Modular Banking – How E-Commerce Businesses are Strategically Forcing their Way into the Financial Services Market

• E-commerce strategies based on merchandising, logistics and payment services

• Payment services as an independent growth driver within e-commerce

• Amazon payments, PayPal, Yapital and Alipay

• Expansion into lending operations und asset management segments

• E-commerce businesses as pioneers in technology-driven banking and financial services

The strategies of the largest e-commerce organizations extend far beyond pure merchandising. Amazon, eBay, Otto, and the Chinese company Alibaba offer comprehensive solutions that enable not only the exchange of goods across trade platforms and market places, but also the storage and transport of goods as well as methods of payment. Payment services particularly stand out among these elements, as their role has changed from supporting merchandising to being an independent driver of growth for these businesses. At the moment, e-commerce businesses are on the verge of taking the next logical step in their development: They will expand their portfolios to include products for consumption and business financing; some of them already offer investement products. In doing so, they are creating targeted solutions within the fields of banking and financial services.

The strategy of the internationally leading e-commerce organizations is built on three pillars: merchandising, logistics, and payment processes. (In addition, risk management plays an important role within this strategy, and shop systems are also partially involved.) The integration of these fields into a comprehensive service offers the parties involved – merchants and consumers – a great advantage, as these fields cover a large portion of the value-added chain, from supply and demand to shipping and delivery all the way to payment transactions and receipt of payment.

Figure 1: Strategic Dimensions E-Commerce-Businesses

With this integrated solution of merchandising, logistics and payment, e-commerce businesses are creating opportunities for merchants and consumers, particularly in regard to three aspects:

• With their platforms and marketplaces, e-commerce businesses make it possible for every type of good to be bought or sold at any time. The diversification of the marketplaces helps different target groups to find each other.

• Through logistics systems, e-commerce businesses make it possible to receive and send goods rapidly to any location.

• Through payment services, e-commerce businesses make it possible to quickly and easily make or receive payments.

Within this strategy, the emphasis on commercial transactions of the various e-commerce organizations plays a subordinate role. Otto and Amazon, which focus on an exchange of goods via their own platforms, pursue similar strategies as Alibaba and eBay, which are providers of marketplaces that bring merchants together with consumers.

Figure 2: Gross Merchandise Volume and Net Revenue

In terms of the gross merchandise volume, i.e. the value of the goods sold via the marketplaces and trade platforms, the Alibaba Group, with its marketplaces Alibaba.com, Tmall and Taobao, emerges as the leader. In China, Alibaba has become an e-commerce giant. With 129.9 bn EUR, its gross merchandise volume tops that of Amazon (66.6 bn EUR) and eBay (51.4 bn EUR) together for the year 2012. The main portion of this merchandise volume stems from the B2B platform Alibaba.com.

However, this ratio is relativized when one takes net revenue into consideration. Here, Amazon remains the uncontested number one at 54 bn EUR, followed by eBay and the e-commerce arm of the Otto Group ahead of the Alibaba Group at around 4.8 bn EUR. These numbers reflect the orientation of the business. While Amazon distributes the majority of its wares as an independent merchant, Alibaba is exclusively a provider of platforms for use by other merchants.

In addition to merchandising, the e-commerce businesses offer services in the fields of logistics and payment processing, which are mainly provided as independent services. This allows the services to be used separately from the merchandising business that is initiated via the platforms and marketplaces of the e-commerce organizations. As a result, these logistics and payment services can be independently and flexibly integrated into other value-added chains to various extents.

Figure 3: Share PayPal Growth eBay

Payment services play a particularly noticeable role here, because as independent services they contribute significantly to the success of the e-commerce businesses.This can be seen in the case of PayPal, for example, which, as a fundamental driver of growth, provides a disproportionately high contribution to eBay’s growth. While in 2009, 32% of eBay’s total revenue stemmed from PayPal, by 2013, this portion had grown to over 41%.

Much as in the case of Alipay, the Alibaba Group’s payment service, the strategy of the other major e-commerce businesses is two-fold. On the one hand, offering payment services aids the e-commerce organizations to tap markets in the first place, as having an option to pay for goods forms the counterpart to having the opportunity of buying goods – especially with regard to international merchandising and its many different currencies. On the other hand, these payment services can just as well be used by other platforms. For example, in 2011, already 49% of the entire Chinese e-commerce business was conducted via Alipay. By the same token, the close linking of payment services with merchandising ensures that the interests of the merchants as well as those of the consumers are taken into consideration, and that the future development of the payment services, at least based on current tendencies, concentrates on these groups’ needs, as reflected in recent innovations within the field of mobile payment.

With regard to reach and functionality, there are some major differences between the individual payment services, while other differences are barely discernible. With 300 million users, Alipay has the greatest distribution range out of all the e-commerce organizations, followed by PayPal with 128 million users worldwide. Amazon Payments (2011) and Yapital (2013) have not provided any numbers or did not start until a later point in time.

