HSBC and Standard Chartered branches line the streets of Asia’s big cities. But in China, without a single branch or plastic credit card issued, tech giants have been growing their shares in loans, wealth management and digital commercial payments. The latter is dominated by Alibaba and Tencent payment platforms. With banking in China going increasingly digital, current valuations of these fintech leaders will soon seem cheap.
Alibaba payment affiliate Ant Financial, using its dominant position in ecommerce, leads in online payments with more than half of China’s market. Tencent’s strength lies in offline transactions, with upwards of 1.1bn users of its social media platform WeChat. Through its stake in WeBank, the online-only bank, wealth management has been a growing business with third-quarter fintech revenue up more than a third to $3.3bn. Its fintech business accounted for more than a quarter of revenue last quarter.
Even so, these fintech units have largely been lossmaking until now. Low fees to lure in new sign-ups have not offset operating costs. But as the oligopoly grows stronger, the two will be able to charge higher fees for transactions and banking services. Profits from payments alone could account for in excess of a third of Tencent’s 2018 profit in three years, estimates Bernstein. This would value its fintech business at up to $230bn, more than half of Tencent’s current value, without accounting for its core gaming and social media units. The same estimates for Ant Financial, valued at $150bn during its June fundraising last year, would give it a much higher valuation when it goes public.
The two have started supporting Visa and Mastercard on their platforms, meaning foreign users in China can utilise its platforms. With oceans of data, technology and more than 1bn users in China any new inroads made in other countries would further increase profit potential and lead to a re-rating of share prices. Banks operating in Asia and their investors are nervous. They are right to be so.
If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.