Alipay: An Accidental Offspring of Alibaba
From the time it was established in 2004 until the present, Alipay and Alipay Wallet have become the primary method of both online and offline payments for many businesses. This blog explores how Big is Ali-pay ecosystem.
When it was spun off from Taobao and made an independent company, Alipay did not anticipate that it would be what it has become today.
From being Taobao’s earliest “tool” for guaranteeing online transactions, Alipay has now become the leader in third-party escrow services for online payments in China. In the fiscal year 2014 (by March 31, 2014), total transactions through Alipay had reached US$623 billion (approximately 3.9 trillion RMB).
By the end of 2013, Alipay had close to 300 million named customers, and 12.5 billion transactions had been executed via Alipay’s services. What’s more, in the course of this, more than 100 million customers had shifted their primary payment site toward the Alipay Wallet, Alipay’s mobile service.
These customers had completed in excess of 2.78 billion transactions valued at more than 900 billion RMB, making Alipay the largest mobile phone payment service in the world.
They provide basic cash-flow services for millions of customers and commercial entities. During the 2014 11.11 Shopping Festival, orders reached 278 million, and turnover was valued at 57.1 billion RMB.
The peak number of transactions handled in one minute was 2.85 million, which was more than three times the figure in the preceding year. The highest monetary value of mobile phone transactions in one single day was 11.3 billion RMB.
More than 460,000 businesses routinely use Alipay services to handle payments. Such payments incorporate a wide range of business areas, including Internet retail sales, virtual games, digital communications, commercial services, tickets, and public service endeavors.
Alipay is no longer a simple payment tool. It has become a “helper in the daily affairs of life” for people in the Internet age. It is putting its efforts into constructing a “life circle” on the Internet, providing ways to make all of life more convenient, faster, and easier in terms of such daily affairs as eating, dressing, housing, and so on.
For example, Alipay already has tens of millions of customers using its services to pay utility bills, make credit-card payments, accomplish online remittances, and so on.
The Spring Festival of 2014 can serve as an example. Most banking locations were closed in the course of this seven-day holiday. As a result, 2.2 million person-times used Alipay Wallet services to make payments from 38 different kinds of bank-issued credit cards. In this one instance, payments made by mobile phones came to 7.1 billion RMB.
This was 10 times the amount transacted in this manner in the Spring Festival of 2013. The number of credit-card transactions that used Alipay payment services during the Spring Festival of 2014 came to over 100 million separate transactions. Credit-card transactions came to 52 percent of all Alipay-serviced transactions.
In these seven days, without ever leaving their homes, Alipay’s more than 50 million customers could use their mobile phones to purchase goods, pay for daily needs, pay off credit cards, use the YuEbao service to organize personal finances, and so on.
From this, it can be seen that the starting point from which Alibaba unleashes grassroots entrepreneurship is Taobao.com. The Taobao platform is also the foundation and the platform for unleashing grassroots innovation. Numerous beautiful and small e-commerce businesses converge here.
Alipay: The Foundation of the Ali Ecosystem
The curtain has already come down on the 11.11 Shopping Festival 2013.
A total sum of 35.019 billion RMB has been paid through Alipay, creating yet another record of sales in the e-commerce age. Although some problems appeared in the first hour after retail outlets began selling, with an inability to process payments, the Taobao and Alipay technical team swiftly restored operations.
They successfully met the challenge of dealing with 213 million Internet people processing more than 100 million orders on a single day and with the massive quantities of data that stand behind those numbers.
Accolades came in from around the world. The excellence of Alipay’s technology truly does deserve respect, but it is the impact of the thinking behind that technology that is profoundly changing our lives.
In recent years, Alipay has already become an indispensable part of many people’s lives. Alipay’s online payment system has made transactions safer, quicker, and easier—from consumers paying for things on Taobao to 460,000 businesses that receive the money.
The system has made people’s lives more convenient in many ways—from enabling people to pay their utility bills online to processing credit-card transactions.
Alipay’s real significance does not lie in its 800 million registered accounts, however, or in the 20 billion RMB in daily transaction volume that it can handle via some 100 million separate transactions in a day.
Despite these massive numbers, the real significance of Alipay lies in its being a critical link in the chain of Internet exchanges. This is more important to producing an Ali ecosystem and enabling it to grow.
Faced with Taobao’s Need, Alipay Resolves the Trust Dilemma
Ali-people often says that while they are innovating to solve problems, they cannot help but take a step forward and actually create something new.
Faced with an abyss before them, that is, they will face bone-crushing defeat if they do not make the leap. To understand the origins of Alipay, we have to go back to the year in which it was born. We have to see what the e-commerce environment was like back then and what Taobao faced in terms of major challenges.
The Taobao platform was established in May 2003. The main thing holding back the growth of e-commerce transactions than was a particularly fundamental problem—that of mutual trust between buyers and sellers.
