A mission-minded loan source that doesn't care if you're a startup with no experience, revenues or credit - The Colorado Sun

A mission-minded loan source that doesn't care if you're a startup with no experience, revenues or credit - The Colorado Sun

A mission-minded loan source that doesn't care if you're a startup with no experience, revenues or credit - The Colorado Sun

Posted: 07 Oct 2020 10:16 PM PDT

When Valerie and Cesar Beltran decided to open Beltran's Meat Market & Grill in Northglenn four years ago, they thought their past experience of running their own meat market in New Mexico and then a Front Range tortilla factory was enough to make them creditworthy.

But as opening day approached, the couple realized they needed more than a home equity loan to pay for unexpected expenses. They applied for a small business loan. Their bank said no. 

"They didn't really want to take the risk. There just wasn't collateral in it for them to take that risk," said Valerie Beltran, the family's hard-working matriarch who raised six children and also picked up her Realtor's license. "I'm a female, I'm a minority, I'm a veteran. I tried to pull every card I could, but traditional banks did not want to look at us."

Valerie Beltrán, co-owner of Beltran's Meat Market, sits for a portrait at the market in Northglenn on Oct. 5, 2020. The family owned and operated bilingual meat market received a Colorado Enterprise Fund loan available to underserved communities. (Eli Imadali, Special to The Colorado Sun)

But there was a lender who would. Actually, a few were willing to work with a startup with no revenues or collateral — and without charging exorbitant interest. Colorado Enterprise Fund, a certified community development financial institution (CDFI), offered a market-rate loan and guidance. The experience proved so beneficial, the Beltrans repaid the loan and went back for a second one to help their son, who opened Beltran's Grill in Broomfield in July, after COVID-19 delayed his plans.

"It wasn't just money," Beltran said. "Colorado Enterprise Fund offered to help with marketing, offered help with QuickBooks accounting and offered help with getting our business plan together to make it stronger. They just gave you more support."

CDFIs, like the Colorado Enterprise Fund, have been around for decades and are seeing an uptick in interest by borrowers and investors as the coronavirus continues to disrupt the local economy. They exist as part of a government effort to encourage banks and lenders to invest in their local communities and provide credit to those in lower-income neighborhoods. By statute, CDFIs offer financial and educational support. In good times, such lenders appeal to borrowers who find it very difficult to qualify for a traditional bank loan. 

And in tough times?

"We come in as a source of support because banks pull back," said Ceyl Prinster, CEO of Colorado Enterprise Fund, which started in 1976. "And many businesses that in normal times would be bankable are, all of a sudden, not so bankable."

Antonio Reyes weighs chorizo at Beltran's Meat Market in Northglenn on Oct. 5, 2020. The family owned and operated bilingual meat market received a Colorado Enterprise Fund loan available to underserved communities. (Eli Imadali, Special to The Colorado Sun)

The allure of risky lending: Social impact

CDFIs are often overlooked or not known to the folks who would benefit the most. Many of these mission-minded organizations are not banks or credit unions. They're not regulated by the Federal Reserve. They don't take deposits. Instead, they're non-profit organizations that manage loan funds certified by the CDFI Fund, which is part of the U.S Department of the Treasury. The market-rate loans are backed by federal and philanthropic grants or investors and must target a specific applicant. 

"CDFIs have been kind of under the radar for a really long time, you know, like the best kept secret," said Yuliya Tarasava, a cofounder of CNote, an Oakland, California-based company that provides investors with a portfolio of CDFIs by category, race, gender or region. "And yet, they've been doing all this amazing work in our communities, literally in our backyard."


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An organization like the Colorado Enterprise Fund has seen its reach expand, with 1,113 loans for a total of $32 million in its 2020 fiscal year, which ended Sept. 30. That's five times the number of loans and triple the amount of last year. In its latest completed report in 2018, it had done $13.8 million worth of loans for 235 businesses, created 1,242 jobs and offered 3,066 hours of coaching and business advice. By 2018, assets had grown about 50% in three years, as borrowers paid back loans and the organization attracted new investors.

And that's a key part of growth. CDFIs are attracting more impact investors and private companies looking to be more mindful with their money. Some are incentivized by federal tax credits to invest in economically distressed communities. Others say they just want to support a certain underserved population. 

