You use Alipay every day, but you may not know the truest side of Ant Group.

Ant Group, with a market capitalization of trillion yuan, finally unveiled its prospectus in both Hong Kong and Shanghai on Aug. 25, showing the revenue structure and profit sources of the giant in detail for the first time.

Ant Group's revenue in 2019 was 120.6 billion yuan, an increase of more than 40 percent over the same period last year, while its net profit in 2019 exceeded 18 billion yuan, more than seven times that of 2018. Under the influence of COVID-19 's epidemic, ant revenue still reached 72.5 billion yuan in the first half of 2020, an increase of more than 38 percent over the same period last year, of which digital financial technology services accounted for more than 63.40 percent.

According to people familiar with the matter, Ant Group plans to launch a stock market listing of the company in October, which could raise up to $30 billion. If successful, it will replace Saudi Aramco's $29 billion IPO as the world's largest IPO.

"Alipay will never become a bank," Ma's public statement in 2013 was mentioned again.

Over the years, the controversy over ants has never stopped.

The prospectus raises the mysterious veil of ants, so that we can see what kind of company ants are.

To reveal the secret, how do ants make money?

In the eyes of many people, Ant Group is equivalent to "online banking", but this is actually a big misunderstanding.

According to the prospectus, Ant's income mainly comes from two aspects-digital financial technology platform, digital payment and business services, among which the digital financial technology platform includes micro-loan technology, financial management technology and insurance technology. What is the specific business of these sectors?

Digital financial technology platform:

* Financial management: ant Group cooperates with fund management companies, insurance companies and other financial institutions to provide comprehensive financial products, including money market funds, fixed income products and stock investment products, through Ant Wealth, the financial platform of Ant Group.

* Micro loan: ant Group works with banks and other lending institutions to provide consumers and small and micro operators with small, flexible consumer credit services, such as spending and borrowing.

* Insurance: ant Group works with insurance companies to provide insurance products, including innovative insurance products, as well as health and life insurance products.

In terms of digital payment and merchant services, it is mainly through charging B-side technical service fees, such as e-commerce, offline transactions and other consumption scenarios, such a fee will be generated for each transaction, and the rate is usually 6/1000.

As can be seen from the following figure, from 2017 to the first half of 2020, the proportion of ant digital financial technology platform in total revenue is increasing year by year, from 44.30% to 63.40%.

In the first half of 2020, the micro-loan technology business in digital financial technology accounted for 40% of the total income, making it the largest source of income for Ant Group, surpassing the income of digital payments and merchant services based on payment business.

In addition, Ant's prospectus reveals the detailed model and capital link of its joint loan business, in which Alipay mainly acts as a platform for dealmaking. The licensed financial institutions, such as banks, are responsible for independent risk control, lending to users and charging interest.

According to the prospectus, ants currently have a total of 2.1 trillion loans, 98 per cent of which comes from co-operative banks and ABS issuance. In other words, 98 per cent of the loans or credit lines obtained by bank users of spending, borrowing and online merchants come from cooperative banks and ABS issuance, rather than from ants' own funds. This kind of model is generally referred to as "Internet joint loan business" in the industry.

Among them, Ant's micro-loan technology platform business is included in the balance of loans and advances in the balance sheet, only includes the balance of proprietary loans issued by the company through the subsidiaries within the scope of the merger (mainly Ant Shang Cheng, Ant Xiaowei, Financial factoring) at the end of each period. At the end of 2017, 2018, 2019 and June 2020, the proportion of the loan balance of the company's micro-loan technology platform partners was only 3.96%, 3.13%, 1.86% and 1.68%, respectively.

In this business process, ants or Alipay do not charge users or charge interest, but charge technology service fees from cooperative financial institutions.

Specifically, the content of ant science and technology service is mainly divided into several parts: platform flow, intelligent business decision system, joint risk control ability, product ability, marketing ability, technical ability. In popular terms, it is to use the technical capabilities of ants to recommend customers to financial institutions, do joint risk control, and develop or market products.

In addition, it also includes some pure technical capacity support, such as helping small town firms with backward technical capabilities to transform their own technological systems.

Making deals through technology, rather than "eating interest", is the essential difference between ants as Internet companies and financial institutions, as well as the basis for cooperation.

Alipay was founded in 2004, after 16 years of development, ants have gradually formed a financial service ecology.

According to the prospectus, Ant cooperates with more than 2000 financial institutions, including more than 200 cooperative banks, more than 90 insurance companies, more than 170 asset management institutions and 24 fund companies. Take Yu'e Bao as an example, 24 money fund companies provide services behind it. And there are more than 100 cooperative banks behind the services of Huabai and online merchant banks.

In 2017, 2018, 2019 and the six months ended June 30, 2020, Ant paid 39.1%, 22.9%, 32.0% and 35.3% of the total purchases, respectively, and the largest suppliers accounted for 15.1%, 5.5%, 9.7% and 8.2%, respectively.

Analysis, where is all the money spent?

