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SINGAPORE: China’s Ant Group is in a strange situation. The fintech firm went in a matter of days from being on the cusp of the world’s largest initial public offering (IPO) to those plans that were thwarted by new regulations from its own government.
This sudden development has not only disappointed investors, but has also raised concerns about its impact on Ant and its future trajectory.
The Alibaba-linked company was supposed to raise $ 37 billion through listings in Shanghai and Hong Kong on Nov. 5, overshadowing Saudi Aramco’s $ 26 billion IPO last December.
In the run-up to the long-awaited list, the group faced great pressure from the Donald Trump administration in the US to derail these plans. Last month, the US State Department proposed adding 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 wary of any action by the Trump administration, a move by the Chinese government took her by surprise instead.
On November 3, the country’s financial regulator introduced new rules on online lending, among which online lenders and microloans like Ant are required to provide at least 30 percent of funds when offering loans with other banks.
This is up from the current 2 percent, while individual loans must be capped at 300,000 yuan (US $ 45,347) or a maximum of one-third of the borrower’s average income over the past three years.
LEVELING 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 delist from its Hong Kong listing.
Ant is one of the most integrated fintech platforms in the world, providing services including payments, consumer loans, asset management, and insurance services, among others.
China’s shocking decision to suspend Ant Group’s IPO hit Jack Ma’s Alibaba group shares AFP / HECTOR RETAMAL
Ant’s online loan business has been a great success, accounting for almost 40 percent of his income, providing easier access to credit for young Chinese through simple online platforms. Many of these borrowers have little income or credit history.
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Such penetration into the lending sector has caused Ant to underwrite around 1.7 trillion yuan ($ 259 billion) in consumer loans and 422 billion yuan in small business loans for about 100 banks and financial institutions, according to reports. of the media.
As a result of these developments, large Chinese state banks have had to compete with Ant for customers. Thus, the new regulations could be aimed at leveling the playing field between major fintech players like Ant and the big banks, which have been asking the government to regulate the growth of fintech giants for years.
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As early as 2014, Yang Kaisheng, a former chairman of the Industrial and Commercial Bank of China and later an advisor to the China Banking Regulatory Commission, urged that it was time to “step up regulation for the good of the industry.”
“The rise of internet financing is inevitable in China because it better serves the grassroots, but whoever engages in financial services, whether online or offline, must comply with regulations.”
Therefore, the new regulations force companies like Ant to take more risks and reserve more capital as larger banks do.
DO NOT WRITE AND YET
Despite the setback from the IPO suspension, the outlook remains bright for Ant.
On the one hand, the company still intends to go public, although it has not confirmed whether it will be in Shanghai: Industry professionals say that more Chinese companies could seek to list in the US, as President-elect Joe Biden may bring more stability in regulation. regime.
Joe Biden met with China’s Xi Jinping in Los Angeles in 2012 when they were both vice presidents. (Photo: AFP / POOL)
According to the prospectus presented on the Shanghai Stock Exchange, Ant aims to invest the IPO funds in three main lines: R&D in artificial intelligence (AI), blockchain, Internet of things and other cutting-edge technology; upgrade your infrastructure for cross-border payments; and innovation and digitization services, focused on improving the data infrastructure and developing services powered by data-driven technology.
Additionally, digital data is critical to Ant’s strategies, including technology development and internationalization of its businesses. So even though the new regulations increase operating costs for the group, the centrality of data in its operations and strategy is a game changer.
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Alipay, part of Ant, currently serves more than 80 million businesses, 1 billion users, and 2 million mobile applications. The data generated by these users forms the foundation of Ant’s comparative advantage as it uses massive digital data to increase operational efficiency, reduce costs, and control risk.
A recent news report suggested that Ant uses more than 100,000 indices, more than 100 prediction models, and more than 3,000 risk management strategies to assess SME unsecured loan applications.
With that, more inclusive financial services are provided especially for those people or companies that used to have difficulties accessing traditional banking services. Therefore, borrowers can still find Ant’s loan offer an attractive proposition.
In addition, it is not only in China, but data and the deployment of technology related to artificial intelligence are also supporting Ant’s penetration in foreign markets.
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In recent years, Ant invested in fintech-related companies in Asia, including Paytm in India, Ascend Money in Thailand, GCash in the Philippines, and Kakao Pay in Korea. Enabled by big data, Ant provides data analytics to support payment companies in other countries.
Therefore, Ant’s market power is likely to increase with the initial public offering with the amount that is set to increase not only overshadowing the loss of earnings it would suffer under the new financial rules, but also increasing the group’s competitiveness. .
Specifically, while big data and AI-enabled technology can improve the accessibility of financial services, they also give established platforms more market power, compared to other financial service providers.
FUTURE REGULATORY CHALLENGES
Despite the inherent strengths of Ant’s operational capabilities, which will be accentuated through its IPO, there are likely to be future regulatory changes in terms of data governance.
FILE PHOTO: A QR code from Ant Group’s Alipay digital payment device, a subsidiary of Alibaba Group Holding, is seen at a grocery store inside a market in Beijing, China, on November 2, 2020. REUTERS / Tingshu Wang
Digital platforms like Ant have so-called network effects, referring to the situation where a growing number of users on a given platform will enhance the value of the services or goods provided by the same platform.
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For example, the value of Facebook is likely to increase with the number of users. Furthermore, it is likely that the values of mobile applications developed for Facebook will also increase with the number of users on the platform.
With network effects, digital platforms like Ant benefit more from access to additional data, compared to other companies. Furthermore, it could also be costly for users to switch platforms.
In many cases, to keep users, AI-based data analytics compatible with big data are used to meet their demands. Also, when switching platforms, users may have concerns about data privacy, about how the platform that collects their personal data will use the data.
As such, the Chinese government may consider further regulating the way that companies like Ant collect, share and use data.
A recent report from the Bank for International Settlements (BIS) suggests that well-designed regulation of digital platforms with respect to data exchange, data privacy and data flow could support market competition.
An interesting proposition is to support data portability. With data portability, a user can transfer their data elsewhere from the platform that collects the data. Data portability can be supported by open-format data through “application programming interfaces” (APIs).
Data privacy has also been addressed to some extent in the General Data Protection Regulation (GDPR) of the European Union. It requires digital platforms to obtain the active consent of users when using or sharing personal data.
If China follows these instructions for regulatory changes in data governance, they are likely to further level the playing field between banks and fintech companies. That may mean more challenges to Ant’s profitability and business model.
Qian Jiwei is a Principal Investigator at the East Asian Institute at the National University of Singapore.
