the
counter for shoppers to use their smartphone cameras to scan and make payment.
Figure 2: A shopper uses Alipay’s QR Code to pay for his purchase
Ant Fortune—mobile wealth management platform
Ant Fortune, a wealth management platform accessed via smartphone apps, is
another pillar of Ant Financial Services Group. In August 2015, Ant Fortune was
released by Ant Financial when the company set out its strategic plan to become
a leading online financial services provider.48 Financial consumers can use the Ant
Fortune mobile portal to invest their money in money-market funds, investment
funds, fixed-term savings, crowdfunding projects, P2P loans and stock markets
(in Mainland China, Hong Kong and the US). Without charging commission fees,
Ant Fortune offers around 900 investment products from over 80 financial
institutions.49 It operates as a financial supermarket providing a one-stop investment
experience for financial consumers. As Ant Fortune works as a financial broker
46 Y. Yang, “Alibaba and Tencent open new front in red envelope war”, Financial Times, 30 January 2017, p.16.
47 Hook and Wildau, “China mobile payments soar as US clings to plastic”, Financial Times, 14 February 2017,
p.12.
48 Y. Wang, “Alibaba Finance Affiliate Launches Fund Investment Smartphone App” (18 August 2015), Forbes
available at: https://www.forbes.com/sites/ywang/2015/08/18/alibaba-finance-affiliate-launches-fund-investment
-smartphone-app/#115f657f6301 [Accessed 2 November 2017].
49 Wang, “Alibaba Finance Affiliate Launches Fund Investment Smartphone App” (2015).
20 International Company and Commercial Law Review
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
to match investors’ money with products offered by external institutions, it does
not become involved in investments or undertake market risks. In this respect, the
relationship between Ant Fortune and other financial firms such as banks, securities
firms, fund companies and P2P lending platforms should be perceived as
co-operative rather than competitive. Evidently, Ant Fortune has lowered the
threshold of wealth management services by offering a variety of investment
options to ordinary investors who have limited investment experience in the
financial markets and possess only a small sum of capital. With the help of Ant
Fortune, ordinary savers are able to establish their own investment portfolios by
relying on its artificial intelligence and professional advice.50 Therefore, Ant Fortune
has solicited 25 million users since its debut, 81% of whom are under the age of
36.51
Among hundreds of investment products available on Ant Fortune, attention
will be given to Yu’E Bao, a wealth management product based on money-market
funds and operated by Ant Financial itself. Depositors who move their savings
from bank accounts to a Yu’E Bao wallet can earn returns up to 15 times of banks’
interest rates.52 Yu’E Bao was launched in 2013 and, in less than one year, the
investment scheme had attracted CNY 400 billion ($59.96 billion) from Chinese
savers, making it a principal rival to dominant state-owned banks.53 Yu’E Bao is
working like an add-on of the Alipay app as users can deposit or withdraw funds
effortlessly by a simple touch. Money-market funds have high liquidity similar to
that of cash, while subscribers can earn handsome returns paid on a daily basis.54
As a result, Yu’E Bao became an instant success after its launch. Tens of millions
of customers have chosen to use Alipay E-wallet and Yu’E Bao as their default
banking accounts. At the end of 2015, the fast expansion of Yu’E Bao and other
mobile wealth management platforms contributed to the record-breaking value of
money-market funds in China—CNY 4.4 trillion ($659 billion).55 Obviously,
money-market funds have posed an enormous challenge to big banks and the
traditional wealth management industry which lost a large number of clients to
these rising fintech firms.
Mybank—online-based challenger bank
China’s banking sector has long been dominated by state-owned lenders which
are reluctant to lend money to small and medium-sized enterprises (SMEs).56 In
order to break up the state monopoly and increase competition in the banking
sector, the Chinese regulator has recently been encouraging qualified private
investors to set up new banks. As a result, Alibaba, partnering with other investors,
established a privately funded bank under the regulator’s pilot reform plan. The
banking arm of Ant Financial Services Group is called Mybank, which is an
innovative online-only bank. In June 2015, Mybank obtained its licence from the
50 M. Jing, “Ant Financial gears up for more wealth management” (9 September 2016), China Daily available at:
http://europe.chinadaily.com.cn/business/2016-09/09/content_26748999.htm [Accessed 2 November 2017].