First of all, let's look at operating costs. From 2017 to 2019, ants' operating costs accounted for 36.3%, 47.7% and 50.2% of their income, respectively, and reached 41.4% in the first half of 2020. The largest operating cost is the transaction cost, which is explained in the prospectus, "mainly including the fees paid by the company to financial institutions to facilitate the flow of funds to facilitate transactions on the Alipay platform."

In other words, every 10 yuan an ant earns, of which 3-4 yuan is the cost paid to a financial institution.

In addition to operating costs, ant's three major expenses account for the main expenditure, including sales expenses, management expenses and R & D expenses. In the past three years, sales expenses and management expenses have been decreasing, only R & D investment has continued to grow. From 2017 to 2019, the R & D expenditure rates were 7.30%, 8.10% and 8.80%, respectively.

The reason why ants invest in technology, as we have mentioned above, is the most important basis for business implementation.

The latest board list in the prospectus shows that about 1/3 of Ant's directors have a technical background, including Ant CEO Hu Xiaoming, CTO Miao Renfeng and now BABA CTO Cheng Li. Among the ant's 16000 employees, R & D personnel account for 63.9%. In 2019, the investment in scientific research is more than 10 billion yuan, accounting for more than 8% of revenue. And 40% of the funds raised in this listing will also be used to further support innovation and technology in the future.

The Commercial Enlightenment of gathering Sand into a Tower

Ant's customers mainly include BABA, commercial banks, asset management companies, insurance companies and different businesses. Revenue from the top five customers accounted for 14.4%, 20.0%, 23.7% and 22.6% of total revenue in 2017, 2018, 2019, and the first half of 2020, respectively. BABA is Ant's largest customer, contributing 8.9%, 9.2%, 8.1% and 6.2% of the revenue, respectively, while Ant's associate, Internet Merchant Bank, is the second largest customer, contributing 2.7%, 5.2%, 5.3% and 6.2% of the revenue, respectively.

It can be seen that although the first two customers are related companies, the customer concentration of ants is still very low. The remaining 99 per cent of "small customers" provide ants with nearly 80 per cent of their profits.

By the end of 2017, 2018, 2019 and the first half of 2020, Alipay APP active users were 499 million, 618 million, 659 million and 711 million respectively. The 100 million user pool and BABA's millions of merchant resource pool provide an important customer base for Ant's "gathering sand into towers", but these are far from enough.

How to gather large and scattered individual users and small and micro businesses? This is a great challenge to business systems and technical capabilities.

According to the data disclosed by Ant, 70% of the users previously did not have a credit card, while 80% of the small and micro enterprises served by online banks were not customers of traditional banks.

In the traditional financial system, physical assets are often needed as collateral, but it is difficult for small and micro operators, including online stores, to raise money.

Since 2010, ants have identified and met the financing needs of small and micro operators based on online and offline payment transactions, business streams and other information, including businesses on Taobao and Tmall, offline merchants using Alipay, and serving the user groups of agriculture, rural areas and farmers at the same time.

The credit products obtained by small and micro operators on the ant platform are usually small, unsecured, flexible in maturity, low in interest rates, and can be lent immediately. All these require ants and financial institutions to establish a dynamic pre-evaluation mechanism.

As of June 30, 2020, the credit term of small and micro operators issued by financial institutions through the platform of ants can be up to 12 months, and users can choose to prepay at any time without penalty interest. During the 12-month period ending June 30, 2020, the daily interest rates of most small and micro operators are about 0.03% or less, some can be as low as 0.01%, and the average maturity of settled loans is less than 3 months. The actual interest burden of small and micro operators is lower. During the 12-month period ended June 30, 2020, more than 20 million micro-operator users have obtained micro-operator credit through the micro-loan technology platform.

However, serving the grassroots who were previously unwilling and unable to serve by banks also doomed that ants' profit margins would not be as profiteering as traditional financial institutions. In 2017, 2018, 2019 and the first half of 2020, the operating profit margins of ants were 20.3%, 5.3%, 20.1% and 34.6%, respectively, and the net interest rates were 12.5%, 2.5%, 15% and 30.2%, respectively.

Conclusion

From the perspective of business model, the greatest contribution that ants bring to business is the enlightenment of "gathering sand into towers". Ants do not earn much money from big customers, but solve the problems of many "small customers", such as loans from small and micro enterprises, personal credit loans and so on. Among them, the 2008 principle played a role, with financial institutions serving 20% of their customers and earning 80% of their profits. Technology companies help financial institutions serve another 80% of their customers and make 20% of their profits.

Before the ants, it's not that financial institutions don't want to make the other 20%, but they just can't achieve it technically.

Therefore, technology must be the most important factor for ants to become ants. In terms of income composition, technology-driven digital financial income has reached 63.40%; in terms of investment, R & D investment is increasing every year, more than 10 billion yuan is spent on scientific research in 2019, and 40% of the new financing for IPO will also be spent on technology R & D. in terms of personnel composition, the board of directors has the largest number of technical personnel, and 60% of the employees are technicians.

It seems that ants are not only "small", but also hidden beneath the financial appearance is the core of science and technology.

Alipay will never become a bank. I still remember that in 2013, Jack Ma made such a public statement. And Ant's prospectus is like an answer paper, which revealed the answer in 2020.