After November 3, 2020, China’s fintech sector has never been the same. That was the day Chinese regulators abruptly pulled off Ant Group’s mega IPO, a dual Shanghai and Hong Kong listing, expected to raise US$37 billion and heavily value the Chinese fintech giant. 315 billion US dollars. The cancellation of Ant’s IPO proved to be the start of an extended campaign to curb Big Tech’s dominance in China’s financial services industry.
Regulators had both practical and political reasons, once viewed as unstoppable, systemically important companies. The practical reason was that Ant and its advent Tencent had created an unfair fintech monopoly that allowed them to exploit their powerful market position at the expense of their users and competitors. The political reason was that the fintech giants moved into the realm of existing financial institutions – although those incumbents undoubtedly benefited from their relationships with Ant and Tencent – and were perhaps a little too ambitious in building their respective empires. The changing political winds in China are no longer in favor of gang-ho and outspoken consumer technology entrepreneurs.
Nearly two years after the fintech crackdown began — and there doesn’t seem to be a definitive end yet — it’s worth exploring how Ant and Tencent’s fintech businesses have changed. They are not exactly what they once were, but neither are they the shells of their former selves.
degree of separation
So far, in order to curb the dominance of China’s fintech giants, regulators have focused on breaking up separate elements of their businesses and forcing them to act like banks. Ant will eventually become a financial holding company overseen by the People’s Bank of China (PBoC).
On the one hand, Ant had to change how it makes loans, which regulators deemed too risky under its old business model, in which commercial banks took most of the loans and Ant earned a portion of the interest income. Ant now has a dedicated consumer finance unit, Chongqing Ant Consumer Finance Company, which is licensed to conduct consumer lending and other operations. It has Ant credit services Hubei and Jibei. Unlike its core microlending business, Ant has to fund and bear greater default risk for the consumer loans it offers through this new entity.
Regulators also require that China’s fintech giants boost their capitalization. In October 2021, Ant announced that it had raised RMB 35 billion ($5.44 billion) from its registered capital of 23.8 billion yuan, based on its capital reserves.
In addition, Ant has had to separate itself from its giant parent company, Alibaba. In July, the two companies agreed to terminate their data sharing agreement, while all of Ant’s top executives resigned from Alibaba’s partnership structure. Although Alibaba still holds a 33 per cent stake in Ant.
The changes have caused Ant’s valuation to decline sharply, as investors see them as a drag on profitability — particularly prospects in the company’s consumer lending practices. Bloomberg estimates that Fidelity Investments cut its estimate for Ant to US$70 billion at the end of May, compared to US$78 billion in June 2021 and US$235 billion on the eve of the aborted IPO. black Rock
Like Ant, Tencent has been ordered by regulators to restructure into a financial holding company, but so far, the known changes to the company’s structure have been less dramatic than Ant’s. In theory, Tencent would have to turn its banking, securities, insurance and credit-scoring services into a financial holding company that can be regulated like a traditional bank.
It is possible that WeChat Pay could be incorporated into a financial holding company, in which case it would be subject to central bank monitoring. Regulators reportedly believe that Tencent’s current payment license, owned by the TenPay entity, a backend provider of wallet services on WeChat and QQ, is insufficient to cover WeChat Pay’s services.
There are signs China will ease its fintech crackdown as part of a broader move to stimulate the ailing economy, which has struggled amid punishing zero-Covid restrictions. The first clear indication of this possibility came in June, when China’s state media reported that Chinese President Xi Jinping chaired a top-level meeting that approved a plan for “healthy development” of China’s big payments firms and the fintech sector. Gave. The meeting said that China will promote oversight of large payments firms to address systemic financial risks and support platform companies in service of the real economy. At the meeting, Beijing recommended fintechs “return to their roots”, meaning they should focus more on payments and less on some banking services.
Also in June, Reuters reported that PBOC had accepted Ant Group’s application to set up a financial holding company. This will be a major milestone in restructuring the company and preparing Ant to revive its IPO. However, neither Ant nor PBOC have yet confirmed that the Reuters report is accurate. Ant has denied a Reuters report that the company was allowed to restart its IPO process. It is difficult to say whether the Reuters report is accurate. However, it is possible that Ant may want to keep the process short, given the loss on the first attempt, and hold off on making a formal announcement until it is certain that the IPO will go ahead without a hitch. could.
Still one app to rule them all?
Ant’s ability to preserve its Alipay Super app will be crucial to restarting its IPO process. In October 2021, various media reported that the PBoC may force Alipay to disband the app and create a separate app for its lucrative lending business. Breaking up the Alipay Super app would be more impressive than separating Hubei (similar to traditional credit cards) and JiBei (which offers small, unsecured loans) into a new entity – which is already done. Despite that restructuring, Alipay users can still access lending services easily from the Alipay app. If they weren’t able to do so, the app would have lost some of its famous stickiness.
Huabei and Jiebei’s continued steady growth will likely play a major role in investor confidence going forward with Ant’s IPO. Ant’s CreditTech arm, which includes Hubei and Jibei, is a major moneylender for the company. It accounted for 39% of the group’s revenue in the first half of 2020, outpacing Ant’s core payment processing business for the first time.
Ant and Tencent both remain formidable companies at the top of the fintech industry in China, without any credible challenges given their scale and systemic importance. While their days of breakneck growth and exceptional profitability are over, China is now a part of history with its entire go-go consumer tech era. Even as Beijing has indicated it will ease its fintech crackdown, it continues to urge fintechs to focus on less-profitable areas of financial services such as payments.
In the future, Ant and Tencent will have to be satisfied with more modest margins and more restrictions on their core businesses than in their early fintech days. Such is the price of both their success and Beijing’s re-orientation away from the big Soft Towards Tech Hard Tech.
Credit: www.forbes.com /