51 Jing, “Ant Financial gears up for more wealth management” (2016).
52 “Foe or frenemy?” The Economist, 1 March 2014, p.75.
53 “Foe or frenemy?” The Economist, 1 March 2014, p.75.
54 The return of Yu’E bao is based on the interbank lending rate, which fluctuates freely overtime. See “The age
of the appacus”, The Economist, 25 February 2017, p.65.
55 C. Flood, “China tightens money market regulation”, Financial Times, 1 February 2016, p.10.
56 Lu, “Private Banks in China” (2016) 31 Banking and Finance Law Review 585, 586.
The Rise of Alipay’s Fintech Empire and Relevant Regulatory Concerns 21
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
CBRC with a registered capital of 4 billion yuan ($645 million).57 Ant Financial
holds a 30% stake in Mybank, while Fosun International Ltd and Wanxiang Group
own 25 and 18% of the new bank respectively.58 Mybank’s primary customer base
consists of SMEs, which have been underserved by mainstream lenders. It is among
the first group of new lenders that do not have brick-and-mortar physical branches,
allowing them to lower the operation cost and provide more convenient services
through online portals and mobile apps. By visiting Mybank’s website or using
its app, consumers can manage their current accounts (including investing money
into money-market funds), apply for credit loans and transfer money between
different banks without charge. Evidently, fintech provides Mybank with significant
competitive advantages over traditional lenders. Owing to the problem of
information asymmetry, large banks often refuse to lend to SMEs because borrowers
cannot provide valid information to demonstrate their credibility and thus fail to
pass relevant credit checks. However, through tracking the trading history of small
businesses which use the Alibaba e-commerce network, Mybank is able to evaluate
the credit situations of small firms based on the accumulated big data. Big data,
coupled with cloud computing, allows Mybank to make loan decisions in minutes.
The business model of Mybank is described by itself as “3-1-0”, namely, making
a loan application in three minutes, approving (or not) the application in one second
and with zero human intervention.59 The intelligent loan application process will
consider 100,000 indicators by analysing big data as well as going through over
100 predicting models and 3,000 loan strategies designed by Ant Financial’s
financial engineers.60 It is said to be more accurate and efficient than the traditional
credit checking process. Given its technological and data advantages, Mybank has
been growing rapidly since its establishment. As of February 2016, Mybank has
served over 800,000 small businesses with a combined loan volume of CNY 45
billion ($6.75 billion).61 In the latest financial year, it generated a net profit of CNY
315.5 million ($47.30 million) up from a net loss of CNY 68.7 million ($10.30
million) in 2015.62
Sesame Credit—big data credit rating service
The last pillar of Ant Financial Services Group is Sesame Credit. Sesame Credit
offers credit rating services to millions of personal consumers by utilising Alibaba’s
big data derived from Taobao and T-mall shopping platforms. At present, China
has not built up an official credit system for its citizens so Ant Financial has decided
to fill this gap by taking advantage of its enormous data reserve. Sesame Credit
plays an important role in Ant Financial’s fintech ecosystem as it supplements the
operation of other financial services. Sesame Credit can be accessed via Alipay’s
app or other co-operative merchants’ websites.63 With the authorisation of users,
57 “Alibaba-affiliated online bank get green light from China regulator” (27 May 2015), Reuters available at: http:
//www.reuters.com/article/us-alibaba-bank-idUSKBN0OC0-SI20150527 [Accessed 2 November 2017].
58 “Alibaba-affiliated online bank get green light from China regulator” (2015).
59 “Mybank Jin XiaoLong: SME Finance Is No Longer Difficult” (9 July 2017), China Finance available at: http:
//finance.china.com.cn/news/special/wtfh/20170709/4281638.shtml [Accessed 3 November 2017].
60 “Mybank Jin XiaoLong: SME Finance Is No Longer Difficult” (2017), China Finance.