In March, Google partnered with the Opportunity Finance Network to create a $125 million fund to help CDFIs working with businesses impacted by COVID. 

In June, Netflix made a $10 million investment in HOPE, a Jackson, Mississippi-based CDFI that focuses on communities of color in the South. HOPE's CEO Bill Bynum told the Wall Street Journal that the attention from Netflix "was more valuable than the deposit itself," and helped "draw millions of dollars more in commitments."

Beltran's Meat Market in Northglenn got a federal Paycheck Protection Program loan from the Colorado Enterprise Fund, which had helped the family-run business in 2016. But as COVID-19 restrictions delayed the opening of its new Beltran's Grill in Broofield, it missed out on a second PPP loan. (Eli Imadali, Special to The Colorado Sun)

This spring, as hordes of companies applied for the federal Paycheck Protection Program, several smaller mom-and-pop businesses missed out. Many didn't have the right banking connections or were confused about how to meet the terms to get the loan 100% forgiven.

The inequity caused the U.S. Small Business Administration and Treasury Department to take note. After a second round of paycheck-loan funding was made available by Congress in late April, the SBA and Treasury set aside $10 billion for CDFI lenders. 

Ultimately, 308 CDFIs made $7.5 billion in PPP loans to 114,717 businesses nationwide — an average of  $64,506 per loan. By comparison, in the first round of PPP loans, the top lender made 27,307 loans at an average of $515,304. The Colorado Sun received a paycheck loan.

More: As society changes, Colorado investors want to make more impact with their money

CDFIs are one of the best ways to reach those small businesses in need. As banks consolidated, they closed local branches. Many commercial banks now partner with CDFIs to fulfill federal requirements and meet needs in low-income communities.

Earlier this week, FirstBank pledged $60 million to support Habitat for Humanity and Impact Development Fund. IDF is a CDFI dedicated to housing affordability for Coloradans. The pledge is of the bank's "Banking for Good" program, which does help meet its federal requirements but also is done "regardless of regulatory requirements," said Leah Dirks, president of mortgage and consumer lending at FirstBank. 

"We contribute (financially), serve on boards, work together to design and implement joint programs when possible," Dirks said in an email. "We also work with CDFIs to bridge the lending gap for borrowers. Many CDFIs also help increase access to resources for minorities and women owned businesses, which aligns well with FirstBank's own diversity and multicultural banking efforts."

Redefining risk

Congress passed the Community Reinvestment Act in 1977 to stop banks from redlining, which is the discriminatory practice that cut off lower-income neighborhoods from credit. But discrepancies remained 15 years later, which led President Bill Clinton to push for the Riegle Community Development and Regulatory Improvement Act of 1994. 

The 1994 law led to the creation of the CDFI Fund, which annually certifies banks, credit unions or nonprofit organizations. Certification requires organizations to have a primary mission of promoting community development among underserved customers. The annual certification helps the CDFI qualify for federal grants, which has totaled $2 billion since the CDFI Fund's inception.

But to qualify the target applicants, CDFIs often blur eligibility guidelines, repayment deadlines and other things traditional banks require and expect from borrowers. 

Colorado Enterprise Fund, for example, will consider an owner whose credit score is 600, where traditional banks often require a minimum of 670, Prinster said. CDFIs go beyond the data.

"We'll look at whether this is the result of medical issues or divorce or something that's a one-time thing. Or is it a chronic disregard for financial obligations?" Prinster said. "We can take a little bit more of an individualized approach on that and discount for those factors."

Dental hygienist Maria Francisco-Matias begins to clean the teeth of one of Marisela Carmona's 18-month-old triplets, Abdiel. Francisco-Matias reopened her business after getting a loan from Colorado Enterprise Fund to help pay for personal protection equipment. (Kathryn Scott, Special to The Colorado Sun)

They're allowed to prioritize what matters differently, she added.

"Collateral is another thing. We realized that you usually don't get fully paid back from collateral so we might weigh that a little less strongly than a bank would," she said. "We're going to weigh the cash flow, the historical cash flow, the projected cash flow for a startup, and some other factors (less, so) we can just be more generous." 

The Carsey Institute at the University of New Hampshire studied the impact of CDFIs during the Great Recession for the Treasury Department. It concluded that serving distressed communities costs more because of the additional services required to train folks to be fiscally responsible. 

