Opinion: Ant Financial’s MoneyGram acquisition is a clever strategy to dominate the US

Photo credit: Ant Financial.

Bloomberg and Reuters have recently reported that Alibaba’s payments arm, Ant Financial, is planning to seek approval for the third time for its acquisition of US money transfer company MoneyGram. The US$1.2 billion deal failed to secure security clearance from the Committee on Foreign Investment in the United States (CFIUS) during the initial 75-day review period. Ant Financial resubmitted the application and has yet to receive the result.

According to Reuters, “CFIUS is a secretive government panel which reviews acquisitions by foreign entities for potential national security risks.”

But instead of national security, the main concern should be how Ant Financial could dominate the US and international financial markets with its MoneyGram purchase. Based on its track record, the Chinese company has the strength to displace traditional banking giants by attacking the loopholes of their products and services.

Let’s take a deeper look.

Low penetration and weak products in China

Before Alibaba and Ant Financial were founded, China’s financial industry was dominated by five major state banks. But within two years of it’s founding, Ant Financial raised US$4 billion, valuing it at US$60 billion. On the contrary, the Bank of Communication, one of the major state banks, has a market value of nearly US$63 billion (or over HK$490 billion) despite its 109 years of existence.

The reason for this is that state banks focus their lending services on state-owned enterprises and pay little attention to individual consumers and SMEs. According to a recent EY report, there are eight bank branches for every 100,000 people in China compared to 28 in the US and Europe. Only 20 percent of the Chinese population can get consumer loans. This ties in nicely with the fact that over 84 percent of the Chinese population resort to non-bank products (see data below).

Photo credit: Capgemini via LinkedIn.

Given the low penetration rate, Chinese leapfrogged credit cards and embraced online payment methods. Anyone with a mobile phone can open an Alipay account and buy or sell products on Taobao and other ecommerce stores.

Alipay also launched money market fund Yu’E Bao, which initially offered yields at 6.2 percent for user deposits, a high rate for risk-free returns. On the other hand, major Chinese banks offer just 0.35 percent. As a result, Yu’E Bao attracted 81 million users (or 20 million users every 15 days) after nine months since launching compared to China’s A-share market of 67 million in 23 years.

Photo credit: Bloomberg.

High payday loans in the US

In the US, 5.5 percent of its adult population have resorted to payday loans in one form or another, according to a Pew Trust report in 2012. “On average, a borrower takes out eight loans of US$375 each per year and spends US$520 on interest,” the report says. Payday lenders are prevalent in neighborhoods where people can’t afford basic expenses until the next payday.

Credit scoring in the US vs in China

Strategy for dominance