Deal focus: China's XTransfer fills missing link in fintech

Four years ago, fresh from a successful RMB100 million ($14.2 million) fundraise, the CFO of Shenzhen-based e-commerce platform Youkeshu tried to open a corporate bank account in Hong Kong. “I walked up and down Des Voeux Road, knocking on the doors of banks all day long, with no success,” Zhiqiang Li recalls.

These roadblocks are not uncommon for Chinese small and medium-sized enterprises (SMEs). Ever since the global financial crisis – and with a notable uptick in intensity after US authorities slapped a $1.92 billion fine on HSBC in 2012 for facilitating money laundering – risk controls have become a priority for all global lenders. Given the time and effort it takes to manually track and verify the trading records of small businesses, an SME trying to set up an offshore account in the territory seldom gets very far.

Nonetheless, China’s estimated five million SME exporters are playing an increasingly important role in cross-border trade. In the first half of 2019, overseas shipments by private enterprises were worth RMB4 trillion, up 13% year-on-year. This amounts to just over half of the country’s total exports. XTransfer has built a business on helping these companies access offshore banking services.

“Through XTransfer, you can set up accounts with banks in the US, UK, Europe – in any of the countries that make up China’s 10 largest export destinations,” says Guobiao Deng, the start-up’s founder. “My goal is to provide to small businesses a global treasury service platforms as good as the ones used by large corporates like Apple and Huawei Technologies.”

XTransfer can’t replace banks; rather, it operates as a platform that sits on top of the banks, linking to them through application programing interface (API) connections. DBS, Barclays, Citibank and Standard Chartered are already in its network. An XTransfer account holder can use these banks to remit and receive money locally in certain countries at wholesale rates. Opening an account costs nothing, with the company charging a 0.4-0.5% commission on transactions.

XTransfer’s also offers products to help SMEs manage long-term foreign exchange rate volatility and Deng tells AVCJ there are plans to launch an asset management business similar to Ant Financial’s Yu’e Bao in the first half next year with a view to improving returns on cash held in accounts.

Targeting enterprises instead of end-consumers has gained traction in the payments industry. In February, Ant Financial acquired WorldFirst, a UK-based company with a core product – World Account – that offers multi-currency accounts for businesses. TransferWise, another UK player, started offering enterprise services in 2015 and now generates most of its revenue from this channel. The likes of Ebury UK and Transfermate are also concentrating on business customers.

Know your risk

XTransfer recently raised $15 million in the first tranche of a Series B round led by Electronic World Trade Platform (eWTP) Ecosystem Fund, an Alibaba Group and Ant Financial-backed vehicle that focuses on innovation and international expansion. China Merchants Venture Capital, 01VC, Yunqi Partners, and Gaorong Capital also participated.

01VC already missed out on Ping Pong – that collects payments for Chinese exporters selling through global e-commerce platforms – having talked to the company in 2016 before it achieved unicorn status. “When we met with XTransfer, we were quick to invest,” says Yangfeng Tao, an associate at 01VC. “Companies like Ping Pong and Lianlian targets B2C e-commerce sellers, which is still a small part of the cross-border market. XTansfer targets the B2B side, which is a much larger market.”

However, this business model does make risk control more challenging. A typical XTransfer customer might be a Chinese merchant that sells machinery to foreign enterprises. Products are non-standard, may require substantial customization, and sell for thousands of dollars per unit. Transactions generally require some offline interaction. Contrast that with Ping Pong, which relies heavily on the likes of Amazon to verify transactions and fund flows.

“For us, there is no such platform. We must gather a merchant’s information and cross-check it,” says XTransfer’s Deng. “We verify deals, detect fraud, and settle disputes, so our standards must be as high as those of the banks.”

The company’s ties to Alibaba extend deeper than eWTP. XTransfer is actually a spin-out from Ant Financial, with the co-founders having spent an average seven years at Alibaba, specializing in areas such as cross-border payments, risk controls and business development. This experience makes the model difficult to replicate.

“When XTransfer works with DBS, for example, I tell them that risks one, two, three are likely to occur and these are the solutions,” Deng explains. “A dozen start-ups copied us but died within half a year, because when problems came up, they didn’t know where they came from or how to overcome them. As a result, banks quickly lost confidence in these platforms.”

He is also confident in the company’s technology edge over the banks, noting that it can resolve problems in two days that occupy lenders for months. The issue involves legacy systems that are also used for loans, securities and insurance products; one misstep implementing a change on payments could have serious broader operational implications. XTransfer supplements its technology by assigning more than one-quarter of its staff to risk control and anti-money laundering duties.

Competitive dynamics

While the Alibaba and Ant Financial connection serves XTransfer well, it remains to be seen whether – and how – the company must deal with its former parent as a competitor. It is acknowledged that the Alibaba Group entities’ ambitions stretch beyond being a payment services provider.

Alibaba acquired One Touch, an online export services provider, in 2010 and has since bundled all related functions into a single platform, including business matching, logistics, customs clearance, tax refunds, and payments. Users pay an annual service fee. However, SMEs are extremely fee sensitive. If payments is all they need, they don’t want to outsource tax refunds if it can be handled in-house.

“We only do the payment part and we are an independent service. This gives flexibility and freedom to customers,” says Deng. Besides, he believes that consumer, not enterprise, is woven into Ant Financial’s DNA. It is difficult to drive a project internally if it’s not the sole focus.

For start-ups like XTransfer, it could be argued that they have never enjoyed the range of options- provided by multinational players and independents – at their disposal today. “You have infrastructure like Alibaba Cloud, Microsoft Azure and Amazon AWS; you have many VCs looking to invest in ex-executives from Alibaba or Tencent.”

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• Topics
• Greater China
• Financials
• Technology
• Early-stage
• China
• Alibaba Group
• 01VC
• Yunqi Partners
• Banyan Capital
• Financial Services