But overall, CDFIs learned to manage the risk of providing loans to low and moderate income individuals and communities. The loans maintained "performance standards generally equivalent to those of the conventional financial sector," said the report. 

More: Colorado's newest billion-dollar B Corp is part of a movement to make a social impact — and profits

Today, there are more than 1,100 certified CDFIs, including 19 in Colorado. About half are nonprofit loan funds, while the rest are banks, credit unions and holding companies.

CDFIs just really know how to manage their risk, said Helen Leung, chief operating officer at Aeris Insight, which rates CDFIs on the same CAMEL standards banks use: capital, assets, management, earnings and liquidity. 

"CDFIs monitor their loan portfolios very closely," Leung said. "CDFIs would call a small business owner if their payment falls behind by 15 days. They say, 'What happened? How can we help?' And you say, 'I lost my guy who delivers my pizzas.'" 

CDFIs are much smaller than commercial banks and must have a community-minded mission. They're available when their customers hit trouble spots.They know how to make arrangements if the customer can't pay on time. 

"It's not that they are lenient. It's not that they give up money without going through a very good critical underwriting criteria. We look at their procedures and we look at their portfolios and the way they manage their loans is very hands-on," she said. "This is why they're successful." 

But it's not like CDFIs will give just anyone a loan. Applicants may not need a business plan, revenues or historical financials to qualify, but there are underwriting standards, said Alex Wise, executive director of Community Enterprise Development Services, an Aurora-based CDFI.

Her organization asks borrowers two questions: Can you pay us back and will you pay us back? 

The idea, said Wise, is to determine whether the business can generate enough cash to pay back the loan but also have money to meet payroll, purchase supplies and budget for the next month. 

"The 'Will you pay us back?' is really looking at their character and moving them beyond just what is their credit score number. It's really saying, 'Have you shown to be someone who is professional, someone who is courteous, who's respectful?' Someone who is most likely to honor their debts," Wise said. "There are certain situations where people just can't do it because of really bad luck, like a car accident. And there are other people who won't do it and may walk away from their debt. We're trying to filter through those."

Affordable housing, race, religion and other specialties

Colorado Enterprise Fund focuses on small businesses but others in Colorado have more specific niches. Oweesta Corporation in Longmont exclusively serves Native communities and tribal members. Colorado Housing Enterprises in Westminster focuses on affordable housing and helps borrowers with down payments. 

Aurora-based Community Enterprise Development Services started by serving refugees and immigrants in 2011. It has since expanded to any underserved racial minorities and continues to delve deeper into the needs of its target communities. 

For example, there's a large Muslim population in Aurora. CEDS worked with the community to configure an alternative to a loan because interest is forbidden under Islamic law. CEDS added Murabaha, an Islamic financing structure that sets a fixed cost. Instead of interest, CEDS charges a monthly fee to offset the cost of administering the loan.

"And because that fee is not tied to the performance of the loan but is separate, it is permissible," said Wise, who previously worked in impact investing in Somalia. "We have a product that's fairly general that can really apply to all of our Muslim clients and that's about a third of our portfolio." 

Since CDFIs are based in a community, they are able to rally support from local philanthropists or impact investors when needed. Colorado Enterprise Fund wanted to offer paycheck loans last spring but didn't have enough funding and the federal backing for CDFIs had not yet kicked in. So it asked its community partners for help. Philanthropic groups, including the Gates Family Foundation and Bohemian Foundation, stepped up and helped raise $11.2 million for PPP loans. 

Colorado Enterprise Fund made $18 million in paycheck loans to about 800 small businesses in the state. 

Dental hygienist Maria Francisco-Matias, right, at Every Child Pediatrics in Thornton, gives dental care education to Marisela Carmona who has arrived for a dental appointment for her 18-month-old triplets Ozziel, top left, Abdiel, and Leonel. Francisco-Matias reopened in June, but only after receiving a loan from the Colorado Enterprise Fund to help pay for personal protection equipment. (Kathryn Scott, Special to The Colorado Sun)

Thornton dental hygienist Maria Francisco-Matias found out about Colorado Enterprise Fund's PPP program after reading a Delta Dental newsletter. Her memories of applying for a business loan were not good. "I don't think they even looked at my application to be honest with you," she said. "I never heard back from them."

