U.S. and European fintechs aspiring to become unicorns should look no further than Ant Group, the parent company of Chinese payments giant Alipay, which is on the precipice of becoming a unicorn 200 times over.
Ant Group (which recently changed its name from Ant Financial) will be selling over 10 percent of its shares in a dual Hong Kong-Shanghai listing at an eye-popping valuation of about $225 billion, reports Fortune.
For the unacquainted, Alipay is China’s leading mobile app for payments, insurance, lending, wealth management, and credit scoring. With over 1.2 billion distinct users (and over 900 million in China alone), Alipay is a true one-stop-shop that has become the world’s largest fintech business.
While few fintechs can hope to ever match Alipay’s scale, they’d do well to draw lessons from Alipay’s success. In particular, two key factors behind Alipay’s success that other fintechs may benefit from replicating.
First: Solve one problem well before tackling others
If the first era of fintech was dedicated to “unbundling” services from legacy institutions, then the second era is geared around “rebundling” those services within a single application, and Alipay has proven itself a master of rebundling. The company is “the ultimate mashup between Stripe, PayPal, Apple Pay, Venmo, FICO, and any of the multiple fintech companies in the U.S. that offer lending, savings, and insurance products,” writes Marc Rubinstein, a former hedge fund investor and financial blogger.
But Alipay wasn’t always a multi-use platform. When Jack Ma founded Alipay in 2004, the service addressed one narrow problem: holding funds in escrow for consumers using Alibaba, Jack Ma’s fledgling e-commerce company. As Alibaba grew, more consumers and merchants began using Alipay, which provided the company a natural opportunity for expansion into adjacent services like peer-to-peer payments and e-commerce via merchants’ websites. By capturing one segment of the market early, it was able to build customer loyalty while continuously offering those customers new products.
“China is one of the world’s most competitive marketplaces. Ant has no choice but to keep branching out to new areas to increase stickiness with end-users,” said Howard Yu, a professor at IMD Business School. “You can see how the company practically follows users to eliminate any fiction across transactions of all types.”
One US fintech has followed a similar tack to great success. Square’s innovative Point-of-Sale card swipers enabled the company to make inroads with small businesses and merchants. This laid the groundwork for Square to cross-sell those merchants payroll and employee benefits services, business banking and lending, and other auxiliary financial services. Square has taken a similar route to expanding its consumer-facing Cash App business: What started as a peer-to-peer payments provider now offers banking services, debit cards, and in-app investing.
Of course, first-mover advantage is critical, and Alipay was an early entrant to China’s nascent digital payments space fifteen years ago.
“Alipay was successful because it capitalized on the digital evolution in China,” said Jeffrey Ungerott, managing principal at Capco. “As eCommerce increased in popularity, there was a need to connect consumers and retailers enabling them to efficiently conduct transactions. Not only did Alipay address the eCommerce sector, it also transformed consumer’s in-person payment habits as well.”
Second: Build big at home–then look abroad
Alipay has evolved into a global fintech giant, but it didn’t set out to serve customers abroad. The company was initially built for Chinese consumers and businesses on Alibaba. Once the company established a strong foothold in China, it then looked beyond its home country’s borders.
“Instead of rolling out a product worldwide, fintechs can alternatively focus on a geographic region and go deep,” said Professor Wu, citing Alipay’s laser-focus on catering to Chinese consumers as a necessary first step to international expansion.
Alipay was strategic with how it expanded internationally. The fintech’s early growth coincided with a tourism boom among middle-class Chinese. Once Alipay was embedded in the financial lives of those Chinese travelers, foreign merchants were incentivized to accept Alipay transactions–after all, there was a huge market opportunity for vendors to appeal to Chinese tourists.
Gaining a toehold with merchants in foreign markets then helped Alipay launch local wallets and partner with local payments companies. Today, Alipay’s non-Chinese customer base is over 300 million people, with a concentration in nearby markets like India, Thailand, and The Philippines.
“Integration with existing payment and eCommerce ecosystems across the globe enabled broader acceptance and customer adoption resulting in additional revenue streams, profits and positioned them for future growth,” Ungerott said.
By comparison, the more aggressive expansion strategy of some European neobanks has generated mixed results. For example, N26, a German neobank founded in 2013, expanded to the United Kingdom in October 2018 with only 1.5 million customers to its name. Within 18 months, N26 exited the UK after failing to gain traction. Similarly, British challenger bank Monzo launched in the U.S. over a year ago, but U.S. customers are still being directed to join a waitlist. VC darling Revolut has gained a respectable 150,000 US customers since launching stateside in March, but the company is hemorrhaging more money than ever.
Of course, this crop of challenger banks is armed with VC capital and boasts impressive YoY revenue growth, but few believe any are positioned to become the next Alipay. The bottom line is, entering new markets is especially difficult for fintechs, owing to countries’ differing financial regulatory frameworks, entrenched customer habits, and the strength of legacy institutions. Alipay’s China-first approach shows that prioritizing domination at home can be the most effective forerunner to expansion abroad.