Buyers did not believe sellers and therefore were unwilling to extend direct payments. Sellers did not trust buyers and were unwilling to risk shipping goods.
Alipay was born out of this opportunity. As Shao Xiaofeng, former CEO of Alipay, said, “In a certain sense, what Alipay did at the beginning was not so much online payment as online escrow—that is, serving as the guarantor of credit.”
This new financial innovation involved considerable risk, but it also reflected Alibaba’s confidence in e-commerce. Both the risk-taking and confidence appear to have paid off.
On October 15, 2003, Alipay put this guaranteed transaction model into effect on Taobao for the first time. The buyer first remitted funds into Alipay. Alipay then notified the seller to release the goods. Once the buyer received the goods, he or she confirmed the release of the payment, and Alipay paid the seller.
By serving as guarantor in the middle, Alipay was able to resolve the problem that had plagued e-commerce from the beginning—that of trust. Once this escrow system was set up, it ensured the formation of a consumer environment on the Internet.
In addition to resolving this issue of trust, the very existence of Alipay enabled electronic payment to become quick, easy, and effective. Alipay’s functions with respect to currency payment greatly facilitated the advance of Internet purchasing.
Looking back at the history of how “currency” developed, in primitive societies, people used such things as shells and hides as vehicles for embodying value. This simplified the trouble of exchanging goods for other goods.
The currency then went from being metal coinage to being pieces of paper as people constantly sought to create payment tools that were more convenient and more effective. In the age of electronic commerce, payment links that go via the Internet have replaced remittances at a counter.
Payment via the Internet and the ongoing development of e-commerce have contributed to each other’s growth.
The head of Alipay’s Science and Technology Department, Wan Gang, has commented, “When the Taobao platform launched Internet purchasing, it may have been supported by network technology, but Alipay was what enabled it to come out of its shell and stand above all of the many other Internet purchasing platforms.”
PayPal in the United States was a competitor of Alipay within China at the time. In contrast to Alipay, PayPal developed in a climate of excellent credit services in the United States, while Alipay grew up in the midst of primitive and rather wild credit conditions.
Undaunted in the face of certain risks, however, the pioneers at Alibaba forged ahead in the midst of this wilderness. Through hard work, they eventually were to enjoy the fruits of success in this particular realm.
That is, Alipay went from 0 customers to 100 million customers in the first five years. It then went from 100 million to 200 million customers in only 10 months.
After that, it “climbed on the express train” of both the Internet and e-commerce in terms of processing transactions. Between 2009 and 2012, the number of transactions processed via Alipay increased at 60 percent per year on average.
In 2012, Alipay handled 6.23 million transactions, including around 70 percent of all online credit-card transactions within China.
During this period, Alipay also launched various business solutions that greatly improved cooperation among commercial merchants so that its own business lines have developed as a result. At present, Alipay works with more than 200 financial institutions and with some 500,000 commercial entities.
It also has become a major tool in influencing the confidence with which consumers approach the Internet. In China’s e-commerce, it is playing the role of certifying and enabling credit.
According to the results of surveys conducted by the Zheng Wang Consulting Company, 88.3 percent of users feel that websites that provide Alipay services are more reliable than those that do not provide such services. Moreover, whether or not Alipay will accept a site into its system plays a direct role in that site’s degree of confidence.
As the very basis of Alibaba’s ecosystem, as the outstanding body enabling Taobao’s sustained growth in annual turnover, as the “bugler” calling the tune for millions of “netizens” who are marching toward the new consumer age—and as all the positive and pleasing figures tell us—Alipay fully deserves its praise.
Without Alipay’s ability to resolve the whole trust issue at the very beginning, customers would not have rushed to register on the Taobao site, and the habit of buying things on the Internet would not have become embedded into daily life.
Millions of sellers would not have taken up residence in the Taobao system. The multitude of businesses that evolved as a result of the ability to sell via Taobao would not have come to be, nor would Alibaba itself have such positive prospects for future growth.
A Service That Enables the Public to Have a Fast, Easy, and Safe Way to Make Payments
According to Alibaba’s own statistics, the success rate for people purchasing things on the Internet, from sending off an order to the seller’s receipt of payment, is only around 70 percent. Thirty percent of orders are lost, whether due to payment technology problems or causes relating to the purchaser himself.
Not only does this lead directly to lower turnover and loss of profits, but also it leaves consumers with unhappy purchasing experiences. This has a long-term negative impact on ensuing sales. Alipay has done all it can to elevate the success rate of payments and to ameliorate problems with payments for orders.
At present, Alipay has cooperative partnerships with more than 200 domestic banks, 4 overseas banks, and 5 international bank-card groups and third-party payment companies.