The basic function of all e-commerce payment services is similar, at least when it comes to online transactions. Users register with the respective service and store their account or credit card data in an online profile. In the case of PayPal and Alipay, they can also load a specific account with credit and use this online credit to make payments. The enrollment process – meaning the registration with the respective service – can vary greatly from organization to organization, while the payment processes tend to be very similar. With regard to complementary merchant processes, the organizations’ third party payment solutions also resemble each other.

Alipay stands out due to the logistical difficulties in China. Here, payment is authorized by the buyer only after receipt of the goods. In all, the services offer similar solutions to handle the challenges inherent in making liquidity available rapidly and in a form that is optimized for online services. The concrete implementation of the solutions reflects the organizations’ specific market conditions.

Figure 4: Payment Services Alipay, PayPal, Amazon Payments, and Yapital

At the moment, it seems that all e-commerce actors are working to secure their future in the market by expanding their payment services to provide optimal solutions for all payment contexts. This process remains linked with the diversification of the goods on offer. Alibaba is currently driving its internationalization in the US market (under the lable “11Main.com” and with its sights set on a stock market launch), while also working on integrating Alipay into operating systems for smartphones. With PayPal Here and Beacon, PayPal is offering a solution for stationary merchandising that enables payment at the point of sale (POS) via different technologies. Similar developments in the same vein include Amazon’s intention to launch “Kindle Checkout” as a new product, as well as Yapital’s aim to use Bluetooth Low Energy technology (BLE). These solutions focus on using the online world made accessible by smartphone in order to create a bridge to the offline world.

Aside from this development in regard to diversification, a further strategic trend can be observed in e-commerce businesses‘ establishment of additional banking and financial services that go beyond payment services.

To begin with, this is related to products in the segment of lending operations. In the field of consumer credit, for example, PayPal is active with its “BillMeLater” service, while Amazon and PayPal have been offering their online merchants financing options with “Amazon Lending” since 2012 and “Working Capital” since 2013, respectively. With “Alifinance”, Alibaba provides small and medium-sized enterprises (SMEs) with a similar service. With these banking services, the e-commerce players are providing the final building block in regard to the liquidity of their customers on the one hand, while on the other hand operationalizing one of their central assets: As the e-commerce organizations have profound knowledge of the transactions and therefore the credit worthiness of their customers, they can also use this data in a targeted manner for risk management in the lending operations segment.

The e-commerce organizations are also active in the asset management segment. With “Yu’E Bao”, Alibaba has been offering a service since 2013 that was previously unusual in merchandising, but one that is oriented along the needs of Chinese customers. “Yu’E Bao” is an open investment fund in which customers can invest directly via their payment or user accounts. The combination of the payment and clearing account with a high-yield investment account lures investors and users in equal measure to park their money in a type of productive instant access savings account and often to use the profits to purchase goods in the directly linked Taobao portal. Due to the immediate availability of the money, there are no barriers to entry within this context. Yu’E Bao recently grew from 200 mn yuan (ca. 25 mn EUR) in mid-2013 to over 180 bn yuan (ca. 22 bn EUR) by the end of 2013.

Overall, the trend among e-commerce actors is to increasingly focus on the field of banking and financial services. In order to do so, the organizations use technological options to provide individual services and occasionally to combine a variety of services. These actors do not think about banking in terms of the organizational complex of a bank, but in terms of financial services that can be flexibly integrated into other value-added chains. Building on this foundation, the e-commerce organizations are formulating timely, meaning technology-driven, modular banking solutions, and are thereby realizing a new type of bank.

eBay
http://www.reuters.com/finance/stocks/companyProfile?symbol=EBAY.O
http://investor.ebayinc.com/sec.cfm

Alibaba
http://news.alibaba.com/specials/aboutalibaba/aligroup/index.html
http://www.chinese-champions.com/alibaba-group/
http://img.alibaba.com/ir/download/201203/Full_2011_Annual_Report_ENG.pdf
http://investor.yahoo.net/annuals.cfm
http://www.economist.com/news/briefing/21573980-alibaba-trailblazing-chinese-internet-giant-will-soon-go-public-worlds-greatest-bazaar
http://www.thefinancialist.com/not-just-a-paypal-clone-chinas-internet-giants-chart-their-own-course/

Amazon
http://www.reuters.com/finance/stocks/companyProfile?symbol=AMZN.O
http://www.crunchbase.com/company/amazon
http://t3n.de/news/amazon-kindle-checkout-525859/

Otto Group
http://www.ottogroup.com/en/die-otto-group.php
http://www.ottogroup.com/de/die-otto-group/geschaeftsbericht.php

Study Credit Suisse
https://doc.research-and-analytics.csfb.com/docView…

FX rates
http://www.finanzen.net/devisen/euro-renminbi_yuan-kurs/historisch
http://www.wallstreet-online.de/devisen/dollarkurs/historische-kurse