China’s Fintech Giants Ant Group’s Alipay and Tencent’s WeChat were slowed by churn but still formidable
Over the past few years, China has cracked down on fintech, leading many to believe so … [+]
China’s fintech sector was never the same after November 3, 2020. That was the day Chinese regulators abruptly took down Ant Group’s mega IPO, a dual IPO in Shanghai and Hong Kong that was expected to raise $37 billion and value the Chinese fintech the giant at an enormous value. 315 billion dollars. The cancellation of Ant’s IPO proved to be the beginning of a widening campaign to curb the dominance of Big Tech in China’s financial industry.
Regulators had both practical and political reasons for going after what were once seen as unassailable, systemically vital companies. The practical reason was that Ant and its arch-rival Tencent had created an unfair fintech duopoly that allowed them to exploit their powerful market positions at the expense of their users and competitors. The political reason was that the fintech giants had moved into the territory of the incumbent financial institutions – although these incumbents undoubtedly benefited from their relationships with Ant and Tencent – and had perhaps been a little too ambitious in building their respective empires. The shifting political winds in China no longer favor gung-ho and outspoken consumer technology entrepreneurs.
With almost two years since the fintech meltdown began – and no final end yet in sight – it’s worth exploring how Ant and Tencent’s fintech businesses have changed. They’re not exactly what they once were, but they’re not shells of their former selves either.
Degrees of separation
To curb the dominance of China’s fintech giants so far, regulators have focused on breaking up parts of their business and forcing them to act more like banks. Ant will eventually become a financial holding company overseen by the People’s Bank of China (PBoC).
On the one hand, Ant has had to change how it makes loans, which regulators saw as too risky under its old business model where commercial banks took on most of the debt and Ant earned part of the interest income. Ant now has a dedicated consumer finance unit, Chongqing Ant Consumer Finance Co., which is licensed to carry out consumer loans and other operations. It has Ant credit services Huabei and Jiebei. Unlike in its original microloan business, Ant must finance and bear more of the default risk for the consumer loans it provides through this new entity.
Regulators have also required China’s fintech giants to increase their capitalization. In October 2021, Ant announced that it had raised its registered capital RMB 35 billion ($5.44 billion) from 23.8 billion yuan, by drawing on the capital reserve.
Furthermore, Ant has been required to separate from Alibaba, its giant parent company. In July, the two companies agreed to terminate their data-sharing agreement while all Ant executives at Ant withdrew from Alibaba’s partnership structure. Alibaba still has a 33% stake in Ant.
The changes have sent Ant’s valuation plummeting, as investors see them as a drag on profitability – particularly chances in the company’s consumer lending practice. Bloomberg estimates that Fidelity Investments cut its estimate for Ant to $70 billion at the end of May, compared with $78 billion in June 2021, and $235 billion on the eve of the failed IPO. Black stone
Like Ant, Tencent has been ordered by regulators to restructure into a financial holding company, but so far known changes to the company’s structure are less dramatic than what Ant is undergoing. In theory, Tencent would have to merge its banking, securities, insurance and credit scoring services into a financial holding company that could be regulated like a traditional bank.
It is possible that WeChat Pay could be included in the financial holding company, in which case it would be subject to central bank supervision. Regulators reportedly believe that Tencent’s current payments license held by its TenPay unit, the backend provider of wallet services on WeChat and QQ, is insufficient to cover WeChat Pay’s services.
The customer scans the QR code, makes a quick and easy contactless payment with the smartphone in a cafe
Towards the playoffs
There are signs that China will ease the fintech crackdown as part of a wider move to stimulate the ailing economy, which has struggled to withstand 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 endorsed a plan for the “healthy development” of China’s major payments firms and fintech sector. The meeting noted that China will increase supervision of large payment firms to combat systemic financial risks and will support platform companies in serving the real economy. At the meeting, Beijing advised fintechs to “return to their roots,” which likely means they should focus more on payments and less on certain banking services.
Also in June, Reuters reported that the PBoC had accepted Ant Group’s application to set up a financial holding company. It would be an important milestone in the restructuring of the company and prepare Ant to revive the IPO. However, neither Ant nor the PBoC have yet confirmed that the Reuters report is accurate. Ant has refuted a Reuters report that the company had been given permission to restart its IPO process. It is difficult to say whether the Reuters report is accurate or not. However, it is possible that Ant wants to keep the process low-key given the debacle that followed the first attempt, and wait to make a formal announcement until it is absolutely certain that the IPO can proceed without problems.
Still one app to rule them all?
Crucial to a successful restart of the IPO process will be Ant’s ability to preserve the Alipay super app. In October 2021, various media reported that the PBoC may force Alipay to break up the app and create a separate app for its lucrative lending business. Breaking up the Alipay super app would be more impactful than the separation of Huabei (similar to a traditional credit card) and Jiebei (which provides small, unsecured loans) into a new entity – which has already happened. Despite this restructuring, to date Alipay users can still access the lending services from the Alipay app. If they couldn’t, the app would lose some of its famous stickiness.
Huabei and Jiebei’s continued steady growth is likely to play an important role in investor confidence to proceed with Ant’s IPO. Ant’s CreditTech arm, which includes Huabei and Jiebei, is a major money maker for the company. It accounted for 39% of the group’s revenue in the first half of 2020, overtaking Ant’s main payment processing business for the first time.
Both Ant and Tencent remain formidable companies at the top of the fintech industry in China, with no credible challengers given their scale and systemic importance. However, their days of breakneck growth and extraordinary profitability are over, now part of history along with China’s entire go-go consumer technology era. Although Beijing has signaled that it will ease the fintech crackdown, it continues to encourage fintechs to focus on less profitable segments of financial services such as payments.
In the future, Ant and Tencent will have to settle for more modest margins and greater restrictions on their core businesses than in their nascent fintech days. Such is the price for both their success and Beijing’s re-orientation away from greatness soft tech versus hard tech.
