This is the third issue of the new column of your DigiBook that helps you follow market penetration of big tech companies: GAFA – for Google, Apple, Facebook, Amazon, to which are sometimes added Netflix and Microsoft – in the U.S., and BATX – for Baidu, Alibaba, Tencent and Xiaomi – in China. You will find hereunder the latest news of these big tech firms’ advances in the asset management industry. To read our former edition, click here
Asset management is a new territory of value added for Big Techs
GAFA & BATX are disrupting traditional trade codes and are making themselves essential to consumers, creating “Super App” including payment, financing, insurance and savings products and services. To do this, they incorporate their service into the customer and use path (social networks), especially Millennials’ one, via mobile solutions – which also make them accessible to sub-banked areas – meeting multiple needs that they are able to identify through the analysis of customer’s big data.
As a report from the Bank for International Settlements points out, “an essential by-product of Big techs’ business is the large stock of user data which are utilized as input to offer a range of services that exploit natural network effects, generating further user activity. Increased user activity then completes the circle, as it generates yet more data."
That is why Big Techs are increasingly positioning themselves on financial and savings services, whose value lies not so much in the profit generated but in the value of the customer data they allow them to obtain and in usages concentration and ‘phagocytosis’. And customers are now ready: about half of Millennials would “happily purchase” investment products from a Big Tech and almost two-thirds of those who already invest would be willing to buy them from Big tech companies, even in Europe.
Thus, the biggest innovation of Alibaba’s Yu’E Bao is not the money market fund itself, but the connection between the financial product and Alipay’s ecosystem.
Funds distribution: the advent of BAT’s mobile apps in China
In terms of the funds distribution, China has taken a considerable step forward in digitizing the process. Mobile platforms are becoming an increasingly popular way for Chinese retail investors to access and purchase fund products. With 69% of investors having purchased funds using them in 2017, mobile devices have replaced computers (representing only 18.6% of fund purchasing) as the most dominant medium. This represents a strong increase from 40.8% in 2016 and 31% in 2015.
BAT are the main architects of this development. Indeed, 588 million users of Alipay have parked cash in Ant Financial's flagship Yu'E Bao and 400 million users are registered on Ant Fortune, its wealth management platform, where more than 100 out of 124 asset managers in China propose more than 4,000 funds. 80 of these financial institutions – a number that have nearly tripled in one year – are using the Caifu Hao wealth management corporate account, which provides them access to a range of AI capabilities that have helped them boost operational efficiency by 80% and grow by 70% the number of transacting users (see article in our DigiBook former issue).
For its part, Tencent, via its affiliate Teng An, after launching in 2018 the first two Chinese pension funds online, today has 300 investment funds and some 40 partnerships with asset managers registered on its online wealth management platform, Licaitong. The platform currently manages Rmb500bn ($69.94bn) in assets for its 150 million clients, across retail funds, insurance investment products and securities firms asset management products. In September, Teng An and China International Capital, a state-backed investment bank, said they had formed a technology joint venture to focus on the bank's retail brokerage and wealth-management services. The companies said the venture may extend services to other financial institutions in the future.
Also in September, Alibaba’s asset manager TianHong has scored one million investors – with an average of Rmb1,000 ($141) – via a new regular saving scheme. The scheme, which is called Target Investment and was rolled out on Ant Financial fund distribution arm Ant Wealth about a year ago, is a regular saving fund investment product that invests directly into TianHong’s CSI300 index fund. The differentiating factor of the scheme, according to the firm, is that it is devised to automatically divest when the portfolio return hits a preset target selected for investors, which ranges between 4% and 10%. The scheme will continue to invest weekly, bi-weekly or monthly if returns have not yet hit the target. The platform also offers an estimation on the investment horizon based on individual goals, during which investors cannot redeem.
