Welcome to Pacific Exchanges, a podcast from the Federal Reserve Bank of San Francisco. I’m Nick Borst.
And I’m Sean Creehan. We’re analysts in the Country Analysis Unit here at the San Francisco Fed. Our job is to monitor financial sector developments in Asia and as part of the Fed’s public mission share information and analysis with listeners like you. Today we continue our series on fintech in Asia looking at the new and innovative technologies that are shaping finance in the region.
In today’s episode we sat down with Souheil Badran, president of Alipay North America. As many listeners will know Alipay is a payment spinoff of the Chinese e-commerce giant Alibaba. Alipay, now part of Ant Financial, is by many metrics the largest fintech company in the world. In addition to payments, Ant Financial offers SME lending an investment platform, credit ratings, money market funds, insurance policies and many other types of financial services.
So now on an average day a consumer will touch base or open up the app six or seven times, which is not something you can traditionally do with a credit card or a regular banking app. So we’ve expanded that to lifestyle meaning I can now also buy movie tickets, I can pay for transportation, I can pay utility bills, everything is happening within the app.
So in previous these episodes we’ve had a few conversations with people working at fintech companies, but we think you’ll particularly enjoy getting Souheil’s perspective as an American working for a large Chinese fintech company as it attempts to expand in the United States. He has some great insights into what’s driving the growth of fintech in different markets like China and the United States.
It was also really interesting to learn about the potential for fintech to make cross-border payments truly frictionless. The idea that a Chinese tourist visiting the U.S. could just bring their phone and make payments for anything they needed here through their mobile wallet.
Yeah, it’s definitely easier than jumping through the hoops of exchanging renminbi for dollars. Souheil also helps us understand why Chinese users are already so used to using their mobile phones compared to a U.S. consumer who may prefer a payment card. So let’s hear our conversation with Souheil.
Well Souheil, thank you so much for joining us today.
Absolutely, my pleasure. Good to be here.
Just getting started could you tell us a little bit about your background. I see that you’ve worked at a lot of different technology and financial services companies in the U.S. How did you get involved with a large Chinese fintech company?
Great question and I appreciate that. My background really is both on the security side having spent seven years at a company called Verisign and then went into financial services through companies like First Data and FIS. So all throughout my career has been focused on how to move money, in a secure way of course. With the last few kind of positions that I’ve had they really focused on international payments and as e-commerce continued to grow as companies started looking at different ways to expand their footprint outside of the United States it became very apparent that there was a need for accepting different payment types because—A, not everybody can just wire money, second, not everybody had a Visa or Mastercard. So we started looking globally at what are the ways people pay in region and that’s who I came across Alipay about five years. I was running a payments company out of Minneapolis called Digital River and we made sure that we accepted Alipay as a form of payment and what that really meant is that Chinese consumers now can buy from U.S. merchants and we were the man in the middle that allowed them to accept those payments.
So Alipay came out of Alibaba of course and now Ant Financial is the spinoff fintech firm, the largest in the word. Can you tell us a bit about the origins of Ant Financial, what it’s up to in China and now what it’s doing around the world, particularly in North America but more broadly?
Sure. So Alipay itself really started as a mechanism for online commerce and it was a way to enable trusted commerce between buyers and sellers. It kicked off with our Taobao property, which is an Alibaba marketplace and what that allowed consumers to do is to effectively pay and Alipay became a wallet of choice because again credit and debit and credit scores were not that available in China.
Throughout the financial ecosystem there are 520 million users and many of them obviously use Alipay but over the years we’ve also expanded our services and really formed the services around consumer needs and merchant needs as well. So if you look at our ecosystem today, at least in China, then I’ll get into the outside of China part. We are doing what we call a lifestyle app, we’re focused more on digital enablement, meaning not only can I pay at a point of sale or online using Alipay but I can also save money. So a few years ago, five, six years ago, we created the money market fund. Right now it’s the largest in the world, they’re obvious economies of a scale with Chinese consumers but we made it very simple for a consumer to go in and save money.
So now on an average day a consumer will touch base or open up the app six or seven times, which is not something you can traditionally do with a credit card or a regular banking app. So we’ve expanded that to lifestyle meaning I can now also buy movie tickets, I can pay for transportation, I can pay utility bills, everything is happening within the app. And as we continue to grow we also developed our version of FICO score as we know it in the U.S. because there was none in China and now we’re able to extend you credit if you’re looking to rent an apartment, go into a hotel based on your credit that we know of. We may say, you know what you don’t need to put a deposit down because we know you’re good for it. If you are a hotel owner and you want to borrow some money we can extend you that line of credit as well, especially if you are an SME and we know you’re good for it, you’re going to pay it back. So what we’ve done is we’ve enabled everything under one app in China.