But Francisco-Matias started full-time with her practice in February. She works out of the Every Child Pediatrics clinics in Thornton and Aurora and provides preventative dental care to children who are also getting health care checkups by a physician. About 95% of Every Child's patients are from low-income households.

When the COVID-19 safety measures went into effect in late March, her business had to close. But when state orders allowed her to return, she couldn't afford the required personal protective equipment. She applied for a paycheck loan from the Colorado Enterprise Fund and was approved. She went back to work June 10 and continues to share her experience with others.

"I told my accountant about it and I said, 'If you know other people who need loans, this is a great organization who I got mine through,' because he couldn't find one for me either," she said. "I think it's because he was involved with bigger banks."

Leung, with Aeris, said CDFIs will continue to be a useful resource to kickstart budding entrepreneurs, help people buy a home and encourage economic development in distressed communities, whether the pandemic gets better or worse.

"In good economies, CDFIs graduate their borrowers and they become good enough, credit wise, to go ask for a bank loan. Everybody says 'Hooray, we graduated,'" Leung said. "In bad economies, banks say, "Hey, this borrower does not meet our risk parameters. Can you help and keep him afloat?'

"It's very cooperative and symbiotic," Leung said. "It's not competition although in good economies, we do see banks coming in and competing with CDFIs. But CDFIs don't lend to make a buck. They lend to create impact and help the community."

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LendingClub Closing Down Their Platform for Retail Investors - Lend Academy

Posted: 07 Oct 2020 01:00 PM PDT

The peer to peer lending platform that LendingClub pioneered will be closing down completely at the end of the year

Views: 5,064

There is big news out of LendingClub today for their tens of thousands of retail investors. They have given notice that they are closing down their Notes platform at the end of the year and individual investors will no longer be able to invest in any loans originated by LendingClub.

This is a disappointing development for the industry, as LendingClub was a pioneer in peer to peer lending, and for me personally as I have multiple LendingClub accounts going back more than a decade.

All investors should have received an email this morning detailing their plans. Here is an excerpt from that email:

As we move towards becoming a full-spectrum fintech marketplace bank, we have looked closely at our current and future product suite and have started development of new products to help our members keep more of what they earn and earn more on what they keep. Unfortunately, under a prospective banking framework, it is not economically practical for LendingClub to continue to offer Notes. So, we had to make the difficult decision to retire the Notes platform effective December 31, 2020.

While LendingClub began in 2007 as 100% focused on individual investors over the years it has moved to a much more institutional investor-focused approach. This was understandable as it is difficult to originate huge loan volumes on the back of just retail investors.

It is true that LendingClub has deemphasized individual investors over the past several years. We saw that the loan trading platform was closed down earlier this year, we have seen investors in some states being locked out of investing, increased investment minimums and there have been few, if any, new innovations for retail investors in many years.

Now, we are coming to the end of an era. The peer to peer lending model has not proven to be the wonderful innovation that it promised. There are virtually no platforms operating at scale today that have a pure retail investor approach. UK platform Ratesetter was probably the biggest, at least in the West, and that was sold earlier this year to a traditional bank for a fraction of what it was once worth.

The Lend Academy Investor Forum has been very active today with this news so if you are interested in unfiltered commentary from individual investors check out this thread. One of the forum members, Brad C, agreed to provide this formal comment for inclusion here:

The closing of the retail platform is somewhat bittersweet for me. I started investing in notes in 2009 so I remember the initial excitement and buzz around peer-to-peer lending. The last few years it's been obvious that LendingClub was deemphasizing the retail platform as part of the business model. I am not a totally surprised they are ending it, but had expected they would attempt to integrate it into the new banking platform since they were one of the original peer-to-peer lending companies. I feel a sense of loss in terms of the initial concept of peer-to-peer lending being dead at LendingClub. I bought into that idea of regular people helping each other with loans while cutting out the big banks/financial institutions taking advantage of people. It seems like we've gone full circle from the original peer-to-peer lending model to now back to big banks/institutional investors controlling lending.

I also reached out for a comment from industry pioneer Matt Burton, the founder of Orchard (acquired by Kabbage in 2018) and now a partner at QED Investors.

