In April 2024, ByteDance was reported to acquire Union Mobile Pay (UMP) for CNY1.4 billion (USD200 million), pending regulatory approval. ByteDance operates popular social media and commerce platforms (TikTok and Douyin). Given growing challenges of new financial licence application globally, ByteDance took the fast acquisition approach in obtaining most permits. Besides the online payment acquiring licence (online merchants) obtained in 2018, the licences from UMP (bank card acquiring licence for offline merchants, cross-border payment licence etc) will complete its payment vertical in mainland China.
ByteDance’s earlier attempts, including a digital bank licence application in Singapore in 2020 were not successful. Their timelines did not align with the core businesses, especially social commerce. For example, ByteDance’s TikTok Shop e-commerce portal was only launched officially in Singapore in 2022. However, acquisition of UMP in 2024 is considered timely.
ByteDance recorded a 16% value share of retail e-commerce in mainland China and a 6% value share of retail e-commerce globally in 2023, looking for offline payment licence to support its offline commerce growth
Source: Euromonitor International
This article analyses its strategic objectives of financial expansion, and the key threats and opportunities in relation to financial industries. UMP is considered to be a key chess piece of the game.
ByteDance’s plan is considered to have three key objectives: payment expense reduction, customer engagement, and monetisation to boost revenue.
Reduce transaction expense and dependence on payment firms
With the growing scale of e-commerce sales, the more the business has to pay to payment firms. For instance, sources indicated that KuaiShou Tech paid around USD3 billion in transaction fees (higher than the acquisition value of UMP) to Tencent and Ant Group in total in 2022. Depending on methods and markets, payment firms impose a merchant discount rate (MDR) charge typically from 0.5% to 3%. By payment expansion to support the transactions across ByteDance’s businesses, ByteDance’s payment expense challenge can be turned into revenue diversification opportunity, while reducing reliance on payment firms.
Enhance customer engagement to accelerate building an online-to-offline (O2O) lifestyle ecosystem
Alipay was developed in the 2000s by Alibaba, originally based on user feedback on the pain points of bank account transfer to Taobao, including payment channel breakdown during peak hours of the 11.11 shopping festival. Similarly, building its own finance engines allows ByteDance to control the financial experience, which is a critical part of the overall satisfaction of customer journeys.
52% of professionals selected “Improving the customer journey and user experience” for preference of key commerce developments in 2024
Source: Euromonitor International’s Voice of the Industry: Digital Survey 2023
Finance, especially payments, will be the fuel powering ByteDance’s digital business engines, driving growth in digital marketing, social commerce etc. The payment licence from UMP will power its offline business growth to build an O2O lifestyle ecosystem across retail, foodservice, mobility etc.
Further monetise the customer base by cross-selling to boost revenue growth
Comparing across the growth trajectory of digital businesses including Alibaba, Kakao, Rakuten, Amazon, and Grab, financial expansion is a natural step for ByteDance to further monetise its customer base (ie 1.1 billion monthly active users (MAU) of TikTok and 750 million MAU of Douyin in 2023) to boost revenue growth, by offering financial products beyond payment to the Gen Z and Gen Alpha that it targets. Cross-selling products to lending, investment and insurance will add interest income and further grow fee income. To cross-compare, among the dozens of profitable digital banks in Asia Pacific, ecosystem is a critical factor for customer acquisition and digital lending.
Threats and opportunities
The direct threat from ByteDance’s financial expansion will be significant to O2O ecosystems including Tencent, Alibaba and Grab with overlapping markets especially in Asia Pacific. The threat will expand from e-commerce to finance, across all key financial products, especially payments and lending.
With growing security, competitive pricing and enhanced engagement, consumers are increasingly comfortable managing their finance via digital challengers. The incumbent banks and payment businesses will face another strong challenger. While doubling down efforts in partnerships and tech upgrades to enhance customer engagement, incumbent banks and payment firms will likely lobby regulators against ByteDance’s efforts in obtaining financial licences.
Meanwhile, there are still embedded finance opportunities to serve ByteDance in markets where ByteDance may face tough challenges in financial expansion. Nevertheless, as ByteDance operates a global business, it likely looks for embedded finance partners with global scale. This strategy removes the complexity of partner search in each local market, while ensuring the consistency of service quality across the markets. For example, JP Morgan was reported to power fast payment solutions for ByteDance across 24+ markets.
Emergence of a financial powerhouse
Furthermore, ByteDance will be unlikely to meet all market demand for financial products from consumers and merchants, likely pushing its business model transformation to either financial marketplace or platform finance. In markets where ByteDance has financial licences, especially in lending, it will likely transform to the platform business model: financial partners can co-lend with ByteDance to the borrowers, while ByteDance provides real-time credit underwriting recommendation via cloud-based APIs. In contrast, in markets where ByteDance does not have financial licences, it will likely transform to the marketplace model to distribute partners’ products, especially for insurance and investment.
In conclusion, ByteDance is highly likely to build a world-class financial business, not only serving its own ecosystem but also serving potential clients.
For more insights, please read our reports, Embedded Finance Ecosystem: Mapping the Path to Goods and Channels Industries’ Transformation, and Top Five Digital Consumer Trends in 2024.