Outside of China we’ve got really two goals, one is merchant acceptance. Every year there are about 130 million trips that take place outside of China, people leaving China to go somewhere. In the United States alone that number is about four million Chinese tourists coming in, Canada is about 700,000 and so what we’re doing is working with the merchants so that they can accept payments using Alipay and that gives the Chinese consumer the ability to pay using Alipay in a way that they’re comfortable with. And we know when we ask our consumers they love using that because again it’s more than just a payment mechanism. They use it to keep track of the money market fund, we have a social aspect that they can communicate with friends but we also have what’s called our discover platform that allows merchants to upload coupons or special so as the Chinese consumer is opening the app they can click on that coupon, save 10, 20 30% off whatever the merchant decides they want to do and then we will drive that consumer to that merchant. So merchants love it because they view it as a free marketing tool, Chinese consumers love it because that’s how they’re used to paying and in addition they’re able to save money through some of the merchant coupons.
So in general that’s the primary objective. What we’ve also done is, I’ll give you an example in India. Three years ago we invested in a company called Paytm so now in India there’s a wallet called Paytm Wallet with our technology behind the scenes and they, today, have over 220 million users on their wallet. Again a very similar model where not only did we go after the banked but we went after the unbanked, the small merchants to allow them to accept payments and not worry about cash as much.
So maybe pulling back a little bit, just looking at the overall trend of fintech it seems like there’s so much excitement about it now, but in reality fintech is nothing new. There’s always been technology used for financial services. What’s different about this current fintech push and why does it seem like, you know, instead of some of the more developed global financial centers it’s countries kind of more on the periphery or emerging markets that are really at the forefront of some of these technologies.
Let me answer maybe two parts, right, with kind of what’s different. You’re absolutely right, we’re still moving ones and zeros if you think about it that way. Whether it’s a credit card or it’s an ACH it doesn’t really matter you’re still moving money around. I think where the developed countries have stepped in is the lack of the banking infrastructure that we have here in the United States, right? It’s a very mature infrastructure, credit is readily available, debit cards are out there today. If you think about places like India and China for example, they bypass a generation in a sense.
A Chinese farmer in western China, it would take him about a day to get to a financial institution. It’s not like you are living in the city or out here where you have a financial institution around every corner. So we’ve eased the pain of making financial transactions. So you’re not carrying cash anymore, you’re really dependent on your mobile app because it’s with you the whole time and now you can not only pay but you can also accept payments. So changing that behavior and enabling the consumers and the merchants, both the individual and the merchants to leverage that technology to better their lives is what’s helping drive that quite a bit.
The second part of that is again the ability of technology both whether it’s an iPhone, iOS or Android that has become fairly inexpensive and now it’s cheaper for me to buy a phone, download the apps because if you think about the consumers that we’re serving the 520 million aren’t necessarily the elite, right? You have a lot of under-banked or unbanked that are using the service, so they use it as a wallet as well. And that’s true across not just China but other countries as well. So they view as a financial enabler for their lives not only from a financial perspective but also saving them a lot of time in terms of bills, utilities, transportation where they don’t have to go and spend half an hour getting a ticket, they can do it over their mobile app.
Is there a barrier in terms of establishing trust for people who may be new to formal financial services to sort of take the leap and, you know, if they’re used to dealing in cash suddenly to put all their money on this mobile app? How do you overcome those hurdles?
Well, believe it or not it’s word of mouth. I think when they see the ubiquity of where Alipay is accepted that helps them quite a bit because they realize merchants would rather not deal with cash. You know, we use the example and there was a published case a few months ago where two thieves went to try and rob three different places and I think they walked out with less than $200 because no one’s using cash anymore. So if I know that my family member is using Alipay it’s become very easy for me to adopt Alipay. Think of it also from a person-to-person, P2P, transfer of money. I use Alipay now to send you money for your birthday, we call them red envelopes, right? I can send you money as a gift and so we’re not necessarily replacing cash, that’s not our intent.
It’s really changing the behavior of the consumer and getting them more comfortable with that. On the merchant and consumer side we also are very strict in the way we do AML, KYC money laundering, know your customer, to make sure that in our network of payments that there is trust, because once you lose trust you’re losing that confidence of that consumer and the merchant and they’re very easy to step out…It’s very easy for them to step out of your network and start getting attrition, which is not something we need.