With these volumes, it is not surprising that this model emulates other operators. Huawei Technologies has entered the fund sales market in China by adding in October a first money market fund (Tianyi Express Money Market Fund from ICBC Credit Suisse AM) to the latest version of its e-wallet application, Huawei Pay. The telecommunications giant has upgraded its digital wallet app to introduce a new feature – dubbed as Pocket Money Collection – that allows users to directly purchase money market funds through their linked bank accounts. Many fund houses have already approached Huawei for a ticket to this new fund portal, eyeing a sizeable network of around 500 million global (mainly Chinese) users.
An approach deployed in Asia… and soon Africa?
BAT have begun to take hold of the growing and weakly banked markets. They enter through payment applications and then offer complementary services. Asia was their first target and Africa could be next. It is indeed a region where people have already taken mobile money services offered by telecom companies. BAT would be likely to pick up a stake in local companies as Ant Financial did with Paytm in India, help banks build and launch applications on its tech stack or even launch its own payment wallet in the region.
As mentioned in an article from Bloomberg, the proliferation of Chinese mobile wallets, and a new wave of “challenger banks” is already giving “nightmares to American bankers”. Reacting to this threat, large banks have started setting up outposts in Silicon Valley partnering with Fintechs. Perhaps these Fintechs can hold the Chinese at bay in mature – and saturated? – European and the US markets. But if the Chinese gambit that is focused on mobile banking and the hitherto unbanked users in other markets pays off, there would be little growth left for others.
Alibaba-backed Paytm is a good example of this strategy. In June, it received approval from the Pension Fund Regulatory and Development Authority (India) to offer investment into the National Pension System. This means Paytm investors can tap into NPS tier-I and tier-II accounts from the eight major pension fund managers already on Paytm’s platform. In the same time, the Securities and Exchange Board of India gave it the green light to offer stock brokerage services.
Paytm also has begun hawking new fund offers of mutual funds, and its platform permits the country’s 40 fund firms to invest in them. Franklin Templeton Mutual Fund and ITI Mutual Fund are the latest to join the online platform. The firm says it has lured more than three million users since its launching and forecasts lifting its market share for the direct sales of mutual funds to 50% in six months, from its current level of 40%, thanks to a new option for its users. This so-called switch option allows users to shift from regular mutual funds to direct mutual funds from lenders, stock brokers, distributors and asset management firms to Paytm Money. In addition, more than 75% of users of the platform are currently SIP (Systematic Investment Plan) investors. The company expects to cross 1 million active SIPs in the future months.
The US incumbent asset managers are trying to get a piece of the pie
Thanks to the evolution of Chinese regulation, opening China's mutual fund market to let foreign asset managers own up to 51%of Chinese fund joint ventures, the US companies have intensified their relation with local actors. JPMorgan is expected to be the first with a traditional bank, Shanghai International Trust.
Vanguard could follow with a JV formed with Ant Financial as part of a pilot scheme launched by Chinese authorities that seeks to spur the growth of investment advisory institutions in China, including robo-advisors and paid-for online advice test. Apart from the Vanguard joint venture, at least six other companies – including fund houses and banks with or without existing investment advisory service –are set to be granted eligibility under the one-year pilot scheme. With this partnership, recent TianHong’s ETF launching (see below) may provide some opportunities for Vanguard in China, by providing advisory services (through its robo-advisor Vanguard Personal Advisor Services) for TianHong’s new range of ETF products.
BlackRock, for its part, is in discussions with Tencent over a potential partnership that could involve replicating the U.S. manager’s Aladdin risk management platform in China. A second possible area of collaboration would be in assisting BlackRock in offering its portfolio construction and investment advice via Licaitong, Tencent’s online funds platform. This potential tie-up could give Tencent a way to compete Alibaba and gain new ground in China's financial technology sector.