61 Mybank available at: https://www.mybank.cn/#loan [Accessed 3 November 2017].
62 “Mybank Earned 315bn Net Profit Last Year, Lower than Tencent’s Webank” (8 July 2017), Netease available
at: http://tech.163.com/17/0708/13/COR0623V00097U7R.html [Accessed 3 November 2017].
63 Sesame Credit available at: https://www.xin.xin/#/detail/1-2-1 [Accessed 3 November 2017].
22 International Company and Commercial Law Review
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
Sesame Credit creates a credit score based on personal shopping data, payment
history on Alipay and other behavioural data from Alibaba’s e-commerce platforms.
Similarly to FICO, which aligns a credit core (300–850) to consumers by
mathematical algorithms, Sesame Credit allocates a score ranging from 350–950
to Alipay users. The credit score can be employed by users to borrow credit loans
from financial institutions and online P2P lending platforms up to CNY 300,000
($44,972.79).64 Apart from that, consumers who have higher scores on Sesame
Credit enjoy certain privileges such as expedited airport security checks and free
loaner umbrellas.65 If one person’s credit score is over 650 points, he or she does
not need to pay a deposit when renting a car.66 There are also other benefits for
high-score users such as fast hotel booking without submitting credit card
information to secure a room. Moreover, Chinese tourists can use Sesame Credit
scores as the proof of their financial capability, other than employment certificates
and bank statements, when applying for foreign visas from places such as Singapore
and Luxembourg.67 Currently, Sesame Credit has been widely accepted by thousands
of websites such as Airbnb to verify users’ identities and financial conditions.68
Conversely, certain wrongdoing (e.g. late bill payment and traffic violation) will
lead to the downgrade of credit scores, causing negative effects for its bearer.69
Ant Financial—banks’ “frenemy”
The financial industry has seen fierce rivalry between traditional banks and fintech
companies. Apparently, in some business areas, there exists direct competition
between Ant Financial and incumbent institutions, such as payment and savings.
The widely popular Alipay has surpassed the state-backed UnionPay in terms of
the number of processing offline payments.70 This means that Alipay’s virtual
payment system is de facto the largest payment network in China. Previously,
UnionPay had been leading the market of debit and credit card payments for two
decades as it was extremely difficult for competitors to break into China’s payment
sector. Even global payment providers such as Visa and MasterCard failed to gain
substantial market shares. Alipay, however, takes advantage of the popularity of
smartphones to override credit cards, winning the favour of millions of consumers.
In 2015, Alipay earned CNY 139 billion ($20.84 billion) from its payment service
department.71 Clearly, it made billions of payment fees which would otherwise be
earned by UnionPay. Although the rise of Alipay could be catastrophic for the
traditional payment industry run by dominant banks, it is beneficial for numerous
64 “Borrow a loan up to CNY300,000 using Sesame Credit” (1 September 2016), Sohu available at: http://www
.sohu.com/a/113129483_444830 [Accessed 3 November 2017].
65 Cheang Ming, “FICO with Chinese characteristics: Nice rewards, but punishing penalties” (16 March 2017),
CNBC available at: http://www.cnbc.com/2017/03/16/china-social-credit-system-ant-financials-sesame-credit-and
-others-give-scores-that-go-beyond-fico.html [Accessed 3 November 2017].
66 Sesame Credit available at: https://www.xin.xin/#/detail/1-0-2 [Accessed 3 November 2017].
67 “Alibaba unit to start credit-based visa application services for Luxembourg” (16 July 2015), China Daily
available at: http://usa.chinadaily.com.cn/epaper/2015-07/16/content_21301110.htm [Accessed 3 November 2017].
68 Airbnb available at: https://www.airbnb.co.uk/help/article/1222/verify-your-account-with-zhima-credit [Accessed
3 November 2017].
69 C. Ming, “FICO with Chinese characteristics: Nice rewards, but punishing penalties” (16 March 2017), CNBC
available at: http://www.cnbc.com/2017/03/16/china-social-credit-system-ant-financials-sesame-credit-and-others
-give-scores-that-go-beyond-fico.html [Accessed 2 November 2017].