So payments is clearly the backbone of Ant Financial, it’s where it all started with Alipay and Alibaba and I think it may be easier for people to see how you’ve had that synergy between an initial ecommerce platform and then, you’ve got to pay for this stuff, it makes sense that you’re providing that sort of platform and then it all comes together. Could you talk a bit about the other side, that you alluded to a bit, the credit scoring and this kind of alternative way of financing, providing loans to some of your users, whether they’re small business or consumers. You talked about, you know, even paying rent. I think that’ll be really interesting to some of our listeners who maybe, they’re familiar with digital payments, they use a Venmo or PayPal in the U.S. but maybe not as familiar with the way fintech can be providing credit and making that pivot between payments to then making a loan for example.
Great. So you’re absolutely right, I mean our genesis kind of kick off in payments and actually kickoff mainly from an online perspective again for consumers buying through the Alibaba and Taobao so from there it actually migrated to the offline as well so that same payment mechanism that you’re using online for ecommerce and card not present or ecommerce transactions you can now use at a grocery store to buy goods and services every day. As we started looking at well, what else can we be doing with payments and with the app itself really that feedback came directly from our consumers and to the points we made earlier around why do I need to go to a bank, why do I need to kind of waste half a day, can I get some of these services online? So I think a couple of things that helped us migrate to the lifestyle enabler that we’re in now, which is technology has become a little bit easier to integrate.
The other part is what we’ve built around the credit scoring system helped us identify whether you’re going to be good for a loan or not. And so what we monitor there isn’t just your financial lifestyle in terms of how much money have you spent, it’s are you paying your bills on time, are you…how do you transfer money, what kind of goods and services are you purchasing to help us craft something that’s attributable to that specific individual. So as we look at our services there was a lifestyle component on it as well. So insurance for example, in China there are delivery services but some of them aren’t as necessarily as good as we have here in the United States. So you may receive a package and you may receive, you may not or it may be broken when you receive it so what we’ve done is we’ve simplified the ability to take out an insurance policy right on that package.
That’s very interesting. I’ve heard more about these sort of micro insurance products in China that basically I think very unique to that market.
And you hit the right word, micro, right? So what we’ve done is we think of it as whether it’s a micro investment in our money market fund, a micro insurance policy, it’s on demand in a sense where I don’t have to take insurance for a month, it’s really just for that specific item. That’s what helped kind of get our consumers to adopt it more and use it every single day. We have Singles Day. Singles Day is 11/11 which is the largest e-commerce shopping day in the world. So in 2016, we processed 17.3 billion dollars worth of goods all online. Our users took out more than 30 million insurance polices in that one day. How did they do it? They don’t have to call another number, they don’t have to do anything else, we know what they’re shopping for, we know the merchant that they’re shopping for, we know kind of through their order where their location is and when they say, hey we’d like to take out the insurance it was very easy for us to extend that insurance and we make it so seamless that they don’t even think about it as an extra step. It’s just on the fly. So that’s really what kind of helped us get to that point in terms of that option and using that for additional services.
I’m interested…You mentioned Paytm in India and you’re now focused on North America, are there commonalities you’re seeing in the services you’re offering in terms of the gaps to fill around the world, is it very market specific? Tell us a little bit about the different challenges you face in different markets.
I think…So we started obviously in China and in China you can look at our app and see the 80 sub-applications in there that cater from anything from applying for a marriage license, to topping off your phone, to ordering movie theater movie tickets. What we’ve done in India is we leveraged the core services that they already have kind of P2P payments, top off for the mobile phones, et cetera. Then we worked with Paytm very closely to understand what really from a lifestyle perspective what’s important to them. It wasn’t kind let’s take all 80 apps from China and try to put them in India. It was really understanding the market. A great example would be movie theaters and Paytm worked with our team and said all right, for us it’s important for a consumer who’s using or Paytm app to be able to order movie theater tickets through the app itself and pay for it through the app seamlessly. So, that was one of the first applications that we developed with them to make sure that the consumer again can leverage the Paytm app. Now that has become the largest app in India for ordering movie tickets.
It’s funny, on the movie ticket there may be something universal about that, because I’m thinking back to some innovations here in the U.S. and I feel like Fandango or other kind of online ticket purchase e-commerce sites. There was…Purchasing movie tickets was one of the first uses I think, I can remember of as sort of online shopping, online purchases.
But if you think about it every service that we have today in China you will find it here in the United States. The only difference is it’s so siloed, right? So you just mentioned Fandango, right? You go to your bank and you check your balances, everything’s a little bit separate. If you want to apply for a marriage certificate you have to go somewhere else and apply for it. To get to the subways or BART over here, again it’s a different payment mechanism. We’re trying…Obviously the market’s simplified and that’s really where we’ve made it all cohesive and that’s why we have that interaction with the consumer.