While the fintech industry has been moving away from peer-to-peer lending (P2P) since 2016, Lending Club's decision to shut down its retail P2P platform marks the end of an era. P2P Lending was my entry into the fintech space in 2010.  During its rise it had the promise to transform lending into a more transparent and democratic process. Hopefully, future entrepreneurs will find a way to break through where P2P failed.

I have averaged probably around a 7% return at LendingClub (see details of my returns here) since I started investing back in 2009. While I liked the peer to peer aspect of the business, I was drawn to the non-correlated returns of this asset class. It has been a staple of my investment portfolio for over a decade. I will now have to look for other alternatives.

A representative from Prosper reached out to me today reminding me that they are still open for investment and remain 100% committed to retail investors. By the end of the year they will be the only game in town so I will certainly be increasing my investments there.

What I Would Like to See LendingClub Offer Down the Road

While this is the end of peer to peer lending at LendingClub I don't believe it is the end of investment opportunities backed by consumer credit. There was this part of the email that caught my attention:

People helping people is core to who we are as a company and we're scoping new products that would retain the peer-to-peer spirit of Notes under the prospective banking framework.

So, once the acquisition of Radius Bank has closed and the regulators give their blessing I expect we will see some new products from LendingClub. Here is what I would like to see:

  1. CD-type product that is backed by consumer loans – this would have a long lockup (at least a year) and pay higher interest than regular CDs. I would like to see an FDIC-insured option and an uninsured option to earn more interest (not sure if regulators would bless this but I think it would be popular).
  2. Floating interest account with a floor – I would love to see a fund-type product that pays 3-4% but with a floor of 2%. This would not be FDIC-insured but would provide investors an opportunity to earn some of the returns from consumer credit.
  3. High interest savings account – a liquid option that pays the highest rates in the country. I could envision a savings account that pays 3% or more, again with the LendingClub bank using very low cost capital to invest in their own loan portfolio.
  4. Investor marketplace – Scott Sanborn first teased this idea in his LendIt keynote in 2017 and I always thought it was compelling. I would love to be able to invest through LendingClub in a range of alternative assets such as consumer loans, small business loans, fix and flip real estate loans and auto loans.

Of course, once they become a regulated bank I realize some of these products may be very difficult to implement. But I hope and expect they are working right now on creating something completely different that would be compelling for investors.

The news today will not be received well by their investors and they will need to work hard to woo them back. A groundbreaking new investment option would be the best way to do that.

What Ant Group’s IPO says about the future of finance - The Economist

Posted: 08 Oct 2020 11:18 AM PDT

IN THE STAID world of Chinese banking, it is rare for executives to voice public criticism. So Jack Ma, the founder of e-commerce giant Alibaba, made headlines in 2008 when he bemoaned how hard it was for small businesses to get loans: "If the banks don't change, we'll change the banks." He has not repeated his warning since then. He has not needed to.

Through Ant Group, which began life as a payments service on Alibaba, Mr Ma's impact on the Chinese financial system has been profound. Ant has helped establish China as the world leader in digital transactions, given entrepreneurs and consumers far greater access to loans, and changed the way that people manage their money. It is now a giant in its own right. Over the past year it counted more than 1bn active users. Last year it handled 110trn yuan ($16trn) in payments, nearly 25 times more than PayPal, the biggest online payments platform outside China (see chart 1).

An initial public offering (IPO) in the coming weeks will bear testimony to Ant's growth. It is expected to raise more than $30bn, eclipsing Saudi Aramco's debut last year as the biggest IPO—a symbol of the world's transition from a century in which oil was the most valuable resource to an era that prizes data. With a forward price-to-earnings multiple of 40, in line with big global payments companies, Ant could fetch a market capitalisation in excess of $300bn, more than any bank in the world.

A four-legged insect

More important than its size is what Ant represents. It matters globally in a way that no other Chinese financial institution does. China's banks are huge but inefficient, burdened by state ownership. By contrast foreign financiers look at Ant with curiosity, envy and anxiety. Some hawks in the White House reportedly want to rein in the company or hobble its IPO. Ant is the most integrated fintech platform in the world: think of it as a combination of Apple Pay for offline pay, PayPal for online pay, Venmo for transfers, Mastercard for credit cards, JPMorgan Chase for consumer financing and iShares for investing, with an insurance brokerage thrown in for good measure, all in one mobile app.