70 G. Wildau, “Alipay bypasses China Unionpay on fees”, Financial Times, 1 August 2016, p.14.
71 Wildau, “Alipay bypasses China Unionpay on fees”, Financial Times, 1 August 2016, p.14.
The Rise of Alipay’s Fintech Empire and Relevant Regulatory Concerns 23
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
businesses and consumers which enjoy faster, safer and more affordable payment
services.
Besides, Ant Financial’s wealth management products based on money-market
funds form a big threat to banks’ deposit-taking businesses. As Yu’E Bao offers
an eye-catching interest return (over 4% annually) for its subscribers, millions of
savers have selected Alipay over other banks as the place to hold their current
accounts. This has resulted in direct deposit losses in billions, if not trillions, for
major state-owned banks, including Industrial and Commercial Bank of China,
China Construction Bank, Bank of China and Agricultural Bank of China (which
are collectively referred to as the Big Four). As of June 2017, the total market
scale of money-market funds in China reached CNY 5.11 trillion ($770 billion),
rising 18.09% from CNY 4.32 trillion ($647.61 billion) at the end of 2016.72
Obviously, a large proportion of the growth came from banks’ deposits. Under
strict state control, state-owned banks are only allowed to pay 0.30% annual interest
for demand deposits or 1.35–2.75% for term deposits (see Table 2 below).
Table 2: Bank of China CNY deposit interest rate73
Fixed-term depositsCurrent de-
posits
Type of deposits
5 Years3 Years2 Years1 Year6 Months3 Months
2.752.752.251.751.551.350.30Annualised inter-
est rate (%)
In sharp contrast, the annualised interest rate of Yu’E Bao varies from 2.3–6.7%
over its four-year history.74 As of July 2017, Yu’E Bao holds 260 million accounts,
making it the No.1 E-wallet in the world.75 As a substitute for banks’ current
accounts, Yu’E Bao allows users to deposit, withdraw and transfer money at any
time without charge. The expansion of Yu’E Bao has eroded the profits of Chinese
banks, which have long been exploiting the interest rate margin between the deposit
rate and lending rate, set by the central bank to protect the interest of state lenders.
In other words, Yu’E Bao has grabbed a large number of cheap deposits from
mainstream banks which have been the main source of profits. In June 2017, the
market scale of Yu’E Bao was around CNY 1.43 trillion ($214.37 billion),
exceeding the total deposit amount of China Merchant Bank (CNY 1.3 trillion,
$194.88 billion), the fifth largest lender in the country.76
Apparently, Ant Financial has become a huge threat to existing banks in terms
of payment and deposit businesses. This heated competition has led to the
decreasing profitability of Chinese banks in recent years.77 Therefore, the
relationship between Ant Financial and existing banks, to a large extent, can be
perceived as competitive. However, despite the rivalry status, Ant Financial has
72 Xinhua, “Outstanding Balance of Yu’ebao surpassed merchant bank’s personal deposits” (5 July 2017) available
at: http://news.xinhuanet.com/finance/2017-07/05/c_1121264650.htm [Accessed 3 November 2017].
73 This table is compiled by the author using data from Bank of China available at: http://www.bankofchina.com
/fimarkets/lilv/fd31/201510/t20151023_5824963.html [Accessed 3 November 2017].
74 Tianhong Fund (Yu’E Bao) available at: http://www.thfund.com.cn/fundinfo/000198 [Accessed 3 November
2017].
75 Alipay available at: https://bao.alipay.com/yeb/index.htm [Accessed 2 November 2017].
76 “Yu’E Bao Reached 1.43 Trillion Yuan, Near to the Deposit Amount of Big Four” (1 July 2017), Sina available
at: http://finance.sina.com.cn/roll/2017-07-01/doc-ifyhrttz1913643.shtml [Accessed 3 November 2017].
77 Reuters, “Fitch: Chinese Banks’ Profitability is Likely to Decline Further” (7 April 2017) available at: http:/
/www.reuters.com/article/fitch-chinese-banks-profitability-is-lik-idUSFit995515 [Accessed 3 November 2017].