It cooperates with these companies very closely. In addition to the most basic kind of bank transfer of funds from one account to another, starting in 2010, Alipay gradually linked up with more than 100 banks to promote a fast and easy pay service.
In going through this kind of new technology, customers no longer need to connect with an Internet bank.
As long as they possess a bank card, they can complete online payment in a fast and easy way. The promotion of this fast and easy payment technology is lowering the threshold for customers who pay online. It has greatly reduced the procedures required to complete transactions and has strengthened the security of bank accounts.
In addition to the attractions of Alipay with which people already are familiar, including quick and easy and Trojan-free transactions, in April 2013, Alipay introduced a third-party insurance institution into its business, namely, Ping An Insurance, to ensure the safety of users’ funds.
If anyone’s account is fraudulently used by someone after using quick and easy to pay, Ping An insures them by paying for 100 percent of what they lost. Moreover, Alipay bears the cost of all insurance fees.
This cooperation between Ping An and Alipay has opened up another form of insurance that guarantees that an online payment will “cross the river safely.” At present, 150 million Alipay users are already making use of quick and easy payments.
As smartphones and other mobile technologies have become universal, and with the developments in Internet purchasing and applications software, the enormous wave of wireless payment is already on us.
The market research group Ipsos has jointly conducted research with Alipay that makes it clear that mobile payments and e-commerce are already relatively mature and that around 80 percent of users are willing to try such new payment products as Sonic Payment.
Already, 86 percent of users who have been surveyed have attempted to purchase things using mobile technology.
In the first quarter of 2013, the size of the transaction market for third-party payment in China reached 63.9 billion RMB, with mobile Internet payment transactions accounting for 47 billion RMB; within this figure, Alipay’s mobile transactions came to around 24 billion RMB, indicating that Alipay held a 50.1 percent market share.
According to Alibaba’s statistics, in 2012, the success rate of payments that were made through traditional cell phone banking channels was 38 percent. Despite this low success rate, however, Alipay’s wireless paying business is growing and becoming sizable at an extremely fast pace.
The number of times people used wireless to pay in 2012 was up 223 percent over the previous year, and the total sum of money transferred via this method had increased by 546 percent. The number of discrete transactions using Alipay via cell phone is now 9.2 percent of all payments made through Alipay.
In 2013, during the 11.11 Shopping Festival, Taobao Alipay payments made via cell phone reached 5.35 billion RMB, which was 5.6 times what the total had been in 2012.
The transaction volume of Alipay’s cell phone payments overall came to 11.3 billion RMB, in 45.18 million separate transactions, which was 24.03 percent of all transactions.
In the realm of mobile payment, Alipay’s product innovations keep streaming out. In January 2013, a new product was officially released called the Alipay Wallet. This is an all-new mobile customer end-user application. This so-called wallet provides an experience that transcends a real wallet.
It has a variety of functions including automatic recharging of money for a cell phone account, paying bills for credit cards, paying fees for daily living, Sonic payments, discount coupons management, hand-form payments, Quick Response (QR) code, access to YuEbao, and so on.
It can listen to commands spoken by a consumer’s cell phone and carry out “smart” transactions. Many scanning and information recognition applications that have been used in Western countries are also being used and are enabling offline transactions and payment to become much quicker and easy.
In all these innovations, including quick and easy payment, credit payment, and wireless payment, the starting point for Alibaba is to ensure that the consumer has a safe, fast, and easy way to make payments, a way that increases the success rate of payments as well as their efficiency. It is to ensure that payment problems are resolved in order to support the growth of e-commerce.
Furthering the Growth of the Payment Industry by the Use of Technology and Competition
Payment systems within China are divided into two categories, online and offline. Online payment is carried out primarily by three parties, Alipay, Cai Fu Tong, and UnionPay.
The Internet payment model involves having independent entities with sufficient material strength and reputable guarantees sign contracts with all large banks. The three primary partners supply the transaction payment platform that interfaces with the banks’ payment settlement system.
According to Enfodesk statistics, by the third quarter of 2013, third-party Internet payment platforms in China had received and transferred 1.6655 trillion RMB worth of transactions.
Alipay accounted for 40.3 percent of those. This was higher than the 28.1 percent handled by UnionPay and the other third-party Internet-based payment institutions.
In May 2011, the central bank of China announced the names of the first group of nonbanking institutions to receive permits to engage in the payment business. Alipay was among the 27 third-party payment enterprises on the list.
Offline payment is the traditional channel by which funds circulate and are paid in China. This method is divided into card-issuing institutions (i.e., banks), clip-receiving institutions (i.e., banks and third-party payment services), and UnionPay and settlement institutions.
Of these, UnionPay is the sole settlement institution that can both issue point-of-sale (POS) machines (a POS information-management system) and is a clip-receiving institution and receives slip- receiving market income.