Given the abundance of consumer data in China and the relatively lax safeguards around its use, Ant has more to work with than fintech peers elsewhere. More than 3,000 variables have gone into its credit-risk models, and its automated systems decide whether to grant loans within three minutes—a claim that may seem far-fetched but for Alibaba's proven ability to handle 544,000 orders per second. Ant is, in short, the world's purest example of the tremendous potential of digital finance. But as it advances further, it may also be an early warning of its limitations.

Start with a deceptively simple question: what is Ant? In its decade as an independent company it has changed names three times—from Alibaba E-Commerce to Ant Small and Micro Financial Services to Ant Group. The company once called itself a fintech leader. Then Mr Ma inverted the term to techfin, in order better to capture its priorities. Such are its efforts to distinguish itself from a purely financial firm that it has asked some brokerages to assign tech analysts to cover it. (Of course, it does not hurt that the valuations for tech stocks are much plumper than for bank stocks.)

Yet there is no doubt that Ant, at its heart, is about finance. The clearest way of understanding its business model is to look at the four sections into which it divides its revenues. The first is payments—how it started and still the foundation of the company. Ant began in 2004 as a solution to a problem. Shoppers and merchants were flocking to Alibaba but lacked a trusted payment option. Alipay was created as an escrow account, transferring money to sellers after buyers had received their products. With the launch of a mobile Alipay app, it moved into the offline world, super-charging its growth in 2011 with the introduction of QR codes for payments. A shop owner needed to show only a QR code print-out to accept money, a big advance for a country previously reliant on cash.

For China as a whole, digital transactions reached 201trn yuan in 2019, up from less than 1trn in 2010. Alipay's market share has been whittled down by Tencent, which added a payments function to WeChat, China's dominant messaging app. Both companies earn as little as 0.1% per transaction, less than banks do from debit-card swipes. Given the sheer volume, this still adds up to a lot. Ant generated nearly 52bn yuan of revenues from its payments business last year. But growth is slowing, dropping from 55% of Ant's revenue in 2017 to 36% in the first half of this year. Instead, the crucial point is that payments are a gateway: how Ant attracts users, understands them and ultimately monitors them.

The biggest beneficiary of all this data is Ant's lending arm, the second part of the company (which Ant, never one to shy away from jargon, calls CreditTech). Ant began consumer lending as recently as 2014, with the launch of Huabei, a revolving unsecured credit line for purchases—basically a virtual credit card. Alipay users can tap into Huabei to defer payments by a month or to break them into instalments. Credit cards had never taken off in China, so Huabei was lapped up. That led to Jiebei, an Alipay feature which allows users to borrow larger sums. Ant also offers loans, with a focus on very small businesses. Annualised interest rates hover between 7% and 14%, lower than the alternatives from small-loan companies.

Like many Ant clients, Zhu Yifan, owner of Rabbits Go Home, a convenience store in Dongyang, an eastern city, started small. Four years ago she and her husband wanted to open their store. With no property as collateral, they could not get a bank loan. Instead, they pulled together money from friends and relatives, and, on a whim, borrowed 10,000 yuan from Ant, the most they could obtain then. By repaying that initial loan and getting customers to use Alipay—giving Ant a look at her cash flow—Ms Zhu's credit score improved. Now, she has a 100,000 yuan credit line from Ant, which lets her stock up before busy holidays.

In barely half a decade Ant has reached 1.7trn yuan in outstanding consumer loans, or roughly a 15% share of China's consumer-lending market. Its loans to small businesses total about 400bn yuan, about 5% of the micro-enterprise loan market. From a financial perspective, Ant's biggest innovation is the way that it funds the credit. Initially, it made the loans and then packaged them as securities, sold to other financial institutions. But regulators feared parallels with the securitisation boom that preceded the financial crisis of 2007-09. They required that the originators of securities hold capital much like any bank—a rule that cut into Ant's margins.

So Ant devised a new approach. It now identifies and assesses borrowers, but passes them on to banks which extend the loans. Ant collects a "technology service fee". For borrowers it is seamless. With a few taps on their smartphones, their credit requests are approved or rejected. Ant ends up with a cash-rich, asset-light lending model. Fully 98% of the loans are held as assets by other firms. Credit has become Ant's biggest single business segment, accounting for 39% of its revenues in the first half of this year (see chart 2).