Can you talk a little bit about the role of banks in all this? You know, when a lot of fintechs first got started they were talking about, oh, you know, we’re going to disrupt the banks. Now it’s sort of shifted towards, oh yeah, we’ll work with the banks or maybe get acquired by a bank. You know given the Ant Financial’s size you sort of had this role of you cooperate with banks in some aspects but in some areas it’s more akin competition and from a general sense how does that all play out?
So we view banks as our partners and we have relationships with over 450 banks worldwide, right, and that gives us the ability to transfer money in and out. If you think about the banks, banks in general were more focused about the consumer who’s able to take out credit or take out a loan, we’ve kind of come in at that level of smaller loans, micro financing, right? That’s a little bit more akin to personal finance in a sense that banks weren’t necessarily equipped to do. So in general we view them as partners. You know nothing in our ecosystem says, if you’re an Alipay consumer they’ll go work with the bank. We actually encourage it, we have no problem with that. So we will also work with banks in specific countries to make sure that we can offer some of their services as applicable. So for us we’re not trying to replace banks. I think banks are very important for the ecosystem but we can live side by side.
So listeners that have heard some of our earlier podcasts have probably heard us hammer this point home a few times now, but we’ve been struck by just the basic data on mobile payments in China versus the United States. So the figure that we keep coming back to is in 2016 roughly fifty times the value of mobile payments in China versus the Unites States, and now you’re here in charge of North America for the largest fintech company in the world for a huge digital payments provider so I imagine you’re very attuned to this topic. Why is it such a big gap when you’re thinking about your strategy here, what needs to happen for that to change in the United States?
I think…Let me answer it a couple different ways just to make sure that the audience is clear on this. We’re not in the United States trying to establish another wallet in the United States, really we’re focused on the Chinese consumer coming to the United States. The reason we don’t want to do that is because of its mature market, lots of wallets out that are out there, very reputable wallets as well. The growth that we had seen in China…So in 2016 I think the number that was done over mobile was 5.5 trillion. You obviously have a very large Chinese population, you know, 1.4 billion give or take with those numbers. You also have a middle class that is now over 300 million and if you think about our U.S. population in the U.S. it’s 330, 340 million so right there that number continues to grow because of the economy in China.
We also bypassed, kind of, the copper…Few years of copper for having to install regular phones, everybody went straight to mobile because of the ubiquity, because of ease. And so you have all the tailwinds kind of supporting that growth in terms of mobile payments. That’s on the consumer side. The merchants have done a real nice job of also understanding the consumers in China, so if you think about the buying behavior of the Chinese consumer; when they’re going to a restaurant they love seeing pictures, they love seeing pictures of what they’re going to eat, and even in high end restaurants so merchants and restaurant owners have done a good job of kind of encouraging them to use the mobile app to be accepted at the point of sale. Little things like today, if we go out to lunch after this and we want to pay you will receive a bill, you will put your card in there, somebody takes it somewhere else, you’re trusting that waiter or waitress to not do anything else with your card. In China, that bill will come to you at the table, you’ll scan…You’ll them scan your phone for that specific amount, you’re more than welcome to leave a tip so that behavior has changed also from a consumer perspective.
So the way we look at it is a combination of things; one is bypassing an era of many point-of-sale devices, the simplicity of QR codes, meaning if I’m a merchant and I’m selling water bottles, I don’t need a point-of-sale device I can just put a sticker on with my QR code specific to me as a merchant. And as a consumer all you have to do is come in and scan it and then you get your water bottle and then we’ve enabled many other services, more than just payments to encourage the usage of the app itself where payments are compared to that Uber experience where you want to get from point A to point B you’re not as worried about how do I pay for this anymore. It’s really seamless.
Just a quick follow-up, I’ve always been a little puzzled you know going to China, QR codes are sort of ubiquitous, but here in the U.S. we hardly use them. Any ideas of why that discrepancy of why QR codes never really took off here in the U.S.?
So if you think about China there was no infrastructure for point of sale as we know it here. As I said earlier, this is a very mature market whether it’s here or Canada, and so the simplest way and most cost effective way were QR codes that were specific to the merchant or for the specific item. The advantage for QR codes as well is you can use them for more than just payment, so within the QR code itself you can look at it from a marketing perspective, you can look at it from an advertising perspective, you can drive somebody to go to a specific site on the QR code, so they really became very ubiquitous.
The other interesting shift here in the United States is some of the larger retailers; so if you think about Kohl’s, even some of the financial institutions like Chase Pay, what they’ve rolled out is QR code-driven. And so now you’re seeing that there is an adoption of QR codes in the U.S., definitely not at the same level of NFC or traditional card swipe here in the United States but we’re starting to see a shift and just a couple days ago Visa, Master Card, American Express rolled out through what’s called EMV Co, is the QR code specifications for their specific market. So you’re starting to see more and more organizations adopting QR code.
