Deep Blue Sea
Jack Ma, the founder of Alibaba Group, was famously cautious about competing head-to-head with the world’s largest player eBay: “eBay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win,” he said.
On January 27 the crocodile finally swam out of the confines of the river and into the open seas of global finance. Ant Financial, Alibaba’s financial services arm, the “PayPal of China”, and the world’s largest financial technology firm, agreed to acquire MoneyGram, which along with Western Union, is one of the two “big” global money transfer operators (MTOs) for a price that represents a 11.5% premium over its share price and assumption of MoneyGram’s nearly 1-billion-dollar debt.
The acquisition has massive potential for the Alibaba Group. In one fell swoop it positions Ant Financial as a global player capable of handling multichannel payments over a network that reaches out to the far corners of the world spanning 200 countries and 350K agents. Well entrenched in China, Ant Financial, will now be able to offer payments and related financial services on a global basis. Only Western Union has as expansive a reach as MoneyGram. Other large MTO’s have wide agent presence too but they tend to be more geographically specialised than the big 2.
Remittances, funds sent to family and friends by migrant workers, are still heavily cash based. Over the past few years, innovative online players have developed disruptive business models via the internet and mobile channels to play in the $700 billion plus market for remittances. But the old fashioned cash-based remittance industry continues to be at the heart of the money flows and relies on agent networks (for cash pay-in and pay-outs).
Though MoneyGram also serves over online and mobile channels, the new players have developed fast, user friendly, digital services that are more intuitive and easier to use. Companies such as Xoom (acquired by PayPal), focus on a few corridors but provide a better more efficient service. Remity and WorldRemit have achieved significant early success. Other disruptors such as Transferwise and Azimo have promise but are still relatively small.
So, Ant Financial through MoneyGram will have the ability to transfer funds electronically from one end of the earth to the other – for customers who have bank accounts or payment cards – but also, through its agent network, equally well for customers who prefer to deal in cash.
In addition to having a wide payment network, the most valuable core assets of an MTO are its anti-money laundering procedures and controls embedded in the entity’s processes, platforms, and above all, its people and culture. Money laundering is a perennial headache for MTOs who are fined heavily not only for helping illegal flow of funds, wittingly or unwittingly, but for simply for having lax AML controls.
Large fines can cripple companies. In 2012 MoneyGram was handed a penalty for $100 million in the United States because, as Assistant Attorney General Lanny Breuer described, “MoneyGram knowingly turned a blind eye to scam artists and money launderers who used the company to perpetrate fraudulent schemes targeting the elderly and other vulnerable victims.”
Of-course MTOs are not alone in finding themselves penalised for aiding and abetting illegal money flows. The fines in those cases have been much larger. HSBC and Standard Chartered were fined billions of dollars for their part in money laundering and for not doing enough to root out and report such activities.
Analysts have indicated that such risks represent the biggest hurdle to the acquisition of remittance behemoths like MoneyGram by potential large investors and puts their business viability into question as a big event triggering another big fine could cripple a company financially or cause it to be shut down by the regulators. This is true. But it is not specific to MoneyGram. In fact, big companies like MoneyGram are better positioned than smaller rivals to make “critical mass investments” in such controls.
Ant Financial has the financial muscle to ensure MoneyGram’s AML controls evolve and ensure that it stays clear of trouble. But it will require continuous investment and a significant culture change not just in MoneyGram but also in its new parent, Ant Financial – a culture of transparency and regulatory compliance.
Alibaba’s marketplace businesses have been warned a number of times for not doing enough to prevent sellers from hawking fake products. But its response has been dismissive. Jack Ma’s famous remark implying that some fakes are better than the real products has been taken to illustrate the casual attitude the group has towards ethical best practices. This attitude should not extend to global money flows. The risks are much higher.
Ant Financial has other perception issues to face as well. For example, it is still recovering from the trouble in China over Cosun, a phone maker which defaulted on $166 million worth of bonds which were sold over Ant’s financial marketplace.
A new problem threatening to impede industry growth is the Trump victory in the United States and the Trump administration’s aggressive stance on migration which ultimately could have a negative impact on global remittance flows. The Trump administration with its protectionist rhetoric and anti-Chinese sentiments may even try to block the deal. The deal may be viewed under the “Exon-Florio” Amendment, the “touchstone law that lets the president block foreign acquisitions that threaten national security.” The New York Times quotes a 2009 case when a Chinese company was stopped from buying a gold mine in the United States because the mine was too near a military base and reminds its readers that the Chinese telecommunications equipment giant, Huawei was repeatedly blocked from acquiring American companies because of its ties with the Chinese military / government.
In recognition of the uncertainty, Ant Financial has reportedly agreed to pay MoneyGram $17.5 million if the deal gets blocked by a US security review.
Strong Core Business Prospects
The group is likely to do everything in its power to grow the remittance business especially targeting the significant remittance in-flows to China and also aiming to capture the “informal” remittances that flow through unregistered private networks and have continued to operate under the radar for decades. It can expand and consolidate the network in developing markets. Today, half of the total global money remittance flows take place between developing countries. As China expands its global influence, constructing ports on the Arabian Sea and building infrastructure in far flung African markets, MoneyGram will provide a payment infrastructure that keeps pace with the needs of this expanding footprint.
The Real Benefits
The future focus of Ant Financial, however, is not likely to be on remittances alone but on payments that support online and mobile ecommerce through the Alipay brand. Ant Financial now also offers a whole host of financial services to Chinese consumers and online retailers such as personal consumer loans and small business finance. It has also ventured abroad cautiously through investments such as its $ 680 million injection in paytm, India’s popular payment service widely used for ecommerce in the country. The main inhibitor to online payments in developing markets is buyers’ preference for cash payments on delivery due to a hesitation to use cards online or because of lack of trust that the goods received will be damaged or not up to standard. MoneyGram’s vast cash in/out network will enable consumers to pay cash if they cannot pay online and also act as pick up points for goods ordered online. It will also provide the infrastructure to make Alipay become the payment instrument of choice for global ecommerce payments particularly in emerging markets where ecommerce has not taken off yet or where cash is still used to pay for goods ordered over the internet.
MoneyGram will provide Ant Financial global reach for remittances and for ecommerce and all other types of payments. And, if all goes well and there are no issues with the United states authorities, Ant Financial will also be able to provide financial services in the US. But it is clear that the crocodile that was afraid to battle the shark has now ventured out and has already evolved and adapted itself to the new environment and ready to compete in the open seas.