Fund management: TianHong confirms its leading position and diversifies its activities
Despite its 619 million investors (40% of the Chinese population), Yu'E Bao lost its title as the largest fund in the world. In just one year, its AuM drop from $270bn to $148bn at the end of September. The fund thus stands behind JPMorgan’s and Fidelity’s MMF ($150+bn of AuM). Two reasons for it: 1/ a performance that fell from 6% in 2013 to 2.4% due to changes in market conditions, below bank wealth management cash products; 2/ measures taken by the regulator to limit the development of the fund which forced Ant Financial to limit the maximum amount of daily subscription/redemption and to suspend subscriptions of certain categories of investors. But the giant, which could be thought threatened, actually took advantage of the outflows, the sums having been transferred – with preferential access – to the 27 other funds of its range proposed on its distribution platform Ant Fortune.
TianHong has also found ways to switch gears and diversify its business. Thus, Alipay partnered with four large domestic fund houses to roll out new free-of-charge money market fund wrappers to attract investors from other cash management products that have been faced with lower yields.
The new service, introduced by Ant Financial over the past few months, is a type of fund portfolio investing in three to five – proprietary and third-party – money market funds as well as bond funds. It may serve particularly as a substitute to the Yu’E Bao for investors that are willing to accept the restrictions on redemption. One of the four wrap accounts' investment portfolios is managed by E Fund Management; dubbed Yu’E Jia, it has recorded an annualized return of 3.7% as of October 8 [4].
Moreover, TianHong recently revealed its ambition to be China’s largest index and exchange-traded fund provider, and planned to join hands with Ant Financial to roll out a “major new service” that aims to propel ETF growth and portfolio investments.
“Having explored and built out index investing for about four years, the launch of our ETF business marks a shift of our index business, from only serving individual investors to covering both the retail and institutional segments” (TianHong Deputy Managing Director).
As a first try, TianHong concluded in September the initial fundraising for TianHong China Growth Enterprise Index ETF, its first exchange-traded fund in China. Amassing Rmb600m ($84m), the assets came up short on what might have been expected – maybe because of a high level of fees –, below the domestic industry ETF average asset size of Rmb1bn [5].
TianHong AM has two more broad-based exchange-traded products lined up as part of its advance into China’s ETF market. The CSI 300 ETF and CSI 500 ETF are scheduled to be listed in October and November respectively.
Lastly, Ant Financial announced in 2018 its plans to make 14 approved target-date private pension funds in China available on its wealth management platform.
An intensified competition revolving around fee charges
As a witness of its success, TianHong AM kept its position as the highest management fee-earner in 2019 H1, taking home more than Rmb1.84bn, representing more than 6% of fees collectively earned by Chinese asset managers during this period. E Fund Management (Rmb1.75bn) and China Asset Management (Rmb1.25bn) complete the podium. TianHong had amassed Rmb1.3tr in public fund assets as of end-June. It also runs 11 unlisted index funds, with Rmb10bn in assets from about 10 million investors.
But online fund sales in China are becoming increasingly competitive, as major incumbents roll out offers to attract new customers. Due to the strong inflows from both digital distributors, some of the funds' assets swelled in just several months. Tencent’s online wealth management platform, Licaitong, which now sells 19 money funds, has joined peers Ant Fortune and TianTian Fund in slashing subscription fees down to 0.1%, excluding certain customized products. Previously, the platform levied a 1.5% subscription fee, for which a 60% discount could be applied during specified time windows.
However, the ongoing trend in which third-party fund sellers cut down fees has been proven viable especially for these big and established distribution channels with a wide range of products available and a huge customer base.
Investments: enhancing value to customers
In September Tencent backed a Series A $20m funding for UK-based Blockchain-enabled supply chain startup Everledger. Graphene Ventures, Bloomberg Beta, Rakuten, Fidelity and Vickers Venture Partners also participated in the round. As leader of the investment, Tencent has joined Everledger’s board. The two companies plan to launch the world’s first WeChat Mini Program for blockchain-enabled diamonds, allowing WeChat users to buy jewelry with more transparency and security, and so, enhancing value to consumers and reduces risks for businesses across the industry.
