Ant Group is China’s premier FinTech (Financial Technology) company. The company operates China’s largest digital payment platform, the AliPay app, similar to Venmo in the US, or Revolut in Europe, but also offers online loans which they provide in partnership with traditional banks. The app is by far the largest of its kind in the world, servicing 700 million monthly users.
As of June 2020, the app had $339 billion worth of outstanding loans with customers, and processed $17 trillion in transactions from the start of 2020. While they currently face no significant competition in China, this all may change due to new lending regulations, which will have a huge impact on the company’s value, growth and lending capabilities.
This move is seen as politically motivated by many, because of the poor relationship between the firm’s owner, Jack Ma, and the Chinese government. In late October 2020, Mr. Ma publicly criticised state-owned banks for their “pawnshop mentality”, and further lambasted President Xi Jinping’s handling of risk-related regulations. This move prompted the Chinese Banking and Insurance Regulatory Committee (CBIRC) to step in just two days before Ant Group’s IPO (Initial Public Offering) in November, expected to be the largest in history, at $34 billion. The Shanghai Stock Exchange stated that Mr. Ma and several other Ant executives had been brought in by the CBIRC”.
Ant faced further targeted scrutiny in December, when they were ordered by the People’s Bank of China (China’s central bank) to bring its practices in line with regulatory policies, forcing Ant to become less of a FinTech giant, and more like the banks that it seeks to uproot. This command was finalised when Ant agreed to a restructuring process with the regulators, where the company’s major business will be placed in a financial holding company.
The new regulations would require online lending providers provide 30% of the loan value, which is a far cry from Ant Group’s current 2% contribution. This move will massively hamper Ant Group capabilities, and will almost certainly force customers over to state-backed alternatives, which charge much higher interest rates. The rules will almost limit the amount private banks can deliver to online vendors, which will serve as another blow to Ant Group’s success in particular. Altogether it is expected that the Chinese e-loan sector will contract massively when these regulations come into effect next year.
Ant currently offers small loans at ~18% annualised interest, which is relatively benign compared to the 25-35% rate charged by many competitors. The higher rates will inevitably lead to an increase in defaults by Chinese consumers, impacting GDP growth.
The message from the Chinese government is clear. If you want to succeed there, you’ve got to play ball. More than that, you have to let them win. While it is unlikely that Ma’s Ant will vanish overnight, it wouldn’t be surprising if a government backed alternative rises above in the coming years. For now, Ant will have to lick its wounds, and explore different FinTech opportunities to capitalise upon.
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