From FinTech to Finlife: the future of FinTech and Digital Inclusive

Finance

Chen, Long

Chief Strategy Officer, Ant Financial

August 18, 2016

Inclusive Finance

Digital Inclusive Finance

Typical 20-80 rule in financial development

25%Traditional credit reporting

system

covers<25% of the

population

23%Loans in rural area

account for 23%

of total loan balance

10%Only 10% have credit

card

21%Among those with financing

nedds, only 21% get loans

from formal FIs

72%72% of adults lack

basic financial

knowledge

2 billion2 billion people without bank

account

In China

In developing

countries

The largest corporates and the wealthiest individuals are not that thirsty for financing, but it remains

a global challenge how to expand financial coverage of SMEs and more individuals.

Key components of satisfying inclusive finance

普

可得性ACCESSIBILITY

惠

可负担AFFORDABILITY

全

服务全面、优质COMPREHENSIVE &

QUALITY

商业可持续性和消费者适当性SUSTAINABILITY AND CUSTOMER

SUITABILITY

可持续

Why is there insufficient financial supply? What is the key

challenge in finance? Is more finance always better?

The key challenge is information asymmetry

• The key challenge in finance is the information asymmetry problem

– Akerlof (1970): Due to information asymmetry, lemons may take over the market and result

in market failure.

– Stiglitz and Weiss (1981) : Due to information asymmetry, adverse selection and moral

hazard may limit supply of financing from FIs.

• Finance is not a case of “the more the better”; oversupply of finance is unsustainable

– Financing with insufficient risk identification will bring loss to businesses

– Oversupply of finance may hurt consumers who lack financial knowledge and may even

lead to crisis (cases of U.S. and India)

• Calls for information and risk disclosure

Why digital inclusive finance works?

Big data technology

helps assess risk

Cloud computing

reduces the costs of

inclusive finance

Mobile technology

makes inclusiveness

more accessible

Mobile changes the approach and efficiency of accessibility

Anytime, AnywhereBarriers of time and distance

network ATM POS

Users

……Account

Manage

r

Users

PC

……

Biometric technique

for personal

identification

Wearable

devices

Smart

phones

Scenario-based finance：combination of finance and scenarios

Finance

ShoppingCommercialSocialShopping

Commercial

Social

Finance

Three key pillars for sustainable digital inclusive finance

Regulation

Compliance

Technology

Driven

Scenario

Based

Traditional finance…

Changed……

• KYC（Identification）

• AML（Anti Money Laundering）

• Investor Suitability

• Information Disclosure

• Risk Management

• Finance serves different scenarios and

controls risk endogenously

• Acquire real data more efficiently in lower cost

• Risk control based upon real transaction

• Big data greatly improves risk

assessment

• ‘Cloud Computing’ make the risk control

more efficiently

• Bio identification identifies targets reliably

Cases of Digital Inclusive Finance in China

Fintech Finlife

26 56 128 263 461

787

1,304

1,971

2,818

3,835

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Strong growth in China online payment market

Online Retail Transaction Value in China (RMB billion）

3rd party Online Payment Transaction Value in China（RMB billion)

total retail

sales/social co

nsumer goods

0.3%

Data source: Eguan, iresearch

12.74%

1,011

2,204

3,659

5,373

8,077

11,867

2010 2011 2012 2013 2014 2015

High technical capacity to cope with growing transactions

300/s

IOE

2010 2011 2012 2013 2014 2015

1000/s

IOE

3800/s

IOE

15,000/秒Cloud computing

38,500/s

Cloud computing

85,900/s

Cloud computing

New technology significantly lowers the cost of payment

SMEs can enjoy a payment processing fee as

low as 0.6%, significantly lower than the

average level in USA

Alipay’s per-transaction cost is below 0.02 Yuan

Tens of millions of cyber attacks each day drive digital

payment security to world-class level

Leading traditional

US payment

1/100

1/1000

Alipay

Less than 1/100,000

Leading US

new payment

company

Fraud loss rate

Three pillars of Alipay

Regulation Compliance

Technology Driven

Scenario-based

Traditional

Innovations

• Big data screens out fraud risks

• Cloud computing ensures

efficiency and system stability

• Information security system

guarantees CIA（Confidentiality,

Integrity & Availability）

• Compliance and custody of client funds

• Customers’ real-name registration

• Daily management of merchant accounts

• AML/Counter Terrorist Financing

• ……

• Forming strong ties with

customers based on transaction

scenarios

• Forming customer risk profiles

based on data from transaction

scenario

Pain points of inclusive wealth management

16陈龙

Unaware of

product offerings

Difficult to

understand

Lack of access

channels

Inconvenient High fees

Yu’e Bao (over 290 million customers) makes a difference to

inclusive wealth management

Make the

poor feel

like a king

Perfectly

smooth

experience

Scenario-

based

Purchase threshold

starts at 1 RMBStraightforward function

T+0 redemption

No fee for purchase and redemption

Daily yield updates

Yu’er Bao directly available for

Consumption

purchases and

Transfer payments

Three pillars of Yu’e Bao

Regulation

Compliance

Technology Driven

Scenario-based

Traditional

Innovations

• With law of large numbers, big data

analysis on Yu’er Bao clients greatly

enhances liquidity forecast accuracy.