By the end of 2011, the asset level of UnionPay had already reached 13.8 billion RMB, with operating revenue of around 6 billion RMB and net profit surpassing 1 billion RMB. In the four years prior to this, UnionPay’s operating revenue increased 2.5 times, whereas net income increased nearly 10 times.
With the swift development of the third-party payment industry, the many third-party payment institutions do not have to tie into settlement agreements, however, but can work directly with banks.
The cardless mobile payment business is also gradually progressing. The monopoly position of UnionPay with respect to payment settlement is therefore now constantly being challenged.
The role that banks play in this online payment system is very special, that is, the system composed jointly of UnionPay, third-party payment, and banks. On the one hand, banks are not willing to allow UnionPay to be a large-scale monopoly in the settlement.
They would rather see competitive resources available via multiple channels. On the other hand, the innovative products of third-party payment institutions form a competitive relationship with the payment settlement of banks.
Because of this, the banking industry is also accelerating its own transformation, looking for innovation.
More and more banks are beginning to focus on research and development (R&D) of Internet-based and mobile-based platforms and are speeding up their own individualized financial products to satisfy the financial needs of different customer groups.
For example, they are setting up platforms that provide financial services for e-commerce.
According to 2012 surveys undertaken by UnionPay, fees for actual payment made by a nonfinancial institution to a bank for online payment came to only around 0.1 percent of the transaction amount.
This is much lower than the 0.3 to 0.55 percent level within the UnionPay network. UnionPay calculates that the losses to all banks because of these low fees exceed 3 billion RMB.
The cost is substantial when UnionPay installs POS machines and when banks install automatic teller machines (ATMs). Moreover, these offline channels are mostly for payment settlement.
To prevent withdrawals from credit cards, clip-receiving institutions need to rigorously investigate the qualifications of merchants, and very small merchants generally do not come up to the standards required.
Moreover, it costs several thousand RMB to install a POS machine. Each time a card is swiped, there is another substantial handling fee.
In contrast to this high threshold and high-cost offline payment method, online payment adheres to the concepts of the Internet—open and shared by all. An online payment environment can be built on the existing Internet infrastructure.
At present, Alipay has already signed agreements with more than 200 financial institutions, forming an open payment and settlement channel. As the third-party payment market continues to develop and grow in size, the online payment environment will become even more transparent and open.
It is true that offline POS machines and ATM networks have an enormous customer base already and satisfy an enormous need. For a long period of time to come, online payment will not be able to replace these offline channels.
Nevertheless, the swift growth of the online payment industry has raised levels of technology as well as competition for the entire payment industry. The core reason is that the open network of the Internet allows for lower costs and higher efficiency.
In terms of payment settlement, in 2013, Alipay executed 12.5 billion transactions, which approached the offline consumption by card swiping of 12.7 billion transactions.
This swift increase in the application rate of Alipay not only reflects the fact that online payment is an effective way to supplement China’s existing payment systems but also that the appearance of third-party payment is aligned with the tide of the Internet age.
When third-party payment groups were in the midst of fierce consolidation, if one wanted to one had to rely on outstanding service and reasonable fees.
Current CEO of Alibaba’s Micro Domestic Business Group and former Deputy CEO of Alipay X. Yeming has noted, “Third-party payment enterprises cannot be in a competitive relationship with banks.
We are a payment services provider that works together with and supports banks in elevating the experience of the customer in online banking.”
As long as regulators do not lean toward any one side and as long as they ensure a fair and effective market, reasonable competition on the part of all will force competitors to carry out innovations and improve the quality and effectiveness of their payment services.
The tacit battle between third-party payment enterprises and UnionPay and the competition among third-party payment enterprises can help to build and maintain a kind of dynamic balance. This is beneficial not only to consumers but also to the society at large.
In March 2014, the People’s Bank of China (China’s central bank) issued a temporary restraining order calling for a stop to face-to-face payment services of Tencent and Alipay via virtual card products and Quick Response (QR) Code. For a while, opinions were voiced saying that the central bank was protecting vested interests.
However, at the same time, we do need to admit that there have been certain security problems in emerging payment methods, including those of the QR Code. These are greatly in need of being addressed. Nevertheless, mobile payment has been launched, and the overall situation cannot be stopped. On
April 9, 2014, Deputy CEO of Ali’s Micro Finance Group and Chief Risk Officer Hu Xiaoming revealed that Ali Small Loans, under the leadership of the central bank, is currently in the process of formulating and perfecting payment standards for the QR Code.
Whether it is the central bank, UnionPay, or Internet companies, all must find a way to protect the rights and interests of consumers through processes that are both cooperative and competitive.
Payment constitutes a necessary link among enterprises, merchants, and consumers. Only if the costs of this link are constantly lowered and its efficiency is improved can the productivity and the entire society’s ability to consume constantly increase.