The strength of Ant's platform is what enables its third and fourth business segments: asset management and insurance (InvestmentTech and InsureTech, to use Ant's nomenclature). Ant got started on asset management in 2013 with the launch of Yu'ebao, or "leftover treasure". The idea was that merchants or shoppers with cash in Alipay could get a small return by parking it in a money-market fund. That attracted people interested in Yu'ebao purely for storing cash, since its yields (now roughly 1.7%) were higher than those available on current accounts at banks. By 2017 Yu'ebao had given rise to the world's biggest money-market fund by size.

Ant broadened its offerings to become one of China's most powerful distribution channels for investments. Today 170 companies sell more than 6,000 products such as stock and bond funds on Ant. Altogether these firms have roughly 4.1trn yuan in assets under management enabled by the app. As with its lending business, Ant screens prospective clients and directs them to products. It then collects a service fee. "Our growth on Ant has been faster than on any other digital platform," says Li Li, deputy CEO of Invesco Great Wall Fund Management. Her group's two money-market funds soared from 665m yuan in assets under management in early 2018, when it started selling them on Ant, to 114bn yuan in June.

Ant's push into insurance happened more recently. For a decade it offered shipping insurance for purchases on Alibaba, letting dissatisfied customers return goods for no charge. But it is only in the past two years that it has applied its asset-management template to insurance. In partnership with big insurance firms, it has unveiled life, car and medical insurance—again collecting fees as a distribution platform. Asset management and insurance now make up nearly a quarter of revenues.

All the ants are marching

Simply looking at the numbers, Ant can appear unstoppable. It has chalked up dizzying growth rates in every market that it has targeted. It benefits from the network effects so familiar in the tech world: the more people use it, the stronger its attraction for yet more borrowers, lenders and investors. It is a virtuous cycle, especially for Ant's shareholders. Nevertheless, there exist three kinds of risks that could slow it down: regulatory, competitive and those that are intrinsic to its own model.

The regulatory landscape in China is treacherous. Officials endlessly tweak rules for banks and investors, patching up holes as they emerge in the fast-growing but debt-laden economy. Many have long assumed that the government will give Ant, a private-sector firm, only so much leeway in the state-controlled system.

Indeed, regulators have already put numerous hurdles in Ant's path. Its first attempt at launching a virtual credit card was blocked. The securitisation crackdown upended its lending model. A government plan to standardise QR codes could weaken it in payments, potentially reducing Ant's market dominance. Another new rule, taking effect in November, will force Ant to hold more capital.

But if all these hurdles were meant to stop Ant, they have not succeeded. So there exists an alternative explanation. Regulators, wary of the pitfalls in financial innovation, continue to erect guardrails around Ant. In general, though, they like it. Not only has it steered credit towards small consumers and businesses, it has also given the government more information about money flows. Duncan Clark, author of a biography of Jack Ma, notes that regulators have long struggled to monitor all corners of China, referencing the old saying that the mountains are high and the emperor far away. "Ant has basically let Beijing tunnel through the mountains and fly drones over their summits," he says.

Another threat to Ant is its competitors. Until 2013 mobile pay was, more or less, Ant's exclusive domain. But Tencent has used its ubiquitous WeChat app to muscle in, taking nearly a 40% market share. Other firms also have financial ambitions. Meituan, an app known for food delivery, now also offers credit. The financial arm of JD.com, an e-commerce firm, and Lufax, an online wealth-management platform, are on track for IPOs this year.

So far these competitors have a much smaller financial footprint than Ant's. Partly this is because they do not have the same breadth. Shawn Yang of Blue Lotus, a boutique Chinese investment bank, says that Tencent, for instance, has high-frequency but low-value consumption data, less rich than the trove that Ant has thanks to Alibaba, which accounts for more than half of Chinese online retail sales.

