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Analysts Say Baidu Is Too Late To FinTech Game To Be A Player Despite Need For New Growth

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As Baidu ’s pursues new growth outside its core internet search business, the company’s most recent deals in financial technology firms look far from promising.

On Monday, Baidu announced that it is making an undisclosed investment in U.S. lending startup Zestfinance. The two companies said in an online statement that Zestfinance will use its artificial intelligence technologies to develop Baidu’s search, location and payment data into consumer credit scores in China, which is yet to have a nationwide credit rating mechanism such as the FICO score in the U.S.

The investment is a continuation of Baidu’s bet on financial technology as it tries to diversify its revenues sources. Baidu’s core online search revenues have come under pressure lately, and the company cut its second quarter revenue guidance in June by 10% after regulators reviewed its advertising practices following the death of college student Wei Zexi. Wei used a controversial cancer therapy found via a Baidu-promoted link, and his subsequent death sparked outrage across China over the search engine’s manipulation of information to users.

In a separate case, regulators are now investigating stealth gambling advertisements that show up on Baidu only at night. Officials haven’t published any results at present.

Before venturing into the nascent business of assessing people’s creditworthiness, in June Baidu participated in a $60 million fundraising round of the China unit of U.S. blockchain payment startup Circle. At the end of last year, Baidu also established an online insurance company with German insurer Allianz and private equity firm Hillhouse Capital, as well as an online bank with China’s CITIC Group. The company has now formed a financial services unit to oversee these new operations.

“Baidu has been looking for growth outside search,” says Wang Xiaoyan, an analyst at Shanghai-based 86 Research. “It invested the most in online-to-offline commerce and just started to pay attention to financial technologies.”

Baidu also tried to make money from online video, but in February proposed to sell its 80.5% stake in online video site iQiyi to a buyout group led by Baidu chairman Robin Li and iQiyi founder Gong Yu for $2.8 billion after years of heavy losses. U.S.-based hedge fund Acacia Partners, which owns a 1% stake in Baidu, said in an open letter on Wednesday that the price is too low and the sell is not in shareholders’ long-term interest as it would involve the loss of a fast-growing and potentially lucrative business for Baidu.

Despite its recent efforts, Baidu isn’t making much of an inroad in internet finance. The company, already a late comer to the market, now faces a duopoly between e-commerce behemoth Alibaba and web giant Tencent. And Baidu’s chances of winning market share from its long-time rivals are slim, analysts say.

Alipay, the online payment app operated by Alibaba’s financial affiliate Ant Financial, had 58% of China’s internet payment market last year while Tencent had 20%, Credit Suisse estimated in February. The two are expected to further consolidate their market share to a respective 59% and 25% in 2018, while Baidu’s payment app Baidu Wallet doesn’t even appear in the ranking of the top five players in China, according to Credit Suisse.

The lack of a popular payment app doesn’t bode well for Baidu’s online banking and insurance businesses, which haven’t had any operating activities to date, says 86 Research’s Wang. Both Alibaba and Tencent embedded their credit, loan and wealth management products within the company’s payment apps, so they can channel traffic towards their other services. Their respective apps also have massive amounts of financial behavior data that can support the companies’ credit and loan businesses.

“Baidu has started to invest in internet finance as early as 2013, but none made to the user engagement level,” says Muzhi Li, an analyst at Hong Kong-based Arete Research, which downgraded the company’s stock to negative and maintained a target price of $154.

Instead, it would be better for Baidu to focus on developing technologies such as artificial intelligence and autonomous driving, 86 Research’s Wang says. Indeed, the company tested its self-driving cars at the end of last year in Beijing to much fanfare. In May, it signed a deal with the city government of Wuhu to gradually introduce the company’s driverless vehicles over the next five years.

“Baidu has a team of top scientists,” Wang says. “Compared with internet finance, it has a much higher chance of success in developing advanced technologies.”