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The world’s largest tech giant is at risk of being split up

The world’s largest fintech giant, the Chinese company Ant Group, is at risk of being split up following proposals for new monopoly rules from the country’s central bank, which in particular will limit the tech giant’s use of data from payment services to establish booming loan businesses.

1. Jun 2021
7 min
Af Bjørn Willum, freelancejournalist

For China’s two biggest tech giants, Alibaba and Tencent, the good news in April was that the month-long investigations into monopoly abuse ‘only’ resulted in fines of DKK 17 billion and USD 9 billion, respectively.

The bad news was that the authorities decided to put a stop to them - and their competitors - abusing popular payment services for rapid entry into the market for other financial services.
In particular, Ant Group - the world’s largest fintech giant, which the e-commerce platform Alibaba owns a third of - was ordered to cut off “inappropriate links” between its dominant payment service Alipay and, for example, its booming business in the market for private loans.

Largest private lender

In addition to online payments, the Chinese population regularly uses Alipay in physical stores, where they pay by scanning a QR code, and the payment service accounts for 55 per cent of the market for mobile payments. WeChat Pay, owned by Tencent, is sitting at about 40 per cent.
But Ant Group has also made itself the country’s largest provider of consumer loans to private individuals in record time. Its algorithms assess credit ratings using data from Alipay, which has over half of the country’s population as monthly users. They also offer insurance and asset management.

Thanks to data from Alipay, revenue from loans in 2020 became the fintech giant’s largest source of revenue for the first time. And that business model must now stop, the authorities have ordered Ant, which has reluctantly agreed to be transformed into a financial holding company that will be regulated more like a bank than a tech company.

Coming up on new times

But according to analysts, it is not just Ant Group that is coming up on new times.
“Ant’s restructuring plan will serve as a template for other players in China’s fintech industry and is likely to result in other companies reorganising in a similar way before the heavy hammer of the authorities crashes down on them”, Prasad from Cornell University, former Division Head for China at the International Monetary Fund (IMF) tells Nyhedsbrevet Finans.

At a meeting with 13 other tech giants last week, representatives of the country’s central bank and financial regulators, amongst others, also ordered them to cut the ‘inappropriate ties’ that exist between their payment services and their booming loan businesses.

“Those who fail to make corrections as requested or defy the rules will be severely punished”, warned the authorities, who also placed a number of other requirements on the sector, which until now had not been subject to many restrictions.

This affects the basic business model

With the new rules, the authorities are fundamentally undermining Ant’s basic business model, which the American tech giants - especially Facebook and Google - are trying to copy not only in the United States and Europe, but also in Asia and Latin America.

Namely, using data on their billions of customers to first penetrate the market for payment services and then move on to lending, wealth investment, insurance and other financial products.

Of course, this is typically as a broker with minimal risk to the tech giants themselves. For although Ant - unlike their American competitors - actually owns 30 per cent of a neobank, it only bears the risk of two per cent of the huge loan portfolio that it has built up through lending to private individuals as well as small and medium-sized companies that have had difficulty getting credit in traditional banks. The risk for the other 98 per cent often lies with state-owned partner banks or investors, who have thus become subcontractors to the fintech giant.

“Everything in China, and here I am thinking of the Communist Party, has to do with taking care of the stability, security and control of 1.4 billion people, including in relation to financial markets. The largest banks in China are state-owned and de facto policy banks. At the same time, when you see these fintech giants taking market share from them and starting to outcompete them in the fintech area, this is of course a threat to these banks”, Mathias Severin Boyer, Chair of the Danish Chamber of Commerce in China and until last month, the country manager in China for Danske Bank, says to Nyhedsbrevet Finans.

Must take 30 per cent of the risk

In addition to being a threat to the banks, regulators have long warned that the tech giants’ exponential expansion into the fintech world in particular poses a systemic risk to the economy.
One of the other new rules affecting the Chinese tech giants is that in the future they must take at least 30 per cent of the risk of the loans they provide - and will thus be encouraged to take more care.

The fact that it is first and foremost Ant that has been in for it is undoubtedly due to the fact that its flamboyant founder Jack Ma - who still controls the company - has spoken out against the banking authorities.

In the autumn, Ant Group was a few days away from implementing the world’s largest stock exchange listing, which would have provided a capital injection for further growth of DKK 227 billion and valued the company at around DKK 2 trillion.

But in a speech in Shanghai 10 days before the listing, he demanded less regulation of the fintech sector - at the same forum where the country’s Vice President Wang Qishan had suggested the opposite. A few days later, the listing was cancelled, a decision made by President Xi Ping personally, according to an investigation by the Wall Street Journal.

Valuation tumbled down

It is unclear when the new rules will take effect, but overall, they will majorly slow down the Chinese tech giants’ entry into the financial world - or roll it back.

And this is expected to cost Ant very dearly.

With the new rules, consulting firms thus estimate that if Ant were to be allowed to try a new stock exchange listing, investors would value the company at a maximum of one third of the original DKK 2 trillion. Maybe even just a tenth, warns Bloomberg Intelligence.

In addition to the loan business, Ant’s original core business, the payment service Alipay, is also facing uncertain times. Namely, the Chinese central bank has proposed defining it as a monopoly if a non-bank payment service controls half of the online payment services market. Or if two such companies together are sitting on over two-thirds of the market. Therefore, not only will it affect Alipay, which as mentioned sits at 55 per cent, but also Tencent, which, via WhatsApp, sits at around 40 per cent. In that case, the central bank will be able to call on the competition authorities to split up the companies.

A lot depends on implementation

“There is a lot that is still unclear and it partly has to do with how and when the new legislation might be formally adopted - but also how it will be implemented”, says Kendra Schaefer, head of tech policy research at the consulting firm Trivium China. All that will take time.

“Right now, we are at the stage where the Twin Towers have fallen and everyone is just standing by the rubble. We don’t know what’s going to happen now - the ball is in the government’s court”, says Kendra Schaefer to Nyhedsbrevet Finans.

“Do I think Ant will have to split up their properties in some form or another? Maybe. Will they have to create certain waterproof bulkheads? I think so. Do I think Ant will have to share certain data - but not all - with the government? Yes, I do. But will it enshrine Ant’s ability to lend? That’s an open question”.