And they’ve done that in India as well.
That’s correct, yeah. And again, think of a point-of-sale device, a traditional point-of-sale device is somewhere between hundreds and thousands of dollars, right? Plus the monthly fees, plus the connection to a VPN line or traditional phone line. I go back to with our application as a merchant you don’t have to download or install any of this anymore. You can download the merchant app on the phone itself and so when a consumer comes to pay me as a merchant all I have to do is show them my QR code and accept that payment on the fly and this is using a device that’s in my pocket the whole time and I don’t have to install any additional readers or receipts or anything else for it.
So you’ve worked here in Silicon Valley and are very familiar with the culture here and now you’ve been at Ant Financial for a while, maybe you could give us a sense of what are the big differences in terms of, you know, culture of innovation, approach to disruption, how do you see the two areas?
Innovation is key. Co-op-itition is key. I think what we’ve done in China…And you’re absolutely right, having lived in Silicon Valley, I mean you know people are always driving to better and looking at the next better mouse trap to innovate and so we’ve become specialized, very specialized in some of the things that we’re doing here in the United States. China’s doing the same thing and there is a culture of kind of nothing’s impossible and technology has really made it available for developers to be able to innovate at a very quick pace. The big not necessarily difference but they’re willing to try things very quickly in China and they’re willing to fail very quickly and they’ll move on, right? They’re not necessarily married to the idea of oh, let’s keep pushing and pushing and pushing until we really fail. We’re very quick to say, you know what, this idea worked for maybe six months and now we don’t see the benefit, let’s just kill it versus being too worried about trying to have something survive that doesn’t make sense for the consumer.
So culturally both hard working environments from an innovation perspective, what we see is the…I think that the difference there is here in the United States as you innovate as a smaller organization you’re going to depend a lot on the ecosystem and many different providers, whether it’s financial institutions or lenders come in to help you distribute your product and service. There that ecosystem isn’t as big and so you’re able…You know, if you’re able to find a way to work with the Alibaba ecosystem you’re distribution is much easier than through one to five partners than tens of partners here in the United States.
I can tell you one thing, when I’m there it’s nonstop. I mean, it’s kind of the nine-to-nine syndrome of…Although we’re over ten thousand people it truly feels like a startup and very proud of what the team has accomplished in the short amount of time that I’ve been there because everything is possible. You know some of the, kind of, preconception was well, would I be able to convince the team in China to develop something specific for the U.S. that they hadn’t done in China so far? And I think culturally they’re so hungry for innovation, they’re so hungry to adapt to the local markets that that collaboration has been really good for us.
So with that backdrop set, the differences between China and the United States, maybe a mature market here, both very innovative but just a different market demand and culture, how would you benchmark success for fintech in general and your endeavors more specifically over the next say five years in China and in the United States? What do you see as the goals and what do you think can be accomplished?
I think specific to us our goal which we talk about all the time is really servicing over two billion consumers worldwide. That means that benchmark and if we’re able to do it in eight to ten years that to us is a great success. So that’s gonna come from different angles. One is what we talked about a little bit earlier in servicing the Chinese consumer as well as working with our partners globally, whether it’s India, Singapore, Thailand, Philippines, some of our partners here in the United States to enable consumer to have access to financial services. That to us is that grand vision of success and enabling that digital lifestyle for our consumers.
From a United States specific perspective, you know, it’s the abilityto have ubiquity across all the merchants where an Alipay user coming to the United States can now use their wallet anywhere and everywhere whether they are eating, sleeping, going to Yellowstone to grab an experience, going to Vegas to race cars or get a helicopter ride, again us working with our merchants to service those consumers is key.
So the definition of success is really the bigger goal of servicing the two billion consumers worldwide, but also making sure that our merchants are successful and thinking about what we’re doing today working with 450 financial institutions, millions of merchants, millions of taxis again, building of that ecosystem and creating specific products whether it’s our on insurance, lending, and taking to that level of that specific vertical will be part of the success that we aim for.
Well Souheil, thank you so much for joining us today.
Absolutely, my pleasure. Appreciate the questions and very glad to be heard. Thank you.
We hope you enjoyed today’s conversation with Souheil. For more episodes like this, you can find us on iTunes, Google Play and Stitcher. If you like what you hear, please leave a review. Feedback from listeners like you will help more people find us. And for even more content, look up our Pacific Exchange blog, available at frbsf.org. Thanks for joining us.