Can Flipkart or Snapdeal become a BANK in India?

Sounds unbelievable right!! But read over and see how data could be leveraged by e-commerce companies to potentially disrupt financial services. As a data professional in the banking sector, I feel these are very interesting times to be in 🙂

Let’s look at how Alibaba is disrupting the financial services business and may soon become a bank in China- yes a BANK and that too maybe a branchless bank!! If that happens then it is absolutely not crazy to say that the larger Indian e-commerce companies like Flipkart or Snapdeal could eventually become a bank #justsaying!

Leveraging data to disrupt financial services

Alibaba, the Chinese e-commerce giant which reported sales of US$ 170 bn in 2012 (it reportedUS$ 5.7 bn sales in one day on 11.11.2013) has started a new kind of online financial services with no physical branches. Alibaba’s scale gives them access to enormous data about users  which along with the help of the penetration of their mobile wallet and the leadership of Jack Ma has enabled them to start a wide array of online-only finance products ranging from – deposits, insurance, virtual credit cards and business loans for the sellers. Let’s look at these in a bit more in detail and see how DATA is playing a key role in most of them:

• Mobile Wallet: Alipay, the payment wallet 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. Alipay’s mobile app has more than 100 mn users and almost one-third of their transactions are happening on mobile.The key selling point of Alipay Wallet is the option of Online-to-Offline (O2O) payments enabling even physical retailers to accept payments.  The app allows users to electronically transfer funds via the Internet, through barcode recognition, QR code recognition, and a new feature called ‘sound wave payment’ to communicate with another Alipay Wallet equipped smartphone for P2P payments.

• Business Loans: Alibaba has given unsecured business loans of US$17 bn (as of Oct 2013) to 400,000+ small and micro businesses (who make garments, toys, home furnishing items etc) who are sellers on the Alibaba platform through their subsidiary AliFinance. What makes this special is that most traditional large banks would not lend to these businesses because they cannot do any risk profiling of such clients. However, Alibaba on the other hand is comfortable lending to these small businesses, which have little or no credit history as it uses advanced credit scoring models based on DATA  they have about the sellers like – transaction volumes, rating of sellers, revenue growth, change in ratings, position of rating in their industry, repeat buyers and the list goes on.

It is very promising to see how these business loans have helped SMBs to grow into larger sellers on Alibaba platform. The best part is  that the highest % of loans have been given to women in small villages (some now known as Taobao villages) who engage in making garments which are sold on Alibaba.

• Virtual Credit cards: Alibaba and Tencent had recently announced that they are targeting to distribute 1 million virtual credit cards each in a week.  Alibaba virtual credit cards (in association with CITIC bank) are different from physical credit cards in the sense that the whole process will be completed online within the Alipay wallet app- filling the application form, the credit worthiness is checked based on the transaction history of the applicant on the Alibaba platform. Tencent has set credit limits for their WeChat credit card users ranging from US$8.14 to US$814. However, as of now the launch of virtual credit cards has hit a road block as thePeople’s Bank of China bans e-payments through virtual credit cards.

Imagine this now- Alibaba is now a platform where the sellers selling millions of products are getting loans to make the products from Alibaba and the buyers who are buying billions of dollars worth of products will also get loans (through credit card) to buy these products!

• Deposits: Alibaba started a fund in June 2013 called Yu’E Bao’ asking buyers to shift money from their banks to this fund through their Alipay Wallet. The pitch was that Alibaba promised 6% interest rate when the traditional banks were paying 0.35% on the savings  and they could remove the money anytime they wanted- primarily to buy on Alibaba using Alipay wallet.

Just by doing this, Alibaba raised US$81 bn by end of Feb 2014 from 81 mn customers making this the fourth largest money-market fund in the world!! The fund is managed by Tian Hong Asset Management Co. in which Alibaba itself bought a majority stake.  Alibaba also makes money from referral fee for investor referrals from the Asset management company.

There have been a lot of apprehensions about how Alibaba would give such high interest rates and still manage liquidity risk since buyers can remove money at any time. Alibaba claims that DATA will again help them here – they know when users purchase or plan to purchase and hence can manage liquidity by keeping a fair balance of cash and investments.

• Insurance: Tencent and Alibaba actuallyteamed up in a joint venture with PingAn Insurance to create a new entity ‘ZhongAn Insurance’  for online liability early 2013. Unlike traditional insurers – like PingAn – ZhongAn will not open any brick-and-mortar stores across China. The new business will focus on liability and guarantee insurance, such as for homes and possessions.

Alibaba may soon have a banking license

China is set to launch a trial program to allowfive new private banks to be set up in the country and two of the ten shortlisted companies for the licenses are internet biggies – Alibaba and Tencent.

This is still the beginning of the new era of consumer banking and will definitely evolve. Alibaba is only 0.1% of the Chinese bank lending, Tencent is also foraying into the online financial services space only now. The regulatory frameworks are still evolving and regulators are experimenting.

But does all this mean that this is beginning of the end of traditional consumer banking space? Absolutely no! The traditional banks are also investing heavily in technology, embracing things like mobile finance, big data to increase speed of services and reach, and also bring down costs.  Also, the financing eco-system will still require traditional large banks, for instance Alibaba partners with Banks, customers who wish to borrow in excess of Alibaba’s loan limits are referred to banking partners.

Will this happen in India?

It surely looks like the large e-commerce/payment wallet companies in India will take a shot at this as they scale up their business- we may be a few years behind China but our growth rates for internet penetration and e-commerce are pretty impressive.

We can already see the leadership at e-commerce companies (Kunal Bahl, Sachin and Binny Bansal and the other Bansal’s) giving the right signals. Companies likeSnapdeal have already announced that they are going to offer financial services (insurance, loans). Flipkart’ is already usingdata for personalization of shopping experience. The next logical step would be leveraging this data to foray into online financial services.

And if we get lucky to have RBI issuing more licenses in the future (a few years later), don’t be surprised if Flipkart and Snapdeal or maybe Paytm applying for a banking license.

*(Research Inputs from Sandeep Reddy)