- Alibaba's consumer credit rating service to go via its Sesame Credit subsidiary
- The intended bank will provide loans to consumers and SMEs
- Its biggest rival, Tencent, is also developing its own credit rating system
By Neil Flynn
Alibaba has been a dominant market leader in online retail and payments for over 10 years, and this has allowed the firm to gather a huge amount of data on individual users’ spending history and behaviour. The firm has decided to monetise this data via its financial arm Ant Financial in order to develop its own bank.
On January 6, the People’s Bank of China issued a notice that allowed Alibaba and seven other firms to set up a consumer credit rating service, which Alibaba will set up through its Sesame Credit subsidiary. Sesame Credit calculates a user’s credit score by analysing their purchase history and behaviour on Alibaba’s shopping platform as well as on Ant Financial’s Alipay payment system and other financial services.
As Alibaba has been leading these industries for over a decade, it is able to analyse huge amounts of data to generate an accurate credit rating score. It will also attain data from third party sources, such as financial institutions in order to improve the quality of their calculations. Alibaba will set up its own financing company, under the Ant Financial umbrella, which will likely be known as the Alibaba Bank, so that it can provide loans to consumers and SMEs in China. The credit data will also likely be sold to third party institutions, as it will likely be the best quality credit data in China.
Sesame's credit card scoring calculation
Source: Ant Financial
Ant Financial is currently in the test phase of a retail shopping credit system, called Just Spend (Huabei - 花呗), which will allow consumers to take out month-to-month loans of between 1,000RMB ($160) and 30,000 RMB ($5,800), to be paid back within a month. The loans are interest free if paid back within the month, with the only fee that Ant Financial would receive being fines for late repayment. The firm has already acknowledged that it doesn’t expect to make a profit from issuing these short-term loans, but profit will come from the increased purchases made over Alipay. In addition, Alibaba will see more purchases over its Taobao and Tmall retail platforms.
Get in line: Alibaba is targeting SMEs and consumers for loans. Photo: iStock
Alibaba’s biggest rival, Tencent, has also been developing its own credit rating system, which would be based on user data. Tencent is the only viable rival to Alibaba, because it can analyse user data from its WeChat Payment service and its association with online retail giant JD.com. But the problem is that the firm’s association with JD.com and the launch of WeChat Payment began in 2014, so in terms of data, Tencent pales in comparison to Alibaba.
In addition, I remain slightly skeptical as to how data analysis across Tencent’s many services would be able to generate accurate credit data, given that most of Tencent’s services are social media and informational. Because of the difference in data quality, Alibaba will use the credit rating system to allow Ant Financial to make credit and loan decisions, whilst Tencent will sell the data to financial institutions. However, I do expect that over time, Tencent will enter the financing business as the quality of their data improves.
Alibaba's interest-free monthly loan application page
China’s state-owned banks are notorious for being unwilling to lend to smaller businesses, which instead have to turn to the shadow banking industry. The introduction of Alibaba and Tencent into this industry will offer Chinese SME’s an alternative, one which I would assume would offer better terms for borrowers. China’s shadow banking industry has been the basis for bearish sentiment over the Chinese economy for several years, because as the name suggests, the shadow banking industry suffers from a lack of clarity, and investors aren’t able to understand the level of debt that China’s SMEs have assumed. With Ant Financial’s likely IPO next year, and Tencent being listed in Hong Kong, the level of credit risk would be much more visible to investors.
Is it a win-win situation for Alibaba investors?
Understandably, investors would likely be concerned that the launch of consumer credit would place risk on the firm’s balance sheet. During the fiscal third quarter conference call, executive vice chairman Joe Tsai stated that the credit risk from loans and credit would be on Ant Financial’s balance sheet, and Alibaba would benefit from a profit sharing agreement.
Prior to the record breaking IPO, Alibaba separated its financial services from its other businesses, and are now all integrated under the Ant Financial name. The company consists of Alipay, Alipay Wallet, the online money market fund Yuebao (余额宝), micro loan firm Ant Credit, P2P lending platform Zhaocaibao (招财宝) and Alibaba Bank, which is likely to be launched in May. Ant Financial shares a 37.5% profit stake with Alibaba, and because of this, Alibaba will continue to promote its financial services across its other business lines, such as the taxi-hailing app Kuaidi Dache, in order to increase the usage of Alipay, which in turn improves the quality of the credit scores that Sesame Credit can calculate.
Partnership with Lending Club
On February 3, Alibaba announced that it has partnered with Lending Club in order to provide loans to US firms wanting to pay for goods from a supplier in China through a venture called Alibaba.com e-Credit Line. The loans that Alibaba will offer range from $5,000 to $300,000, with interest rates between 0.5% and 2.4%.
As Alibaba makes its easier and more feasible for American firms to source products from China, demand from the US can be expected to increase, and hence more and more Chinese suppliers will sign up to Alibaba’s international services. This move will be Alibaba’s biggest attempt to date at entering the US market, and instead of going head to head with Amazon in the online retail space, they have targeted the overseas sourcing market, in which they hold a dominant position.
Neil Flynn is is head equity analyst at Chinese Investors. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.