(WSJ) Ant Group Co., the startup controlled by billionaire Jack Ma that is gearing up for a blockbuster two-part initial public offering, wants potential investors to see it as a technology company and not a financial-services firm.
The company, however, remains in focus with China’s financial regulators—which isn’t surprising given that Ant’s mobile-payments network, Alipay, has a billion users in China and in just a few years, Ant has changed how many people spend, borrow, save and invest.
Ant first came to prominence with Alipay as a major player in digital payments, and then for operating a huge money-market fund. Along the way, it drew attention from banks and authorities. More recently, it has become an important intermediary with its digital-finance arm as it connects banks, insurers and asset managers with customers.
Ant itself isn’t a financial institution, but its mainstay payments and digital-finance businesses and various subsidiaries and affiliates are overseen by financial regulators. And it holds multiple licenses in areas such as microlending and insurance sales. In addition, its listing prospectus said the People’s Bank of China last year issued draft regulation on financial-holding companies and if the central bank implements those rules, they could cover Ant. The company said future regulations could also affect its dealings with financial institutions or require it to obtain more licenses.
“The elephant in the room with Ant is how well the company can manage its relationships with regulators in China,” said Duncan Clark, chairman of business-consulting firm BDA China and an author of a book about Mr. Ma and Alibaba.
The Hangzhou-based company has tried to style itself as a partner to banks, supplying technology and enabling lending to clients who have long been shunned by traditional banks. In its fast-growing digital-finance business, about 500 million people and more than 20 million small businesses obtained credit through Ant’s lending platforms during the 12 months ending in June, the company’s preliminary listing prospectus said.
Outstanding loans made via Ant’s platforms stood at 2.15 trillion yuan ($312 billion) at the end of June, of which 80% were to individuals. Just 2% were funded with Ant’s own money and the rest were funded by banks or asset-backed securities.
“Our approach is not to use our own balance sheet or provide guarantees,” the company said.
The People’s Bank of China this summer asked some commercial lenders to report their outstanding balances of online consumer loans and specify how much was originated in conjunction with Ant, according to a person who saw the survey notice.
The central bank asked about loan interest rates and what percentage of the total had gone bad, the person said. The PBOC didn’t comment on the request, which was earlier reported by Chinese media.
“It is inevitable in China that something that started as unregulated and small becomes regulated and more carefully watched by the government when it gets big,” said Martin Chorzempa, a China-focused research fellow at the Peterson Institute for International Economics.
He said the central bank likely wants to assess how much risk banks have taken on by working with Ant and whether default rates on those consumer loans have risen disproportionately during the coronavirus-triggered slowdown.
This week’s listing documents showed 2.97% of the credit balance on consumer loans that Ant originated were 30 days past due at the end of July, while 2.15% were more than 90 days overdue. That is roughly in line with what Chinese commercial banks have reported recently.
Ant has two consumer-lending platforms. Huabei, which means “just spend,” lets individuals borrow money to buy online and in stores. Its user base is young and many clients don’t qualify for traditional bank-issued credit cards.
Jiebei, which means “just borrow,” offers unsecured term loans that are repaid in installments. Borrowers must give a general idea of what they plan to spend the money on—travel, for example—and national rules on consumer loans ban borrowers from channeling the funds into property or stocks.
Ant said it works with about 100 Chinese banks, from national state-owned lenders to rural commercial banks. Many provide short-term unsecured loans to Alipay’s users and the fees Ant collects are based on loans made via its platform. The company said its technology helps banks assess borrowers and make lending decisions. Banks underwrite loans, supply the funds, set interest rates—and bear the risk of loans going bad.
Overall, revenue at Ant’s consumer and small-business lending business—CreditTech—has soared. It produced 28.6 billion yuan ($4.15 billion) in revenue in the first six months of 2020, or 39% of Ant’s total.
Analysts say smaller banks have been eager to partner with Ant to expand their loan books. Sanford C. Bernstein analyst David Dai said banks with limited branch networks can’t grow much in consumer lending so for many, “partnering with Ant is the only solution.”
Take Bank of Xi’an Co., a small commercial bank with local government backing. The lender reported 29.7 billion yuan ($4.3 billion) in consumer loans by the end of 2019, up nearly fivefold in two years.
The bank said that was due to it “working with high-quality partners to conduct small-ticket online consumer loan businesses.” Since 2017, Bank of Xi’an has made loans via platforms operated by Ant, and via rivals Tencent Holdings Ltd. and JD Finance, an affiliate of e-commerce company JD.com Inc.
Aside from the lending business, Alipay—a payments arm that handled more than 110 trillion yuan in transactions last year and is licensed by the PBOC—could also face more scrutiny.
Earlier this year, a PBOC committee asked the country’s top antitrust agency to investigate whether Alipay and its chief rival, WeChat Pay—owned by Tencent—have used their dominant market positions in digital payments to stifle competition, according to people familiar with the matter. It isn’t clear if the antitrust authority plans to launch a probe. The central bank’s recommendation was earlier reported by Reuters.
Chinese regulators have previously tightened their oversight of some Ant operations. A few years ago, regulators instructed Alipay and its peers to clear all payment transactions involving bank accounts through a government-owned internet-payment system. It also made them transfer funds to designated bank accounts, hurting interest income from those reserve funds for Ant.
Financial regulators also pressured Ant to tame the growth of a giant money-market mutual fund called Yu’e Bao that it created in 2013 to enable Alipay users to earn returns on spare cash in their digital wallets.
In 2018, a partnership with an insurer to sell Xianghubao, a mutual-aid product that offers medical protection, ended after Chinese regulators accused the insurer of engaging in misleading marketing and disclosure lapses. The product has grown in popularity, now boasting more than 100 million users. Today, it isn’t subject to China’s insurance regulations.
Ant’s global ambitions could also mean it faces more official attention farther afield.
“As we further expand into other markets, we increasingly become subject to additional legal and regulatory compliance requirements,” Ant’s IPO filing said.
Source: Wall Street Journal by Stella Yifan Xie