• Based on big data analysis, asset

allocation is updated daily, and can be

prepared in advance of the “Single’s Day”

peak demands.

• Almost no leverage

• Liquid assets

• Short duration assets

• Secure assets

• Comply to or exceeds the regulation

requirements of “Measures for the

Supervision and Administration of Money

Market Funds”

• Most clients are frequent online

shoppers, and are insensitive to interest

rate fluctuations.

• Payment demands from clients are

steady, which make liquidity demand

predictable and greatly reduce liquidity

risk.

Ant Fortune——An open platform of wealth management,

which makes wealth management simpler

Release on August 18, 2015

Digital inclusive credit: serving SMEs and individual clients

Internet mobilizes advantages in data, client channels, and funding sources to bring financial service to

SMEs and individual clients.

SMEs

/Individual

clients

Risk management based on

big data

Affiliated with business

scenarios

Direct access to funding

sources

Risk assessing model leveraging big data

Data analytics

Default Pro

PolicyMarketingRisk

Collection rating

Credit Pricing

Prediction Anti fraud

Acquisition Cross sale

Attrition Life cycle mgnt

Growth strategy Event marketing

Product ……Close-loop marketing

……

Entry policy Granting policy

Consumer credit

Credit payment

Business Management & DecisionProcedure

Data sources Taobao platform Alipay platform External dataB2B platform

Marketing

Approval

Granting

Drawdown

Supervision

Collection

Crediting system

Credit scoring

Micro loan Wealth Management Insurance Consumption

Prudent risk management procedures

4. Post monitoring• early-warning

mechanism

3. Loan approval• credit rating mode

• auto credit decision mechanism

• supplementary manual check system

1.Customer screening• predictive models

• risk management model

• seller classification model

2. Credit investigation• target marketing

• bulk credit

Prudent RM

proceduresEfficiency

Effective

Risk control

Big Data

Modeling

Achievement in the past 5+ years

4 Million Small & micro business served

about 5 times of the total volume provided by the Grameen Bank in 39 years

RMB 700+ BillionLoan disbursed cumulatively

<RMB 40KAverage loan ticket size

With ‘310’ experience

Average NPL rate around 2-4%

Digital insurance: more than channel innovation

• Provide insurance to the long tail users

• Reduce the operational cost

Distribute channels

reconstructionBig data pricing

Product innovation

based on the scenarios

Shipping Insurance for returned purchase

25

• Premium of 0.5 Yuan per policy

• Total users over 270 million

• On Nov11th, 2015, 308 million

shipping insurance were sold within

one day.

Digital credit scoring：Zhima Credit serves many

scenarios based big data technology

Fraud and credit management Fraud and credit management

Facilitate Customer Identification

Post payment service to high

value client based on Zhima

credit rating

Lending E-commerceOnline

Dating

Travel

Penetration increases active users in multi-user scenarios

Highly Engaged Users

Data Security and Privacy Protection

Data desensitization watermark encryption Manual review

Data processingIntranets

Data collection

Serving rural customers, bringing prosperity to rural economy,

empowering employment and entrepreneurs in rural area

Promote rural

consumption

Support

entrepreneurs in

rural area

Increase income

for rural population

Enhancing

capability of FIs in

rural area

Alleviate disaster

loss to agriculture

More than 130 million

clients.

Innovative products like

“wind index

insurances”

More than 150 million

active Alipay users

in rural area

Serving180 thousand

rural SMEs, cumulative

loans more than 130

billion RMB

More than 40 million

wealth management

clients in rural area

Cloud service for

about 100 FIs in

rural area

Payment Micro loans

Wealth

Management Insurance

Cloud service

for FIs

蚂蚁金融服务集团 版权所有

After adopting Ant Financial cloud service, Paytm in India overcomes bottleneck and leaps forward, with the

number of customers exceeding 100 million, which has increased by 5.6 times from last year; payment

volume has increased by 2.6 times.

From China More than China

Share with the world an inclusive finance model featuring wide coverage, low cost, high

efficiency, and robust security

From China, more than China case: inclusive finance in India

蚂蚁金融服务集团 版权所有

A chronicle of the development of Inclusive Finance

2005 Systematic inclusive

finance

An inclusive financial

system that is

comprehensive.15

thC

en

tury Loans from religious

organizations

Monks in Italy initiated

loan services to

suppress growth of

usury.

16

thC

en

tury Cooperative loans

“Loan fund” was born in

Ireland, which provides

interest-free micro

credit to poor farmers

from donated funds.

70’s

in

th

e

20

thC

en

tury Group lending model

Modern micro loans, taking

the form of group lending,

emerge in Bangladesh and

Brazil, with joint guarantee

liability among members of

the group.

90’s

in

th

e

20

thC

en

tury From micro loan to micro

finance

More and more countries

and organizations believe

that, to fight poverty, just

providing loans is not

enough.