24 International Company and Commercial Law Review
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
also contributed to the development of the banking industry in some respects. For
example, the online-based Mybank targets loan services for small and
micro-businesses, an area of business which has been ignored by state lenders for
decades. Thus, Mybank seems to play a supplementary role in the banking arena
by serving marginalised clients whose business competes directly with the
prosperous online lending sector, which also considers SMEs as their main
customers. The P2P lending sector in China had an outstanding loan amount worth
CNY 816 billion ($122.33 billion) by the end of 2016.78 It is clear that Mybank
helps the banking industry to expand its business boundary to contend with other
fintech firms. What is more, the development of Sesame Credit led to the
establishment of China’s personal credit system, which plays an important role in
strengthening the country’s financial infrastructure. At present, services provided
by Sesame Credit are essential for banks lacking effective methods to gauge credit
conditions of numerous individuals and small businesses. Ant Financial’s big data,
therefore, empowers Chinese banks to make loans in a more efficient manner. In
this regard, the businesses of Ant Financial and existing banks seem complementary
with each other.
Legal and regulatory issues relating to fintech innovation
Financial regulation in the fintech age should strike a good balance between
encouraging industry innovation, protecting financial consumers and preventing
systemic risks. As an increasing amount of deposits have been transferred from
existing banks to various fintech platforms including Ant Financial, regulatory
authorities have had to reform and upgrade the monitoring framework to
accommodate the latest developments in the financial industry. While pioneering
fintech services have brought greater convenience and better returns for consumers,
their associated risks should not be underestimated. Hence, this section will analyse
some legal and regulatory issues relating to Ant Financial’s fintech businesses in
three areas: first, how to structure a regulatory system which can simultaneously
spur innovation and control extra-financial risks; secondly, how to enhance the
protection of financial consumers regarding personal data privacy and the safety
of client money; and thirdly, how to prevent systemic risks caused by fintech
innovation and preserve financial stability.
Support fintech innovation while controlling financial risks
Fintech innovation has challenged conventional business models, services and
products in the financial industry. It is difficult for industry disrupters to prosper
and innovate under the existing regulatory rules, which were designed for incumbent
players.79 The financial industry in China has been strictly regulated by the People’s
Bank of China and three sector-based regulators: CBRC, China Securities
Regulatory Commission (CSRC) and China Insurance Regulatory Commission
(CIRC).80 Nonetheless, the latest fintech innovation has blurred the traditional
boundary between different financial services. As is shown in the case of Ant
78 G. Wildau, “China curbs ‘Wild West’ loan sector”, Financial Times, 5 April 2017, p.6.
79 Lu, “Financial Technology and Challenger Banks in the UK” (2017) 32 J.I.B.L.R. 273, 282.
80 The central bank and three financial regulators are usually referred to as “One Bank, Three Commissions”.
The Rise of Alipay’s Fintech Empire and Relevant Regulatory Concerns 25
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
Financial, the fintech giant participates in various financial activities, covering
deposit-taking, investment, payment and credit rating. The new integrated business
model, therefore, has challenged the efficiency and effectiveness of China’s current
regulatory architecture, which is clearly split and regard to banking, securities and
insurance. Thus, the institutional structure of financial regulation has to be reformed
to adapt to the fintech era. The twin-peak model adopted by the UK and Australia,
which concentrates on conduct regulation and prudential regulation simultaneously,
might be an example for China’s upcoming financial reform. At present, existing
laws and regulatory rules lag behind the pace of technological advance and industry
growth. The financial industry in China was considered as relatively conservative,
with limited financial activities and players, most of which have state backgrounds.
Nonetheless, the upsurge in fintech firms ranging from P2P lending and
crowdfunding to mobile payment has been transforming the financial industry
greatly. The Chinese regulators, who regard financial stability as their top working
priority, are wary of the fintech explosion. In particular, some recent scandals in
the fintech sector have worried the regulators. In 2016, Ezubao, one of the largest
online investment platforms, turned out to be a Ponzi scheme as it defrauded CNY
50 billion ($7.5 billion) from 1 million investors across China.81 Moreover, it is
predicted that 90% of 4,856 online P2P lending portals are struggling to survive
owing to the liquidity problem.82
Therefore, how to encourage fintech innovation and entrepreneurship while
containing extra-financial risks remains a tricky task for financial authorities.
