The word “disruptive” is often used when talking about technology and startups – “we’re here to disrupt the industry”, “blockchain will disrupt traditional banking”, “Amazon disrupted brick and mortar stores”, “Airbnb is disrupting the hotel industry” – but there are two organisations that we feel have disrupted very different and established industries. And they did it by claiming that the rules of those industries don’t apply to them at all.
The two companies in questions are Alipay and Uber. We looked at how they managed to succeed despite operating in very highly regulated industries, and the answer was surprisingly similar.
Not a taxi company!
As mentioned in one of our earlier blog posts, The European Court of Justice recently announced that in their eyes, Uber is a taxi company. Whereas for years, and even now, Uber has been insistent that they are a technology company that exists to connect drivers to passengers. By sticking to their “tech company” claims, they hoped to avoid all the regulations and licences that taxis operators have to adhere to. However, as in Europe, companies all over the world have struggled to integrate Uber into their legal frameworks.
Aside from regulators, taxi unions globally have been more or less unanimous in their animosity towards Uber. See a full list of countries that have experienced bans or protests here.
While Uber has been spreading worldwide, and has inspired multiple clones in pretty much every country in the world; regulations and legal threats have almost all been resolved. The result is that many governments, states or cities have either changed their rules to accommodate Uber, mandated that Uber drivers need to adhere to a new set of rules, or in some extremes, banned Uber altogether. Now the focus for Uber should be on revenue generation and consolidating their position – especially as investors are getting weary and pushing for an IPO.
Meanwhile, taxi companies have realised that they can’t sit on their laurels, but need to modernise in order to compete with Uber (and their cohort). This could be through their fleet management, pricing model or uptake of technologies such as payments and mobile applications.
Has Uber disrupted the taxi industry? We think it’s a resounding yes.
That which we call a rose…
The case of our other candidate that has claimed they are not what they say they are, is still in the midst of their regulatory journey. In their case however, it’s more a case of the regulators applying new rulings in order to safeguard consumers by increasing security and reducing fraud. This article nicely sums up just one of the rules being suggested: for securing the ubiquitous QR codes in China.
Alongside the ease of use for consumers, another feather in Alipay’s hat was that they were able to collect (and keep for themselves) the customer data for transactions through Alipay. We wrote about this in detail last year. Ultimately, when a transaction happens, all the banks see is a payment to Alipay, or a payment from Alipay, they are not able to view who the customer is. Aside from allowing Alipay to target and rate their users better, this opacity (from the government’s perspective) raised concerns about money laundering and other nefarious activities.
As a result, the central bank mandated that by June all payments systems must go through a central clearing house. This means that payment data will then be shared with the government – and presumably will be stored on a government database. How that is used, and who might get access to it is something that is not yet clear.
As Alipay grew from being a fast and cost effective way to transfer payments on Alibaba’s ecommerce ecosystem (thus increasing the convenience and user experience), it started to think of ways to add revenue generating activities into the Alipay platform.
Aside from payment, Alipay has two main products. They are Huabei (“just spend”) and Jiebei (“just borrow”), the former being a virtual credit card and the latter an unsecured loan product. The decision on who gets the loans and how much they can get are a direct result of the information that Alipay gathers – because they now have their own credit rating score that’s dependent on the user’s Alipay transactions.
Alipay then packages up all those loans (an estimated US$22 billion of them) into securities that they can sell to investors. These are the same type of asset backed securities that are blamed for the 2008 global financial crisis.
What’s the problem?
Ant Financial is the largest issuer of consumer loan securities. They account for 60 percent of all issues in 2017, according to Reuters calculations that are based on data from China Securitisation Analytics.
Problem number one is: as all the data of the borrowers and the credit scoring system is based on Alipay’s own data, no investors really know what they are getting.
Problem number 2 is that Jiabei and Huabei between them have a total net capital of 10.6 billion yuan. Yet, according to CIB Research, they had issued 265.1 billion yuan in loans by the end of June 2017. Also, outstanding loan securities issued by them have now exceeded 250 billion yuan.
At a ratio of 23:1, this currently sits at around 10 times the ratio of total financing to total capital that is set by the banking regulator.
Again, another series of talks with regulators will occur in order to settle this, where Ant Financial will presumably be taken to task in regards to their transparency as well as reducing the numbers of loans and/or their financing to capital ratio.
As alluded to in the beginning of this post, Uber and Alipay have succeeded by wedging themselves firmly into the industry they are disrupting while at the same time saying that the rules of that industry don’t apply to them.
Both Uber and Alipay deserve a lot of credit in sticking to their guns while the regulators threw everything at them (good lawyers and lots of money helped in this).
However, the role of the regulators in this cannot be underestimated. In trying to level the playing field, regulators have been able to mould both Uber and Alipay, and the market they exist in, to create a fairer system whereby both the tech companies and the incumbents are relatively happy. If regulators were at anytime to have banned Uber or Alipay then it is certain that consumers would have lost out. By light regulation, blurring of lines and re categorisation of companies, they have struck a happy balance where an industry is disrupted, but consumers get a better deal and organisations are forced to modernise. Is that not a good outcome?