INSIGHTS | Deciphering the Ant Group rectification plan - Android

Ant Group said it has formulated a revamp plan to appease regulators after its $34 billion was shut down. Here's what we know about the company's future.

A year ago, Ant Group was riding high. Since it was founded in 2014, it had become, by its own description, China’s dominant fintech company. It was set to raise $34 billion in blockbuster dual listings in Shanghai and Hong Kong in November 2020.

But it was not to be. Two days before its listing, Chinese regulators shut it down, citing changes to the regulatory environment that Ant hadn’t disclosed in its IPO prospectus. They made it clear, Ant would not be allowed to list in its current form.

The company, supervised by regulators, has since been negotiating its “rectification” behind closed doors.

So, is Ant Group’s future clear?

READ MORE: UPDATED: Ant Group IPO delay and Jack Ma’s ill-timed speech

Bottom line: Clearer. We know about the plan only from two very brief statements, from Ant Group and Pan. There’s a lot we still don’t know.

With a rectification plan in place, changes should accelerate across the company. It appears that the company will continue providing the same services, but will change how it is organized, accounted for, and regulated. The brief statements don’t tell us much about the key question of managing data flows between digital payments and microlending.

We don’t know much about Ant’s understanding with its regulators. Both statements agreed that there are five points in the rectification plan. But they don’t agree on what the points are. We can make some informed guesses based on areas of overlap, but some big questions are still hanging over the company.

Whatever will happen to Ant, it will set a precedent for the governance of platform companies.

What we learned

The new information: Last week, we got a trickle of new information about these questions.

• Ant wrote a terse press release announcing that it had a rectification plan, in English, on its WeChat account. 183 words summarize the specifics of the plan.
• Pan, a deputy governor at the People’s Bank of China (PBOC), made a one-paragraph comment about the plan during an interview on the plan and fintech regulation more broadly with official media (in Chinese).
• State media quoted the regulators’ readout of the meeting, given by Pan: the PBOC, the China Banking and Insurance Regulatory Commission (CBIRC), China Securities Regulatory Commission (CSR), and the State Administration of Foreign Exchange (SAFE).

“We don’t know if it will mean sleeping in separate bedrooms or a full-blown divorce.”

The confusion: Ant and Pan both describe a five-point plan, but they do not agree on what exactly those points are, or how to order them.

• It’s hard to separate the five points in Ant’s English statement, but the Chinese version clearly outlines them. We’ve broken them up below according to the Chinese.
• Pan’s five are different. For example, he puts antitrust first in his statement, but Ant places it in sub-point three of point five.
• Adding to this confusion is the fact that many of the regulations they are referring to are still in development, or so brand new that courts haven’t had time to interpret them.
• Both statements also refer to a third set of five demands (in Chinese) by the central bank deputy governor in December 2020, which don’t line up perfectly with either statement.

So, we have three sets of five points that have some overlap but are not the same; a penta-triptych in an impressionist style.

What they said (in the order of appearance in the statements as published):

If you can’t read the text, please click here. (Image credit: TechNode/Chris Udemans)

Financial holding company

This is Ant Group’s first point, but only ranks third in Pan’s list. Ant will set up a financial holding company “in its entirety,” it said. This will affect how the company is regulated. Recently China has been making new regulations for financial holding companies, but we don’t know that much about how they’ll be applied yet.

(Image credit: TechNode/Eliza Gkritsi)

Does it lend? Ant Group has always said it’s not a bank and it shouldn’t be regulated like one.

• Ant doesn’t make money the same way banks do. Banks lend out money and earn profits from interest.
• Ant Group behaves more like a loan originator, such as Countrywide: it finds people who want financial services—such as loans, investment products, or insurance—and connects them to finance companies. It makes money by charging providers what it calls “technology fees” for helping them find customers.
• Ant owned only 2% of the RMB 2.15 trillion in loans it has created; the rest were underwritten by its partner banks.
• But Ant Group also owns 30% of MyBank, which underwrites loans enabled through Ant’s credittech platforms. MyBank is Ant’s second-largest customer, according to the IPO prospectus, accounting for 6.2% of Ant’s revenue in Q1 2020.

(Image credit: TechNode/Eliza Gkritsi)

The same goes for investments and insurance: Out of the RMB 4.1 trillion of assets that go through its investmenttech platforms, only 33% of that is directly managed by Tianhong Asset Management, a company that Ant Group has a 51% stake in.

• Ant’s insuretech platforms enabled RMB 52 billion worth of insurance premiums contributions. But its licensed subsidiary only accounted for 9% of those.

