Elephant vs Ant

Welcome back, Jack

In much of the Western world, The House That Jack Built is best known as a horror film depicting a serial killer who ends up falling into an abyss. In China, it’s the name of a book chronicling the rise of the country’s most famous entrepreneur, Jack Ma.

However, in recent weeks it felt as if the film’s chasm denouement was strangely apt for Alibaba’s founder, who not only disappeared from public view but also came under governmental scrutiny – threatening his huge online empire and particularly its fintech arm, Ant Group.

The abrupt cancellation of Ant’s record-breaking $37 billion IPO only a few days before it was due to begin trading in early November was certainly a horror show for bankers and investors alike.

Ma may have skirted the abyss, making his first public appearance last week since a speech in which he criticised the Chinese banking system last October and then largely disappeared from view.

Meanwhile, the People’s Bank of China (PBoC) has released new antitrust regulations that make a number of things about the future of online payments clearer, but also leave plenty of unanswered questions about the prospects for China’s largest private-sector players.

Firstly, China is grappling with the same regulatory arbitrage issues as other countries. Across the world there’s an increasingly uneven playing field between banks, which are forced to hold capital against loan losses, and technology companies, which don’t.

At a late December meeting, Ant was reportedly told to restructure: replacing its asset-light model with one with more stringent capital requirements. Financial analysts report that it was previously holding collateral equivalent to only 2% of the loans it originated. That’s because Ant’s banking sector partners shoulder the repayment risks after making loans on the basis of the platform’s peerless proprietary credit data. In return, Ant gets a “technology fee” amounting to about 40% to 50% of a loan’s interest payments. In the 12 months to June 2020, Ant originated Rmb1.7 trillion ($262 billion) in consumer loans, equivalent to 21% of all short-term consumer loans issued by deposit taking institutions.

One option is to increase its stake in MYbank, which obtained a private-sector banking licence from the PBoC in 2015, and use that to originate loans. However, on Wednesday the Wall Street Journal reported the more likely option is to convert Ant into a financial holding company “overseen by the central bank”. This will subject it to “more stringent capital requirements”.

The new PBoC rules also make clear that an oligopoly won’t be allowed. The central bank will intervene if certain thresholds are breached in market share. For non-banking payment services these are: one-third for one player, 50% for two and 75% for three. Alipay and WeChat Pay already breach two thresholds based on their respective 55.4% and 38.5% market shares as of March 2020.

More worrying for both companies is the PBoC’s data protection requirements: not allowing the tech behemoths to force customers to share their data for marketing purposes as a prerequisite for signing up.

The PBoC’s digital currency project (the e-yuan) is another clear threat to the tech companies’ position at the core of digital financial services. The central bank wants oversight through a centralised data depositary – which could marginalise the currently dominant Alipay and WeChat Pay platforms.

The battle is really about who gets to know the nation’s customers better: the corporate sector or the government. Ant’s most valuable assets are twofold: the technology it has developed to track individual and company financial behaviour; plus the years of data it has amassed. Losing this edge will have a massive impact on Ant’s prospective valuation. As a result, analysts have scaled back estimates to the $150 billion range, rather than last autumn’s circa $300 billion IPO price tag.

Concerns about Ma’s rub with the regulators have pushed Alibaba to an historically wide stock market discount to arch-rival Tencent (see this week’s “Internet and Tech”). But many believe Ant’s IPO could be revived shortly. PBoC governor Yi Gang hinted that too this week during the virtual version of the World Economic Forum when he said that if Ant follows the standard legal structure “you’ll have the result”.

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