Only then will entrepreneurship at the grassroots level continue to be sparked. This is one of the reasons Alipay and its payment links are so significant to grassroots innovation.
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Ali Small Loans: Turning Trust into Wealth
After getting over one of the most fundamental barriers to entry for small business, namely, payment, Alibaba set its sights on the issue of how merchants within its ecosystem can get financing.
Given their small size and limited ability to withstand risk, and because of their lack of corporate governance structures and adequate collateral, many of the merchants on the Alibaba platform find it hard to get operating loans through normal channels such as banks. Their ability to grow and even survive is constrained by the lack of finance.
Recognizing this financing need of many Internet merchants, Alibaba began to provide financial services for online merchants via Ali Small Loans. This stemmed from its principle of doing all possible to serve the microenterprise.
It came up with a slogan to describe the approach: “Turn trust into wealth, and make it easy to borrow money.”
Difficulties of Small and Microenterprises in Getting Funding and Grassroots Entrepreneurship
As noted earlier, the slogan for Ali Small Loans is “Turn trust into wealth, and make it easy to borrow money.” However, turning this motto into reality is not so easy.
Anyone can recognize the vital contribution that microenterprises make to China’s economy. The best estimate is that small and microenterprises make up over 99 percent of the total number of enterprises in the country.
They provide close to 80 percent of all jobs in cities and towns and generate over 75 percent of all entrepreneurial innovations.
The value created by these enterprises comes to 60 percent of China’s gross domestic product (GDP), and the taxes they pay come to 50 percent of total national tax revenues.
Nevertheless, their inability to get funding has continued to hold them back. It is the main obstacle to their further growth, and indeed, it often threatens their existence.
Since the global financial crisis, China’s microenterprises have been in a very tough situation. They are facing reduced orders even as the prices of their raw materials and labor have gone up.
Intensified competition within industries is yet another challenge they face, which highlights the problem of scarce capital and the inability to get financing.
Microenterprises rely heavily on self-generated funds to pay for operations. Using one’s own funds or borrowing from family and friends cannot support long-term growth, however. External sources of funds are currently limited to one singular channel: loans from banks or similar financial institutions.
Barriers to entry are very high when it comes to using the stock market, debt markets, and private equity, and microenterprises basically have little hope of taking advantage of these channels for funding.
Despite the fact that they, therefore, rely primarily on bank loans, only 12 percent of microenterprises can actually get a bank loan.
Current Deputy CEO of Alibaba and head of its Innovative Finance Department Hu Xiaoming believes that the reason the other 88 percent misses out is either that they have no collateral to put up for a loan or that they cannot handle the complexities of the loan procedures. A third reason is that they are not the banks’ “cup of tea.”
Without funding channels, the inability to get capital often deals a death blow to grassroots entrepreneurs who have founded their own companies.
Imagine if all those Silicon Valley entrepreneurs had not been able to get that first “bucket of money.” How would the Internet have come about? How would companies such as Facebook have developed?
It may not be appropriate to compare high-tech companies and Internet enterprises with grassroots efforts in China. Nevertheless, we cannot deny the innovative forces of China’s grassroots, nor can we deny their potential to change China.
In trying to release further grassroots entrepreneurship, therefore, one step that must not be overlooked is resolving the problem these microenterprises have in getting funding.
Meanwhile, among the multitude of microenterprises, those that are in the business of e-commerce often do not have offline assets or even data on their operations, so they face the same problems, if not worse, in the real world when it comes to raising money.
On Alibaba, however, they have indeed amassed a large amount of data, including the number of goods they have shipped, their sales data, their supply-chain circumstances, and customer evaluations.
All of this information can be used as evidence of credit. Alibaba, therefore, decided to provide a financing service via the Internet using data from the Internet.
Cooperating with Banks in Providing a Bonded Insurance Loan Service
In 2002, Jack Ma launched something called Credit Access, which can be considered the first emerging sprout of an Alibaba financing service. After this, the Alibaba website amplified this by creating a Credit Access Index. This provided a quantified evaluation of the credit situation of both sides of a given transaction.
By creating a system around this, Alibaba incorporated a whole set of indicators into an index that described an enterprise in terms of basic conditions, years in operation, trading conditions, and any business disputes, lawsuits, and so on.
At the outset, Alibaba was not intending to be a loan provider on its own. Instead, it set its sights on the “big guys” in China’s financing industry, namely, the state-owned banks.
Starting in 2007, Alibaba allied with the Industrial and Commercial Bank of China (ICBC) and the Construction Bank of China to launch an Internet-based bonded-insurance loan service for member enterprises.
This opened up a credit service that conformed to the resources of both sides. Members were not required to put up any kind of collateral.
An alliance of three or more enterprises had to come together to go through Alibaba to apply to banks for a loan. Alibaba mainly played the role of a loan intermediary.