Regulators around the world have devised regulatory instruments to fit fintech
innovation into the existing regulatory framework. The most notable approach so
far has been the so-called “regulatory sandbox”, which allows businesses to test
novel products, services, business models and delivery mechanisms under a
temporary lighter regulatory environment.83 The regulatory sandbox was first
adopted by the UK’s Financial Conduct Authority (FCA) and, as a result, the UK
has been viewed as the most fintech-friendly jurisdiction in the world.84 The FCA
has three operative objectives: to protect consumers, enhance market integrity and
promote competition.85 It is clear that the FCA puts the competitive objective at
the centre of its regulatory work, which stimulates industry disrupters to promote
innovation and competition. Accordingly, the regulatory sandbox can help fintech
firms to trial their products in a safer and more flexible environment without the
overhaul of current regulatory systems. In today’s economic climate, it seems a
win-win situation for all parties, including fintech businesses, financial regulators
and consumers. In the first round of regulatory sandbox, the FCA selected 24 firms
to be tested and there will be more businesses to be included in the second round.86
Apart from the UK, there are a number of jurisdictions adopting the regulatory
81 M. Fangjing et al, “Chinese investors seek protection of rights over Ponzi claims”, Financial Times, 3 February
2016, p.6.
82 D. Ren, “China regulators warn that 90 pc of peer-to-peer lenders could fail in 2017” (19 February 2017), South
China Morning Post available at: http://www.scmp.com/business/china-business/article/2072177/china-regulators
-warns-90-pc-peer-peer-lenders-could-fail [Accessed 3 November 2017].
83 FCA, “Regulatory Sandbox” (2017) available at: https://www.fca.org.uk/firms/project-innovate-innovation-hub
/regulatory-sandbox [Accessed 3 November 2017].
84 C. Binham, “UK regulators are the most fintech friendly” (12 September 2016), Financial Times available at:
https://www.ft.com/content/ff5b0be4-7381-11e6-bf48 -b372cdb1043a [Accessed 1 August 2017].
85 Financial Services and Markets Act 2000 s.1B.
86 FCA, “Regulatory Sandbox” (2017).
26 International Company and Commercial Law Review
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
sandbox as a temporary method to regulate their fintech industry, including Hong
Kong, Singapore and Australia. Moreover, Regtech, which means the application
of new technologies in financial regulation, can be used by both regulatory
authorities and regulated firms to manage risks and reduce costs relating to
regulation and compliance.87 Given that extra-financial risks can be detected and
managed, financial innovation should be encouraged; otherwise, another financial
tsunami might occur in the future as the last global financial crisis was partly
triggered by financial innovations such as over-securitisation.
Protect financial consumers using fintech—data privacy and
fund safety
Apart from encouraging innovation and competition, financial regulators should
pay more attention to the protection of financial consumers who are exposed to
higher risks as a result of fintech invention. In particular, how to protect personal
privacy and fund security should be carefully considered by regulators and
practitioners. Recently, the credit rating service offered by Sesame Credit has been
kept under close scrutiny as it is said to threaten the individual’s data safety and
its services contain obvious conflicts of interest.88 In 2015, the central bank gave
eight tech firms, including Alibaba and Tencent, temporary permission to develop
their credit scoring systems but has delayed granting a full licence afterwards
because of potential conflicts of interest in the business model of fintech companies.
Most third-party credit scoring firms in the world like FICO are independent bodies
which do not take part in core financial activities such as banking, investment and
payment. However, Ant Financial not only operates Sesame Credit but also engages
in a full range of financial businesses, which, therefore, questions its independence
and objectivity in allocating credit scores. More importantly, the use of big data
derived from users’ shopping history on Alibaba’s e-commerce platforms has
raised controversies. According to China’s Administrative Regulation of Credit
Investigation Industry, in order to collect personal information, it is required to
seek the consent of the people relating to such information, otherwise the
information should not be collected, except that such information has to be disclosed
under laws and administrative regulations.89 In practice, online shoppers provide
a large amount of information when they view webpages, select goods and make
payments. Under most circumstances, shoppers are not aware of their footprint
being recorded by the platforms. Obviously, they accept some general terms and
conditions before using the online shopping websites but those lack detailed rules
in terms of what information users would like to be kept by Alibaba. Also,
consumers do not have control over how the information is being processed and
disseminated. The Regulation requires that anyone using personal information has
to reach an agreement with the people relating to such information about the
purpose of use; the information should not be used for other purposes outside the
agreement; the information should not be disclosed to third parties without the
87 Deloitte, “Is RegTech the new FinTech?” (2016) available at: https://www2.deloitte.com/content/dam/Deloitte
/ie/Documents/FinancialServices/IE_2016_FS_RegTech_is_the_new_FinTech.pdf [Accessed 3 November 2017].