But it is also a matter of business culture. The most controversial episode in Ant's history came in 2011 when Mr Ma spun it out from Alibaba, without notifying SoftBank and Yahoo, which together held about 70% of Alibaba's shares back then. Mr Ma explained that Chinese regulations forbade foreigners from owning domestic payments firms, though there may have been work-arounds. Some suspected that he wanted to bring in powerful investors closer to home. Ant's earliest rounds of fundraising as an independent firm did indeed attract major state-owned enterprises. A stake was also sold to a private equity firm managed by the grandson of Jiang Zemin, China's paramount leader during Alibaba's early years.

Yet in retrospect the spin-off has a clear strategic rationale. As a standalone company Ant has had the motivation to explore distant corners of the banking system and act aggressively. An executive with another e-commerce company says that its financial unit worries about making mistakes that might taint the group's core retail business. Ant, by contrast, has diversified, with less than 10% of its revenues now from Alibaba. For China's other e-commerce dynamos, its success offers a template. They may be several years behind but the fintech race is far from over.

The final danger for Ant has the most global resonance: the nature of its model. Unsecured lending to small borrowers is risky, whichever way it is done. Indeed the coronavirus pandemic has offered a sharp test for Ant. Delinquent loans (more than 30 days past due) issued via its app nearly doubled from 1.5% of its outstanding total in 2019 to 2.9% in July. Yet that is better than most other banks in China. Is that because of Ant's prowess? Some critics say that it reflects its market power. Given the centrality of Alipay and Alibaba to their operations, few dare to default on Ant loans, worried that a downgraded credit rating may damage other parts of their business.

Still, many bankers are persuaded that Ant truly does have an advantage in its analytics. "They don't need quarterly statements. They see your daily flow of funds. They know who your customer is. They know who your customer's customer is," says one. Based on the address for e-commerce deliveries, Ant has more up-to-date information about where someone lives and works than a bank. Based on what that person buys, Ant can work out their income bracket and their habits, preferences and way of life.

But according to Hui Chen, a finance professor at Massachusetts Institute of Technology who has worked on research projects with Ant, individual and systemic risks are different. The machine learning that underpins Ant's algorithms observes individual behaviour again and again, and is then able to detect patterns and anomalies. But if risks do not appear in the historical data—say, a big economic shock—the same machine learning may stumble.

There are also some limitations hard-wired into Ant's strategy. By design, it aims for high-volume, small-scale borrowers and investors. "Their analytical advantage is most significant with this mass market, where traditional banking models are most inaccessible," says Mr Chen. Most corporate lending—about 60% of all credit in China—will remain off limits. Ant also has an awkward relationship with banks. It relies on them to fund the loans on its platform, but as it grows it may become a competitor in their eyes. For now that is not much of a concern, given that it focuses on borrowers ignored by banks. But it means that Ant must befriend the very institutions that it once set out to disrupt.

Doubts exist about its investment and insurance platforms, too. Ant has excelled in selling money-market funds to a plethora of retail investors. Moving up the value chain could be harder. "They are great at selling penny products. But that's not where you make the money in insurance," says Sam Radwan of Enhance, a consultancy. To close a deal on a valuable, complex policy like a variable annuity, brokers typically speak with consumers several times. "No ordinary customer is going to trust an online broker for something that complicated," says Mr Radwan.

Doing the jitterbug

Ant's global ambitions are also running into problems beyond its control. It has stakes in around ten different fintech companies in Asia, such as Paytm in India. Boosters once imagined a world connected by Ant, its credit-to-investment architecture straddling borders. The first blow to that vision came in 2018 when America blocked Ant's acquisition of MoneyGram, a money-transfer firm, which would have established Ant as a force in global remittances. Security concerns over Ant have increased as China's foreign policy has become more aggressive. Little wonder that Ant plans to devote just a tenth of its IPO proceeds to cross-border expansion.

Despite all these limitations, one lesson from Ant's decade in existence is that future possibilities remain vast. Ms Li of Invesco gushes about her fund-management firm's mini-site within the Alipay app, one of the tens of thousands of separate sections that constitute the Ant ecosystem. In September Invesco hosted a live-stream on the mini-site to discuss its market outlook. More than 700,000 tuned in—just one example of how Ant has become the main doorway into the financial system for tens of millions of people. And for all those who have walked through it, many more have not. Ant will soon know where they live, how much they earn and what they want. It is coming for them.

This article appeared in the Briefing section of the print edition under the headline "Queen of the colony"

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