It also supplied the credit records of the companies to banks, and it was then up to the bank to do due diligence and decide on whether or not to make a loan.
What had looked like a beautiful blueprint turned out to have numerous problems in actual implementation, however. Alibaba’s cooperation with the banks was not as smooth as anticipated.
The banks’ traditional model for extending loans did not match well with the many small-scale, short-term loans required by e-commerce financing. There also was a huge gulf between the two sides in terms of loan concepts and review and approval procedures.
With respect to Alibaba’s cooperation with the Construction Bank of China, people inside Alibaba expressed the following during interviews: “Of 100 enterprises we recommend, the Construction Bank may wash out 97 and approve
3. In the end, only two or three actually get a loan. We feel that this is rather inefficient, and it also provides a bad experience for customers.” Hu Xiaoming has frankly admitted the differences:
Our average level of loans for customers right now is only some 60,000 RMB. When we talked to them, loans made by ICBC and the Construction Bank of China generally came to 2 RMB million.
In our eyes, this was not loans to microenterprises. The entities we prefer are smaller since they are the real innovators, one factory, a shop run by husband and wife, or the customer might even be a retired military person.
So long as he had credit, we were willing to loan him 2,000, 20,000, 100,000 RMB. This was the kind of thing we would rather do.
Although this original grand scheme came to nothing, cooperating with China’s commercial banks was to be of tremendous significance for Ali Small Loans. In the course of the cooperation, Alibaba drew more members into its Credit Access system and set up a complete credit evaluation system and risk-control system.
Even more important, Alibaba found the direction it wanted to take in the whole process. Through innovating, it decided to use its own methods to provide financial services to microenterprises.
In June 2009, “Ali-loans” was spun off from the business-to-business (B2B) service and Ali Small Loans was established.
On June 8, 2010, three separate entities established the Zhejiang Alibaba Small-Sum Loan Shareholding Company, Ltd., in Hangzhou. The three were the Alibaba Group’s Lian-he Fuxing Group, the Yintai Group, and the Wanxiang Group. This entity was China’s very first microloan company oriented toward making loans to e-commerce.
After this, a similar company was set up in Sichuan Province based on cooperation between Alibaba and the Chongqing municipal government. Alibaba then began to provide financing services for microenterprises and individual entrepreneurs on the B2B, Taobao, and Tmall e-commerce platforms that were both of an ongoing nature and favorably priced.
It used a data- and Internet-based operating model. Its core business was providing small-scale loans.
Ali Small Loans, separated out as an independent entity, constantly improved on its operations and became highly specialized in providing financing for more and more people.
At the same time, it kept to the marrow of the Alibaba mission, which was to unleash grassroots entrepreneurship. It constantly sought out new territory and resolved new problems, daring to be a sort of “hero on the front lines,” breaking the path for others.
Small Is Beautiful: Focusing on Microfinancing Services
There are many reasons that formal financial institutions lend little support to microenterprises. Among them is that bank credit is not suited to the specific characteristics of the small business.
According to the results of a survey undertaken in 2011, the operating and financing situation of 3,231 microenterprises in 36 cities could be characterized by the following four main features. First, their operating capital shortage was fairly low (64 percent had a gap of less than 100,000 RMB, 94 percent had a gap of less than 500,000 RMB, and 98 percent had a gap of less than 1 million RMB).
Second, their time frame for needing financing was high (82 percent needed financing within 10 working days, i.e., completion of the review and approval procedure within that time and 43 percent needed to get the loan within 5 working days).
Third, they could withstand quite high-interest rates (86 percent of those interviewed expressed the ability to accept rates that were four times the legally mandated rates).
Fourth, they generally lacked any collateral. Alibaba’s credit product was designed in a way to allow it to be targeted specifically at these characteristics.
1. The degree of Capital Gap Fairly Small: So Ali Small Loans Made Loans of Less than 1 Million RMB
Loans of 1 million RMB or less basically could satisfy the turnover rate of capital in microenterprises. It could meet their investment needs for internal bolstering.
In contrast, the standard financial institutions universally kept loans at a level of more than 1 million RMB owing to their need to control costs. They, therefore, were unable to meet the needs of micro enterprises on this front.
What’s more, based on the principle of fast-in, fast-out, a loan model that saw fast turnover of loans allowed Alibaba to use a relatively small amount of capital and yet create a relatively large cumulative quantity of loans. In 2013, the average amount of a single loan made by Ali Small Loans was 13,000 RMB.
The average amount made to a single customer was 36,000 RMB. This was far lower than the single-loan quantity that a traditional financial institution was able to make. Alibaba thus used its own advantages to make up for the shortcomings of banks.
2. Need to Get Loans Quickly
Ali Small Loans operates 7 days a week, 24 hours a day, year round. It issues loans and takes in loan repayments all the time. If an applicant has his or her materials in order, the system can provide him or her with a loan within three minutes of completing the process of review and approval.