88 Reuters, “No more loan rangers? Beijing’s waning support for private credit scores” (4 July 2017) available at:
https://uk.reuters.com/article/ant-financial-credit-idUKL3N1JO05W [Accessed 3 November 2017].
89 State Council (PR China), Administrative Regulation of Credit Investigation Industry (2013 Order No.631)
art.13(1).
The Rise of Alipay’s Fintech Empire and Relevant Regulatory Concerns 27
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
permission of the people.90 Despite the strict privacy law, the implementation
process could have certain flaws as on the internet the flow of information is
extremely hard to control. There are also hackers who steal personal information
and sell it to potential buyers to make profits. In response to the urgent privacy
issue, Sesame Credit has appointed a chief privacy officer whose main duty is to
build an inclusive privacy control mechanism throughout the process of credit
rating.91
In addition to the privacy issue, how fintech firms use and keep clients’ money
remains an important matter. As we know, depositors of traditional banks are
protected under the official deposit insurance scheme. In China’s case, its deposit
insurance covers up to CNY 500,000 ($80,550) per saver per bank.92 This means
that, if the savers’ banks go into financial difficulty, their money up to a certain
limit will be automatically compensated by the state without any conditions.
However, as savers move their funds from bank accounts to fintech platforms such
as Ant Financial’s Yu’E Bao, their money will no longer come under official
protection. As a result, ordinary savers are exposed to higher market risks which
they might not even realise. In the eyes of most savers, Yu’E Bao is regarded as
a safe alternative to bank savings and they never think about the possibility of
money loss. Therefore, it is recommended that financial regulators and fintech
companies conduct investor education to help people to raise risk awareness.
Moreover, fintech platforms, with the help of the central bank and financial
regulators, can establish reserve funds in order to reimburse clients’ losses in
emergency situations.
Prevent systemic risk and maintain financial stability
The rapid growth of fintech makes some fintech giants like Ant Financial
systemically important. As has been stated, the amount of money managed by Ant
Fortune is at the same level as that held by China’s Big Four lenders and, thus, the
safety and soundness of Ant Financial will have a significant impact on the overall
financial stability. Although Ant Financial has a strong technological background
(the “tech” side of fintech) as it was initiated and supported by Alibaba, it lacks
experience and expertise in terms of operating financial businesses (the “fin” side
of fintech). Whether it can manage to handle such a large amount of money in a
safe manner and control relevant risks remains uncertain. Clearly, Ant Financial
has realised the seriousness of this problem and has therefore hired many financial
and legal professionals from established institutions. For example, Douglas L.
Feagin, manager of Ant Financial’s international business, was a senior partner at
Goldman Sachs; Yu Shengfa, president of MyBank, was previously the president
of Hangzhou Bank; Hu Tao, general manager of Sesame Credit, was a senior
manager at China Merchant Bank; Huang Hao, president of Ant Financial’s wealth
management sector, was the general manager of China Construction Bank’s internet
finance department; Ying Ming, president of Ant Financial’s insurance sector, was
90 State Council (PR China), Administrative Regulation of Credit Investigation Industry (2013 Order No.631)
art.20.
91 Sina, “Sesame Credit Hired Chief Privacy Officer” (18 July 2017) available at: http://tech.sina.com.cn/i/2017
-07-18/doc-ifyiakwa4502600.shtml [Accessed 3 November 2017].
