Microfinance, E-Commerce, Big Data and China: The Alibaba Story
One of China's great success stories and by some measures already the world's largest e-commerce company, the Alibaba group is an innovator in microfinance. Founded in 1999 by Jack Ma, a former English teacher from Hangzhou, the Alibaba Group includes 25 Internet-based businesses that cover business-to-business online marketplaces, retail payment platforms, shopping search engine and data-centric cloud computing services. Alibaba.com has three major marketplaces. The company’s English language international marketplace brings together importers and exporters from more than 240 countries and regions. The China marketplace is developed for domestic business-to-business trade, as well as a transaction-based wholesale platform, AliExpress, which allows smaller buyers to buy small quantities of goods at wholesale prices. And finally the Taobao Marketplace is the biggest consumer-to-consumer online shopping platform in China.
Alibaba estimates that the trading platform has helped create 2.67 million jobs directly through business growth, as well as indirect job formation through their collaboration with logistics companies and other partners. As a part of its efforts to understand the impact of the ecommerce model, Alibaba tracks “TaoBao Villages," which are rural villages where nearly all households are using the TaoBao platform in come capacity. The benefits seen include:
- Providing low income, remote and other populations access to broader range of goods and services at lower wholesale and retail prices;
- Providing small scale producers with new sales channels; and
- Reducing operational and startup costs for micro and small businesses.
Photo Credit: Francis Minien
Acknowledged as a key driver of the group’s success, Alipay is Alibaba’s third-party online payment platform, linked with 108 partner banks in China and players like VISA and Western Union around the world. The company served more than 800 million registered users as of the end of 2012, processing nearly one million transactions per day. Initially, Alipay provided a breakthrough payment service for Taobao called “escrow”, which allows consumers to verify whether they are happy with goods before releasing money to the seller. This has been a significant advantage to the service as China's weak consumer protection laws reduce consumer confidence. Consumer protection and transparency in vendor ratings are hallmarks of the system, which has built a very loyal group of active (approximately 50%) users.
While Alipay’s online payments still dominate (80%), mobile payments grew from 10 to 20% of total transactions last year. And while big cities topped in spending, underdeveloped regions experienced the fastest growth, as tier 4 cities grew 64% in online payment users. People can use Alipay to pay:
- Utilities (water, electricity, gas, etc.)
- Medical insurance use at hospitals
- Goods and Services
- Credit card repayment
- Charitable donations to NGOs
- Wealth management products.
On June 14, 2013, Alipay launched an upgrade to its mobile application, the “Alipay Wallet," that allows subscribers to invest money through its “Yuebao” product into a money market fund managed by Tian Hong Asset Management with a 3.8 percent annual return, much higher than earnings on a deposit account. Subscribers are still allowed to use their money in the fund to purchase on Taobao or pay bills through Alipay. The interest rate and flexibility immediately attracted one million users in just one week, often transacting in very small amounts. By the end of June, the company claimed 2.5 million users, with more than 57% accessing the service through smart phones.
Microfinance Meets Ecommerce – the Role of Big Data
The TaoBao platform has 16 million participating vendor businesses, nearly 90% of which are small and microenterprises with difficulty accessing finance to fuel their growth. AliFinance was established in 2011 to provide loans to vendors on the Taobao and Alibaba platforms. Alibaba has built its own credit scoring model based on online activity, using big data to understand client behaviors and characteristics and offer responsive financial services, overturning traditional banking models and leveraging the group’s cloud computing services to keep response time to customers fast and operational costs low.
AliFinance currently has 409,444 borrowers spanning the country with an outstanding portfolio of 105 billion RMB ($17.2 billion). Loans are 100% unsecured and require 3 months of platform trading activity to qualify. The average loans size is 20-30,000 RMB ($3,500 to $5,000) and repayment terms are flexible. Clients qualify for a credit limit based entirely on their scoring model. No contact is needed between borrower and lender, with all communications, contracting and payment handled online, helping reduce costs and risk. NPL on the portfolio is 50-60 million RMB out of 105 billion outstanding, or less than .0005%. Alibaba’s credit scoring model taps over 1,000 data sets within the group, including:
- Revenue growth
- Transaction data
- Position/rating of the client in their own industry
- Changes in rating within industry
- User ratings and purchases
- Any experiences with poor behavior and “punishment records” on TaoBao
- How many users rate the seller as a favorite
- Usage levels and repeat buyers.
According to the Financial Times, despite its fast growth, AliFinance still only makes up only about 0.1 per cent of the total loans issued by China’s banks. However, AliFinance has been given regulatory leeway to leverage its microlending operations beyond standard limits on its registered capital, growing roughly 40 times as big as a normal microfinance company is allowed. Some questions have been raised about how far the model can scale without a banking license, although AliFinance actively partners with banks in the lending process.
Future for Online Financing
In early April, Fitch cut China's sovereign credit rating and soon after, Moody's cut the country's economic outlook. Both cited increased risks from the growth of shadow banking as an underlying reason for their downgrades. China's shadow banking system is providing approximately 40 percent of the country's credit, often to small and medium-sized enterprises who have trouble access credit from the big banks. Technically, AliFinance qualifies as a shadow lender, based on their microcredit company and credit guarantee company licenses. But some analysts point to the potential for online lending to make small-scale lending more transparent. Traditional banks are weighing their options while internet companies like AliFinance are jumping into the business of microfinance.
Jack Ma, founder of Alibaba, recently argued that the Chinese financial industry is over-regulated. He noted that “There are two big opportunities in the future financial industry. One is online banking, where all the financial institutions go online; the other is internet finance, with is purely led by outsiders. The financial industry needs spoilers to make a revolution”.
----This post is a contribution from Leesa Shrader, a CGAP consultant, based on her August 2013 interviews with Alibaba senior management in China.