This is the shortest time an applicant has to wait; the longest time, if his or her materials are in order, is seven days. The entire process takes place on the Internet. The procedures are simplified, and the applicant does not need to spend money on transportation or other such links in the process.
3. Mostly Short-Term Use of the Money and an Ability to Withstand High-Interest Rates: So Ali Small Loans Adopted a Loan Model of Fast In, Fast Out
In contrast to bank loans, Ali Small Loans adopted a small-sum loan model that was fast in, fast out. In all of 2012, the average length of time that a customer “occupied” capital was 123 days.
Although the interest that customers could withstand and accepted was 18 percent at an annualized rate, the actual cost of the money was around 6.7 percent.
A good example is ordering loans. Ali Small Loans’ order loan product was priced at a daily interest rate of 0.005. On average, a customer would use such a loan for four days.
At an annualized rate, the financing interest-rate cost of the loan to the customer was only 6 percent, roughly equivalent to the officially approved standard interest rate for a one-year loan.
Difficulty in Supplying Any Guarantee or Collateral: So Ali Small Loans Did Not Require Collateral
The credit loans of Ali Small Loans did not require any collateral whatsoever, nor did any guarantor need to stand behind the customer. For the order loan product, the applicant had to supply either the orders or the shipping receipts (bills of lading).
This swept away what had been an important hurdle in making credit loans available to microenterprises.
It also went a step further in simplifying the applications and review and approval procedures, and it lowered the costs of the financing for microenterprises.
Alibaba’s small-sum credit loan product did fairly well in differentiating itself from standard bank credit products. It focused on a small segment of the market, namely, microfinance services, and therefore was able to extend benefits to more microenterprises that had been left on the outside of official financing channels.
Because of the need to control costs, and because of discrimination against the different kinds of ownership systems of small businesses, traditional banking institutions did not target the many small businesses on Alibaba’s platforms as potential customers.
These customers, therefore, were outside the range of vision of the official financing institutions.
When talking about how Ali Small Loans positioned itself, Hu Xiaoming has said, “In the entire financing ecosystem, we only make loans that are 1 million RMB or less. We leave anything bigger to the banks. We are ‘vegetarians’; we don’t eat this kind of meat.”
Given both cost and risk considerations, traditional banks are unwilling to touch the microfinance business, whereas Ali Small Loans explicitly declares that its upper limit is 1 million RMB.
By positioning itself in a very clear-minded way, based on cloud-computing technology and a large amount of data, Alibaba has carved out an entirely new path in Ali Small Loans.
By the end of 2013, 642,000 customers had received loans through this system. Ali Small Loans had issued a total amount of 172.2 billion RMB in loans.
Big-Data-Based Risk-Control System
The critical issue in providing funding for microenterprises lies in figuring out how to handle information asymmetries.
The field of information economics says that information asymmetries between buyers and lenders lead to higher costs, as well as creating moral hazard and adverse selection. This influences the equilibrium between lending and borrowing, supply and demand.
Why is it that banks find it so hard to make microloans? Microenterprises have particular qualities that ensure that information is asymmetrical, whereas the traditional loan technologies of banks ensure that returns are not able to cover the risks involved.
Alibaba, however, believes that it can use its big-data technologies and its cloud-computing capacity to resolve this asymmetry in information to a certain degree. By the end of June 2013, the nonperforming loan rate of Ali Small Loans was 0.84 percent, lower than the level of commercial banks in China.
The product called Ali Small Loans uses Alibaba’s core technology, namely, big-data technology, to improve the structure of information in an effective way and thereby maintain this relatively low rate of nonperforming loans.
The unique advantage held by Ali Small Loans is that it has access to over 10 years of accumulated statistics on microenterprises on Alibaba’s platforms. It uses these statistics to form a risk-control system, with preload, mid load, and post-loan links that tie into one another.
Before making a loan, Ali Small Loans abandons its broadly open-style method of operations and sales. It instead analyzes data that have been amassed on its platforms. It differentiates among customers, selecting those on the platform that has been operating for a fairly long time and that is more reliable or creditworthy.
It then bestows credit on these and issues an invitation to contract with its small loan product. Right now, more than 2 million merchants are being invested with such credit. This enables more micro-opportunities to enjoy the resources of funding and credit.
In applying for loans, customers do not need to provide any collateral or guarantees. All they need to provide is gross sales figures for the past year, operating costs, gross assets, gross liabilities, and other related financial data.
Alibaba’s trading platform has already accumulated a large amount of data on them relating to their volume of completed orders, volume of trades, inventory turnover, customer relations, credit record, and so on.
Based on its cloud-computing platform, Ali Small Loans then “mines” these data and carries out a “washing” process.
