Commentary: Ant Group will be back, but its path may not be as smooth-sailing
The new regulations force fintech firms like Ant to take on more risk and set aside more capital like the bigger banks do, says National University of Singapore’s Qian Jiwei.
SINGAPORE: China’s Ant Group is in a strange fix. The financial technology (fintech) firm went within days from being on the cusp of the world’s largest initial public offering (IPO) to those plans being thwarted through new regulations from its own government.
This sudden development has not only disappointed investors but also raised concerns on its impact on Ant and its future trajectory.
The Alibaba-linked company was supposed to raise US$37 billion through listings in Shanghai and Hong Kong on Nov 5 – eclipsing the US$26 billion IPO of Saudi Aramco last December.
In the lead up to the much-anticipated listing, the group faced great pressure from the Donald Trump administration in the US to derail these plans. Last month, the US State Department had proposed to add Ant Group to a trade blacklist in its effort to prevent US investors from participating in the Chinese company’s IPO.
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While Ant was cautious of any action from the Trump administration, it got blindsided by a move from the Chinese government instead.
On Nov 3, the country’s financial regulator introduced new rules on online lending – among which is requiring online and micro-lenders like Ant to provide at least 30 per cent of the funding when it offers loans with other banks.
This is more than the 2 per cent currently, while loans to individuals are to be capped at 300,000 yuan (US$45,347) or a maximum of one-third of the borrower’s average income in the last three years.
LEVELLING THE PLAYING FIELD
With the new rules announced, the Shanghai stock exchange suspended Ant’s IPO on the same day, prompting the company to also pull out of its listing in Hong Kong.
Ant is one of the world’s most integrated fintech platforms providing services including payment, consumer lending, asset management and insurance services among others.
Ant’s online lending business has been a big hit – accounting for almost 40 per cent of its revenue – as it provides easier access to credit for young Chinese through simple online platforms. Many of these borrowers have little income or credit history.
Such penetration of the lending sector has seen Ant underwrite about 1.7 trillion yuan (US$259 billion) worth of consumer loans and 422 billion yuan in small business loans for about 100 banks and financial institutions, according to media reports.
As a result of these developments, Chinese state-owned big banks have had to compete with Ant for customers. The new regulations could hence be targeted at levelling the playing field between the major fintech players like Ant and the big banks, which have been calling for the government to regulate the growth of fintech giants for years.
Even as early as 2014, Yang Kaisheng, a former president of the Industrial & Commercial Bank of China and then an adviser to the China Banking Regulatory Commission, urged that it was time “to step up regulation for the industry’s own good”.
“The emergence of Internet financing is inevitable in China because it serves the grassroots better, but whoever is engaging in financial services, no matter online or off-line, must comply with regulations.”
The new regulations thus force the likes of Ant to take on more risk and set aside more capital like the bigger banks do.
DON’T WRITE OFF ANT YET
Despite the setback of the IPO being suspended, the prospects remain bright for Ant.
For one, the company still intends to list, even though it has not confirmed if that will yet be in Shanghai – industry professionals say more Chinese companies could look to list in the US as president-elect Joe Biden may bring more stability in the regulatory regime.
According to the prospectus filed to the Shanghai Stock Exchange, Ant aims to invest the IPO funds in three major items: R&D in artificial intelligence (AI), blockchain, the internet of things, and other cutting-edge technology; upgrading its infrastructure for cross-border payments; and innovating and digitalising services, focused on upgrading data infrastructure and developing services empowered by data-driven technology.
Moreover, digital data is pivotal to Ant’s strategies, including technology development and internationalisation of its businesses. So despite the new regulations increasing operational costs for the group, the centrality of data in its operations and strategy is a game-changer.
Alipay, part of Ant, currently serves over 80 million businesses, 1 billion users and 2 million mobile apps. The data generated by these users form the basis of Ant’s comparative advantage as it uses massive digital data to increase operational efficiencies, reduce costs and control risks.
A recent news report suggested that Ant uses over 100,000 indices, more than 100 prediction models and over 3,000 risk management strategies to assess SMEs’ collateral-free loan applications.
With that, more inclusive financial services are provided especially for those people or businesses which used have difficulties to access traditional banking services. So borrowers may still find Ant’s loan offerings an attractive proposition.
Moreover it is not just in China, but data and the deployment of AI-related technology are also supporting Ant’s penetration into the overseas markets.
In recent years, Ant invested in fintech-related companies in Asia including Paytm in India, Ascend Money in Thailand, GCash in Philippine and Kakao pay in Korea. Enabled by big data, Ant provides data analytics to support those payment companies in other countries.
Therefore, Ant’s market power is likely to increase with the IPO with the amount it is set to raise not only eclipsing the loss of profit it would suffer under the new financial rules, it would also increase the group’s competitiveness.
Specifically, while big data and AI-enabled technology can improve the accessibility of financial services, they also give the incumbent platforms more market power, compared to other financial services providers.
FUTURE REGULATORY CHALLENGES
Despite the inherent strengths in Ant’s operational capabilities, which will be accentuated through its IPO, it is likely that there are future regulatory changes in terms of data governance.
Digital platforms such as Ant have so-called network effects, referring to the situation in which an increasing number of users on a given platform will improve the value of services or goods provided by the same platform.
For example, the value of Facebook is likely to increase with the number of users. In addition, the values of mobile apps developed for Facebook are also likely to increase with the number of users on the platform.
With network effects, digital platforms like Ant benefit more from accessing additional data, compared to other firms. Further, it might also be costly for users to switch platforms.
In many cases, to keep users, the AI-based data analytics supported by big data are used to accommodate their demands. Moreover, when switching platforms, users might have concerns on data privacy - about how the platform collecting their personal data will use the data.
As such, the Chinese government may consider further regulating how companies like Ant collect, share and use data.
A recent report by the Bank for International Settlements (BIS) suggests that well-designed regulation of digital platforms regarding data sharing, data privacy and data flow could support market competition.
One interesting proposal is to support data portability. With data portability, a user is able to transfer their data elsewhere from the platform which collects the data. Data portability might be supported by open format data through “application programming interfaces” (APIs).
Data privacy has also been addressed to some extent in the European Union’s General Data Protection Regulation (GDPR). It requires digital platforms to get users’ active consent when using or sharing personal data.
Should China pursue such directions of regulatory changes in data governance, they are likely to further level the playing field between banks and fintech companies. That may spell further challenges for Ant’s profitability and business model.
Qian Jiwei is Senior Research Fellow, East Asian Institute, National University of Singapore.