But regulators say “same industry, same regulation.” In his interview, Pan said that platform companies “should not make technology a ‘camouflage’ for illegal activities.”

Now what? The company’s operations likely won’t change dramatically, but the way it runs its books will: Rules for financial holding companies will require it to behave a lot more like a bank—which will likely drag on its profitability.

• Financial holding companies “only manage equity investment and do not directly engage in commercial business,” according to trial measures for this type of corporate structure issued by the State Council in September 2020.
• The regulatory framework sets requirements for registered capital and corporate governance rules. It also places these companies under the purview of the People’s Bank of China (PBOC).
• “Ant will have to inject a significant amount of capital to meet the capital adequacy requirement, and also need cash to meet the manage liquidity risk appropriately,” Li Nan, associate professor of finance at Shanghai Jiaotong University’s Antai College of Economics and Management, told TechNode.
• More detailed rules on balance sheet management, leverage ratios, and capital adequacy requirements might be drafted later, Chinese media have reported.
• Ant Group will still be able to “enjoy the benefits of economies of scale,” but with “Chinese walls” separating the different operations, Li said.

A customer makes a purchase using Alipay at a store in Shanghai on July 24, 2019. (Image credit: TechNode/Shi Jiayi)

Monopolistic behavior

Correcting monopolistic behavior is Pan’s first point. In Ant’s statement, the issue is much less prominent, with only a mention of competition in a sub-points below the fifth point. Pan ties the monopoly issue to the “inappropriate links” we’ll see below.

Market dominance? According to iResearch, Ant Group accounts for more than 55% of the third-party digital payments market. By this measure, Alipay reaches the threshold to be classified as a dominant player in the sector, according to new regulatory definitions issued in January.

• It’s not illegal to be a dominant player. But the regulation calls for a review into the dominant players’ business practices to make sure you play fair.
• Its ubiquitous digital payments app Alipay had 1 billion annual active users as of the 12 months ending August 17, 2020.
• These users transacted a neat RMB 118 trillion in payment volume in the 12 months ending June 30, 2020.

Playing fair: The fintech giant also has to “correct unfair competition in its digital payments business and give consumers more choice in payment methods,” Pan said.

• Ant said that “returning to its origin, our payment business will serve consumers and SMEs by focusing on micro-payments and bringing them convenience.” Micropayments are low-value retail transactions.

Simplifying structure… a bit

Ant Group is hard to supervise, regulators have said. In part because its business cuts across different regulator’s territory, and in part because its operations are spread out across many subsidiaries. Reorganization will clearly define Ant’s different businesses to align with regulatory lines.

Another issue related to corporate reorganization is to bring Ant’s credittech operations under properly licensed subsidiaries. This is not directly addressed as a separate point in either of the statements, but both allude to it. Ant and Pan both mention a promise to set up a licensed personal credit reporting company. Ant also promises to place two major lending platforms in a consumer finance company.

What’s the issue? Ant Group is a very difficult corporate entity to wrap one’s head around, particularly its credittech operations. It does a lot of different things, both tech and finance, and has many corporate entities. It is very difficult to discern which company does what.

• The company’s microlending business is currently divided into a few different subsidiaries, according to its IPO prospectus. Two are “dedicated to technical services”: Ant Zhixin in Hangzhou and Chongqing Wantang. Ant Shangcheng and Ant Small and Micro Loan, both registered in Chongqing, are used to “fund a small portion” of the microloans enabled through Ant’s platforms.
• The two microloan companies that actually fund loans are able to operate nationwide because Chongqing municipality allows fintechs that have set up shop there to offer their services in the rest of China.
• Sesame Credit, a fully owned subsidiary, has been a licensed corporate credit reporting company since 2016.

LISTEN MORE: China Tech Investor: Ant Group is really big, and really confusing

Now what? The plan will set up “clearer boundaries between different regulated entities under the financial holding company,” Jun Wan, a lawyer who specializes in fintech at Han Kun Law Offices in Shanghai, told TechNode.

• Reorganization “does not mean that Ant has to be broken up,” Li said. The plan “implies that Ant will set up different licensed subsidiaries under the same financial holding company,” the Jiaotong University professor said.
• Ant Group started the process to set up a Chongqing subsidiary dedicated to consumer finance in August 2020, and got the green light from the China Banking and Insurance Regulatory Commission in September 2020, its prospectus said, but didn’t give any details as to what happened since.

Data

Pan demanded that Ant “break the data monopoly.” Ant, in its own second point, offered a promise to return Alipay “to its origin… by focusing on micropayments,” which could mean less focus on data. Both referred to regulations on personal credit reporting companies, specifically in regards to data management.

