Ant Financial Gargantuan IPO: The FAAS becomes real – Part I

FAAS = Finance As a Service, including payments, credit, investments, insurance etc; as technology deepens into financial services.

So what exactly is Ant?

In brief, it’s a bridge to the digital world for the consumers and small businesses that have gone digital, but their financial services partners have not.

Here it in their own words (from Ant IPO prospectus):

"With China’s economy shifting towards domestic consumption and the growth of small businesses, the financial services needs of consumers and small businesses have expanded considerably and demand for credit, investment and insurance products is projected to increase substantially. These needs are underserved by brick and mortar channels of the financial system because of the lack of reach and customer insights in the process of underwriting risk, for example in the case of a micro-loan or small-claims insurance."

All banks/ asset managers/insurance company CEOs of the world...take notice. It is possible for a savvy tech player which uses your capital / license/ back end to generate far bigger value. You could co create it by proactive collaboration though.

So how does Ant do this gargantuan nos leading to the largest IPO ever?

Basically, it combines the traffic on Alibaba and Alipay to originate customers, and then use their technology skills with cloud and AI to match those with financial service providers, and take a cut in-between. Customer always sees Ant group and is dependent on them, while the regulated financial services provider remains largely behind the scene.

Does this look like it has happened before?

While this has not happened in Finance before, it has happened in media (think Google and Facebook), electronics (think apple), retail (think Amazon, and Alibaba of course). While in hardware, this is usually new products like Apple iPhone, a touch screen phone, in services, it is usually an overlay on top of an existing service that makes it digital and helps evolving customer needs. These are characterized by either a new OTT platform takes up large part of value away from the underlying traditional and usually regulated rails, for example the telecom. In other words, this is disruption by innovator collaborating with the incumbent and slowly increasing the value share as the network effect kicks in.

So does that mean this will be a one way street forever?

There is always a stage in a jungle when a hunter once can eventually get hunted, and in world of business, the disruptor can get disrupted. That’s why Amazon tries to remember as if every day is first day. As for large behemoths, they become too big for the ecosystem, and can face regulations and/or a innovative challenger that reads changing landscape even better. Other risks are geopolitics.

So is this a buy on IPO?

Well, the world has not seen a platform this large and this popular in this particular form. So hard to see it fail, but who knows.

So how does one value Ant?

Just a brief look at key nos will make investment case clear (Source: Ant DRHP & Internet)

Ant Financial is expected to be priced giving a market capitalization of US$300 Billion+, which happens to be larger than the largest bank, though one could say that bank has gone through ups and downs over a century. The more relevant comparable is however not a bank as Ant works with a number of partner financial institutions. Visa, the global payment behemoth valued close to US$400 Billion is at least 30% higher, and it works with far more customers, merchants and financial institutions across the world than Ant. However, the other more relevant comparable would be Amazon, which came before Alibaba, the parent of Ant. Amazon is a global leader in data and technology through its cloud service that powers many of the largest organizations and finance will become increasingly cloud centric. Ant is already on this path through its AntChain blockchain. Ant Financial went big on cloud native, building a finance-grade cloud-native hybrid cloud solution, which was launched earlier this year.

So whats in store for Ant investors? Ant group has already penetrated areas of digital payments (whether ecommerce, QR code based peer to peer or any electronic payments), asset management (runs the largest money market fund globally) and credit tech, or providing lending as a service where they famously provide a loan in 3 minutes. A few critical ways in which Ant can further grow and leapfrog over its global competitors are insurance, where their penetration is low and can increase thanks to tight relationship with Alibaba and blockchain, which diversifies them from financial services to empowering smart contracts in all aspects of business such as manufavturing, healthcare, logistics, supply chain etc.

The key risks for Ant though clearly more into distant future are regulatory actions in the form of monopoly concerns or Government actions in terms of digital currency. As we know, China has already launched its own Central Bank Digital Currency (CBDC) project called Digital Currency for Electronic Payments (DCEP), a hot topic of discussion these days, especially after Facebook talked about its world money concept christened as Libra. Digital currency would enable consumers and merchants to pay to each other smoothly, and can bring about massive disintermediation and restructuring of all services on top of payments, whether of traditional intermediaries like banks or new ones like Visa or Ant. The third risk is of course, potential challenges in international expansion from geo politics.

More on these tech developments in part 2. For now, lets wait for the reception into markets of Ant big bang as we enter a tumultuous week that also has US prez election and second wave of Coronavirus pandemic reaching new highs apart from Ant IPO!