China International Capital Corporation and Tencent Digital will form a technology joint venture focused on the development of digital wealth management services. The joint venture will also focus on growing CICC’s retail broker and other businesses via its digital and financial technology platform, and help investment consultants to improve marketing, compliance and risk oversight. In future, it may also provide services to other financial industry players. The joint venture will be funded with Rmb500m ($70.2m), with CICC controlling 51% and Tencent Digital owning 49%. Tencent is the third-largest shareholder of CICC after acquiring a 4.95% stake in the company in 2017. Its rival, Alibaba, acquired in February a 4.83% stake in the investment bank to become the fourth-largest shareholder in CICC.
Alibaba has obtained the approval of the listing of Ant Financial. In anticipation of this operation, Alibaba has acquired 33% of the capital of its affiliate. But Alibaba will not pay any cash for this participation: it will exchange it for 37.5% of Ant Financial’s profits, plus 2.5% of its outstanding loans each year. Moreover,Alibaba will swap certain intellectual property rights to fund its acquisition of the new stake in Ant Financial, which is currently valued at roughly $150bn. Furthermore, the rules on quotation in Hong Kong, relaxed for the occasion, now make possible a quotation of Alibaba with preferential securities. This is a strong political sign on the part of local authorities who want to repatriate the many players in technology, mostly listed in the USA. Through this IPO, Alibaba, already listed in NY, hopes to raise $20bn. The operation could be carried out in 2020.
Services: cloud market is dominated by Big techs both in Asia and in the U.S.
Tech giants are set to grab up to 40% of the $1.35tr in US financial services revenue from incumbent banks [6]. Three of the largest US tech companies — Apple, Google, and Amazon — are particularly encroaching on financial services and threatening incumbents with their size and ability to attract massive, loyal user bases.
In asset management industry, Amazon, with AWS, has developed a suite of tools to help fund firms enhance their marketing and customer experience. Tools such as Amazon Comprehend, Amazon Lex, Amazon Personalize, Amazon Polly and Amazon Textract use artificial intelligence to help make better decisions around customer segmentation, pricing, product development and cross-selling.
In China, Alibaba’s Aliyun – a.k.a Ali Cloud – continues to dominate with 43% of China's cloud market [7]. That is more than the combined share of Tencent, Amazon.com Inc and Baidu Inc, the next three largest players. Besides the infrastructure, now, Aliyun has plans to design and run Fintech applications and even core banking software for large banks, setting to become an “Amazon plus IBM” as told an Ant Financial executive. Recently, the company built and launched an internet finance platform for the Bank of Nanjing, making a case for potential banking customers.
Conclusion: less a question of whether than a when
In China, the Big techs are already the leaders of the financial and asset management industry. By building distribution partnerships with local and foreign asset managers, they expand their empire in Asia and maybe more.
According to a report by Boston Consulting Group (BCG) [8], Google and Amazon could start rolling out fund shops in the next few years with their digital capabilities and marketing skills far exceeding those of asset management giants.
"It is probably less a question of whether other digital giants will try to grab a piece of the asset management industry than when they will - and exactly which parts of the value chain they will try to disrupt." (BCG)
Thanks to a level of digital expertise and direct-to-consumer marketing prowess which goes well beyond what even the biggest and best-resourced asset managers can bring,digital giants could disrupt the market. Google could use the consumer sentiment data it captures through its services to predict market or individual stock performance "with a new level of insight"while Amazon's reputation means that consumers "might readily trust a 'mutual funds sold by Amazon' offering", with the prospect of reviews enabling them to quickly identify a suitable provider.
BCG advises companies to review their strategies, capabilities and operating models as the coming decade is likely to see volatility and economic uncertainty continuing, while the implementation and use of technology in asset management firms will be paramount for companies to remain profitable.
Author: Pascal Buisson - December 2019
[1] Millennials and Investing – Calastone (2019) - [2] Asset Management Association of China - [3] Why China’s Payment Apps Give U.S. Bankers Nightmares (Bloomberg) - [4] Ignites Asia - Oct. 2019 - [5] eastmoney.com - [6] McKinsey - [7] Canalys - [8] Will these ‘20s roar? - BCG (2019)