It uses big-data-handling technology, including rating cards and quantitative analysis to make a fairly accurate assessment of the ability of the microenterprise to pay back a loan and of its likely intentions of paying back a loan.
After a loan has been extended, Alibaba carries out a real-time form of regulatory control over data to do with the borrower, keeping track of the volume of business, evaluations of the entity, conditions of the industry, and so on.
If it discovers any unusual activity or violations of prescribed thresholds, it can automatically mobilize mechanisms that make deductions from the borrower’s Alipay account. Most of these supervisory controls are handled automatically via cloud-computing systems and computers.
Loan officers are only responsible for supplemental actions. With respect to loan term limits, Ali Small Loans encourages borrowers to pay back loans as fast as possible.
According to Ali Small Loans statistics, the term order-type loans generally do not exceed one week. Each individual loan generally comes to less than 10,000 RMB, but the frequency of loans is high. Some vendors take out order loans practically every day.
In addition, Ali Small Loans has set up a corresponding credit-restoration system that allows enterprises to restore a good credit rating. If they themselves encounter problems with people not paying for the product, as long as their credit numbers are good on the platform and they have future cash flow, Ali Small Loans provides them with supplemental assistance.
By means of operating measures on its e-commerce platform, it provides support to enable the enterprise to recover its ability to pay back its borrowed money.
Alibaba’s microfinance services group has used big data and cloud-computing platforms to prove that the data amassed on the Internet has value and can be used to provide evidence of the credit situation of its enterprises.
Through a combination of Internet technology and unique innovations in finance, Alibaba’s small loan model is truly achieving the motto, “Turn trust into wealth and make it easy to borrow money.” It is bringing benefits to ever-more microenterprises engaged in e-commerce.
The small loan system of Ali Small Loans is providing China with a feasible path toward funding microenterprises in the Alibaba ecosystem. It has provided the lifeblood for more than 300,000 grassroots entrepreneurs by providing the indispensable financial support for releasing their entrepreneurship.
YuEbao: Internet Ways to Manage Personal Wealth
YuEbao is a value-added service that was created by Alipay. Users shift funds from their Alipay accounts into YuEbao in order to invest in a wealth-management fund called the Tianhong Zenglibao Money Market Fund.
In shifting funds into YuEbao, they can gain relatively high returns from current deposits while still being able to use funds in their YuEbao accounts.
At any time, they can purchase goods on the Internet, use Alipay for payment functions, and so on. The advantage of YuEbao lies in the fact that funds shifted into its account not only earn higher returns but also can be used to pay for consumption in ways that are flexible, quick, and easy.
Collision Between the Internet Business and the Financial Industry
After YuEbao saw the light of day on June 13, 2013, it was broadly regarded by the public as yet another historic episode that changed the use of the Internet for finances following on the innovations of Alipay.
By January 31, 2014, this fund had already reached a scale of 350 billion RMB. More than 58.95 million people had YuEbao accounts. It had become the largest fund in the Chinese domestic market. It would have been impossible to realize such magnitude by using offline sales methods.
Most users belong to grassroots classes of people. YuEbao guides this portion of users in learning to use new wealth-management products to make reasonable plans for their modest sums of money. In actuality, this is a powerful impetus to releasing entrepreneurship among the public at large.
The enormous attention that YuEbao is getting from the public and the debates going on about it naturally have attracted the attention of many others. Consumers who have never done any online purchasing now want to try it.
In the end, this has had a very positive effect on increasing the number of transactions going through Taobao. “Pull on one hair, and the whole body is affected,” as the saying goes. Every time Alibaba pulls another “hair,” the entire chain of e-commerce is affected.
If this very vital emerging industry, this sunrise industry, did not get refreshed by the morning dew all the time, it would not be as sparkling and lively as it is today. It can be said that innovation is its fundamental driving force for constant development, as well as the most effective route to growth.
At the current time in China, quite a few issues have become apparent in the way banks and securities firms market financial products. For example, they aim for short-term profits.
They promote high-risk products to a clientele that can only handle low risk. They engage in churning, make inappropriate recommendations, and so on.
In contrast, Internet sales platforms have the advantage of being able to tap latent customer demand among targeted customer groups and with targeted product designs. They can be more precise in marketing to appropriate customers. The powerful interactive nature of Internet technology and its precision can effectively lower the costs of service.
From the perspective of financial institutions, therefore, fund companies have for many years wanted to break out of their excessive reliance on banking channels. They want to move away from being forced into a passive position.
It is no exaggeration to say that Alibaba’s cooperation with the Tianhong Fund stirred up a “channel revolution” in the fund world. No longer do fund companies have to line up to go through bank channels to achieve distribution.
They can go through innovative forms of cooperation with Internet companies. With much less trouble, they can achieve an increase in customers and ramp up the scale of their business.