Charity

Local

Loans

Manual

Business

Global

Finance

Digital

2014 Ant Financial digital inclusive

finance

Utilizing mobile internet, cloud

computing, big data, Ant Financial

builds a more comprehensive

inclusive finance system featuring

credit scoring, payment, wealth

management, insurance, and loans.

2016 G20 advanced

principles in digital

inclusive finance

Advanced principles

in digital inclusive

finance establish a

globally recognized

model.

Lessons of Unsustainable, Excessive Finance

Lessons from oversupply of credit

Sub-prime mortgage crisis in the U.S. Micro loan crisis in India

Encouraged by the government, Fannie Mae & Freddie Mac increase

sub-prime mortgage with insufficient credit support to a targeted

group (low-income, in area with insufficient financial service

coverage) , which became the initiation point of an economic crisis.

3950

7150

10000

2003年 2004年 2006年

Sub-prime loans by Fannie Mae & Freddie Mac

（in 100 million USD）

Government of India relaxed regulation control on micro loan

institutions, with the hope of quickly satisfying demand of

financing. Subsequent over expansion of credit created a giant

debt bubble and resulted the micro loans financial crisis in India.

Oversupply of credit is associated with relaxed regulation environment, which

results in irrational expansion of FIs and oversupply of credit.

Gross loan portfolios (USD) of India’s six largest MFIs

Case sharing——P2P in China

P2P crisis in China

Fail to meet regulation compliance:

-Lacking regulated custody of investors’ fund

-Lacking truthful disclosure to investors

-Lacking proper screening of investor

suitability

……

Lack of technology capability:

-No data-driven risk management capability

No interaction with scenarios:

-Lacking first-hand data from interaction with

scenarios that can contribute to effective risk

screening

Platforms in

normal

operations

1702

44%

Problematic

platforms

2133

56%

Operation status of P2P

platforms in China

As of February 29, 2016

Policies and Regulations

Top-down planning: Adopt digital inclusive finance as

national strategy

On July 24, G20 Finance Ministers and Central Bank Governors Meeting issued

G20 High-level Principles for Digital Financial Inclusion

to encourage adoption of these principles for broader coverage of inclusive

finance planning, in particular with digital inclusive finance

In 2016, the State Council issued

“Development plan for promoting inclusive finance(2016-2020)”

Elevating inclusive finance to the level of national strategy

Emphasizing promotion of inclusive finance with innovative financial products and services

Finance as crucial element for social development,

Digital Technology as breakthrough point for financial development

Technology drives Finance, Finance propels Economy

Proportionate Regulation: reserve space for innovation and

enable its growth

UK FCA initiated SandBox pilot project in May 2016

Simplify market entry standard and procedure;

Under the condition of consumer rights protection, entrepreneurs may carry out

innovative financial products and services in the “SandBox” ;

The outcome of pilot projects help FCA to decide whether to promote the service

China Taiwan in 20th Century:

Payment card industry used to be

dominated by a domestic monopoly

brand, which subsequently failed to face

off outside competitors

U.S. in 20th Century:

Payment card industry grew from “domestic

competition” to “global giants”

>>Encourage

orderly

competition

>>Encourage

beneficial

innovation

Service Provision: promote financial infrastructure

construction and incubation of innovation

Connection gateway: develop internet and mobile Internet

Data sharing: public data from government and credit record

from the central bank

Simplify procedure: facilitate innovation under the condition

of compliance

Local government support: preferential tax policy to support

growth of innovative FIs

Consumer protection and education: secure consumer's

financial rights; educate consumers in financial knowledge

Consumer Protection

Financial Compliance

Custody of client funds

Information disclosure

Suitability screening of investors

Information Security

Privacy protection

Prevention of unauthorized use of information by

third party

Risk Mitigation

Clarify consumers’ rights and responsibilities, and

mitigate consumers’ liability

Insurance against risks

Collective funds against risks

Consumer Education

Regulative

authorities

Self-regulatory

organization

Academic research

institutions

Market participants

KYC: client identification based on big data and biometric

verification KYC is a key challenge in providing

remote financial servicesRisk Management with big data

Compared to traditional approach

Security Reliable, low false alarm rate

Thorough Comprehensive and

multi-dimensional

Accurate Accurate risk control without

sacrificing user experience

Real-time Accomplished in real-time

Biometric verification

• Remote account access and risk

screening with biometric ID by face,

fingerprints, retinal scan, etc.

• Makes financial access possible for

countries and regions with under-

developed financial infrastructure

Assessment and Monitoring: effective assessment and

measurement of digital inclusive finance

Inclusive Finance Index sorted by provinces

Data source: “Peking University Digital Inclusive Finance Index (2011-2015)”

2011 2015

Establish a comprehensive digital inclusive finance

development plan with long-term effectiveness

Top-down

Planning

Appropriate

Regulation

Service Provision

Consumer

Protection

Financial

EducationKYC

Assessment and

Monitoring

Protect consumer’s rights in

the entire process

Effective assessment and measurement

of digital inclusive finance

Promote construction of

financial infrastructure

Adopt digital inclusive

finance as national strategy

Reserve space for

innovation

Establish a unified technology-

driven client identification system

Educate consumers in

financial knowledge

陳龍

•Thank You!