92 Lu, “Private Banks in China (2016) 31 Banking and Finance Law Review 585, 598.
28 International Company and Commercial Law Review
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
the vice-president of China Life Insurance; and Chen Leiming, chief legal officer,
was a partner at the US law firm Simpson Thacher & Bartlett LLP.93
Furthermore, the increasing deposit base of Yu’E Bao could result in some
potential bank runs, as when savers move money from banks to Ant Fortune in a
short time the banks could face sudden deposit loss and liquidity drain. As the
insolvency of banks can trigger panic effects and destabilise the entire banking
sector, financial regulators should prevent this from happening by strengthening
macro-prudential regulation and establishing a comprehensive and effective
financial safety-net. It is apparent that the enormous scale of funds managed by
Yu’E Bao has attracted heavy regulatory attention relating to its liquidity risk.
Accordingly, the CBRC has been closely watching the operation of Yu’E Bao and,
most recently, it tightened the regulatory rules regarding how much money per
saver can be held in their Yu’E Bao accounts. The maximum personal quota was
reduced from CNY 1 million ($149,909.30) to CNY 250,000 ($37,477.32).94
Moreover, there is a new rule restricting how many times users can transfer money
between Yu’E Bao and their bank accounts within 24 hours (currently three times
a day).
Conclusion
This article has examined the development path and business model of Ant
Financial Services Group. Over its 14-year history, Alipay has evolved from a
nascent payment tool to a comprehensive fintech conglomerate covering payment,
wealth management, banking and credit rating. Its mobile payment service has
been accepted by millions of retailors and online shops, making Alipay the largest
digital payment system. The wealth management platform, Ant Fortune, has assets
worth CNY 1.43 trillion ($214.37 billion) under management, which is the largest
investment fund in the world. Moreover, MyBank as an online-based lender has
utilised big data and artificial intelligence to offer loan services to small businesses
which are denied access to mainstream financial institutions, while Sesame Credit
helps 700 million Chinese netizens to create personal credit files. Evidently, Ant
Financial plays an important and indispensable part in today’s financial industry.
It provides consumers with better, safer and more accessible financial services.
Thus, it is considered as the most valuable fintech firm with a valuation of $70
billion.
This article has also considered the “frenemy” relationship between existing
financial institutions and rising fintech firms. Clearly, the explosive fintech sector
has stolen substantial market share from incumbent players. In particular, the
prevalence of mobile payments paints a gloomy picture for traditional payment
networks such as UnionPay, Visa and MasterCard. Besides, Yu’E Bao surpasses
banks’ saving accounts by rewarding financial consumers with better returns and
high liquidity at the same time. However, in other business areas, Ant Financial
supplements the present financial industry as MyBank strives to serve SME
borrowers neglected by most banks. In addition, Sesame Credit is able to help
93 Sohu, “Senior Managers of China’s Fintech Giants” (12 April 2017) available at: http://www.sohu.com/a
/133541889_465942 [Accessed 3 November 2017].
94 Sina, “Yu’E Bao Reached 1.43 Trillion Yuan, Near to the Deposit Amount of Big Four” (1 July 2017) available
at: http://finance.sina.com.cn/roll/2017-07-01/doc-ifyhrttz1913643.shtml [Accessed 3 November 2017].
The Rise of Alipay’s Fintech Empire and Relevant Regulatory Concerns 29
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
existing lenders to assess the financial conditions of millions of consumers and
smaller businesses and make smarter loan decisions.
Finally, some suggestions have been made for financial regulators in terms of
their regulatory approaches towards fintech. First, when regulating fintech, the
authority has to strike a balance between spurring innovation and containing
excessive financial risks. The best method so far has been the “regulatory sandbox”
approach initiated by the UK’s FCA. Secondly, enhancing the protection of
financial consumers accessing fintech services should be urgently placed on the
agenda of regulators, in particular issues relating to personal data privacy as well
as the safety of investors’ money, which is not covered by the official compensation
scheme. Thirdly, at the macro-prudential level, any fintech activities that are likely
to cause systemic risks should be closely watched, e.g. the potential liquidity risk
of Yu’E Bao.
30 International Company and Commercial Law Review
[2018] I.C.C.L.R., Issue 1 © 2017 Thomson Reuters and Contributors