In the pre-rectified Ant Group, data was like the family fridge: Alipay put food in, and other units like Huabei and Jiebei could take it out as needed. It was not clear to outsiders who was using what data for what purposes.

Data management is a regulatory priority in general, and particularly for the regulators on Ant’s case. “The regulators keep focusing on personal information protection given Ant collects a huge amount of personal information. It may require Ant to follow the strict personal information protection laws and regulations when collecting the personal information,” Wan said.

Data mixing: Ant uses data from Alipay and Alibaba to assess the credit risk of potential borrowers for its microlending businesses. Regulators seem to be concerned both that the company’s monopoly on payments data gives it an unfair advantage over rivals, and that the way it uses the data threatens user privacy.

• Access to user data is crucial to one of the unique aspects of Ant’s credittech business: Unlike banks, Ant can perform risk assessments for consumers and SMEs with little to no credit history.
• The company described its credit risk assessment process in its IPO prospectus: “Based on customer insights and risk rating in terms of spending, assets, liabilities, occupation, and other parameters such as financial stability, we categorize all Alipay users into different risk categories. […] By leveraging our dynamic risk management systems and extensive and real-time customer insights across different consumption scenarios, including those on Alibaba’s platforms, we have constructed comprehensive customer profiles, which feed into our dynamic credit risk assessment system.”
• In a speech at the Bund Summit on Oct. 25, 2020, Jack Ma argued: “We must use today’s technological capabilities to replace pawnshop thinking with a credit system based on big data.”
• Ant also uses its “unparalleled customer insights” to serve investment and insurance products to consumers, its prospectus said.

New rules on data soups: In his interview, Pan said that Ant will have to abide by the “’credit reporting industry management regulation’,” a 2013 regulation on the credit risk assessment industry. The 2013 rules were updated in January.

• In January, while Ant’s rectification plan was being negotiated and drafted, the State Council updated the 2013 regulation on the credit reporting industry. The new administrative measures have yet to be finalized and implemented.
• The measures will guide how the 2013 law is implemented and, according to some legal commentators, clearly extend it over tech companies.
• The rules are still in the pipeline, and much is left up to interpretation (in Chinese).

Data walls? Under most extreme reading of the administrative measures, it could be that Ant will no longer be able to use data from Alipay to perform credit risk assessments for its microlending products.

• Soochow Securities, a Shanghai-listed financial services firm, said in a report that the measures won’t allow internet platforms like Alipay to both attract hordes of borrowers and perform credit risk assessments. As the measures are implemented, the two functions will have to be separated.

Porous walls: It’s more likely that the data flow will continue, with more oversight: This could have serious implications for Ant’s credittech business model: It likely means that it will have to pass through regulatory hurdles to use customer transaction data from Alipay to conduct credit risk assessment, experts told TechNode.

• The rules don’t prohibit credit-reporting agencies from working with other companies, like Alipay, to collect data. But they have to report to the PBOC when they do so, and only work with licensed information providers.
• “Ant may still be able to use relevant data from Alipay,” but it will have to follow rules on how to do that, Wan said.
• Ant might have to limit the amount of data it collects to perform credit risk assessments. The proposed measures require companies to minimize their data collection to what’s necessary.

Some say Ant may have to share data. The 2013 regulation also proposed a nationwide data platform where credit reporting agencies contribute data. But the platform never got traction.

• Data monopolies are the crux of the anti-competitive behavior that big tech companies exhibit, several experts wrote in November 2020.
• Li understood Pan’s data monopoly remark to mean that “Alipay may misuse the market power and data collected from the Alipay platform to discriminate against certain types of consumers or small merchants.”
• The new measures reiterated the need for a platform, but didn’t make it mandatory. Ant could also be asked to share credit assessment data with other platforms.
• The Financial Times, citing anonymous sources, reported Friday that the PBOC is pushing for Ant to give control of its data to an external, state-owned company.
• Legally, it’s not mandatory: Ant will “not be required to share all the credit risk data through a national database,” Wan said.
• The database, under the supervision of the PBOC, didn’t get traction, in part because tech companies refused to share data on it.
• If Ant has to share its data with other companies, its valuation will be significantly lower, wrote Wang Shuai from the Oxford-Hainan Blockchain Research Institute.

Ant Group nests

Under the monopoly issue, Pan also brought up “irregularities such as nesting credit business in the payment link.” Ant didn’t make any direct mention to “nesting” in its statement.

No nesting: Pan specified that “nesting credit business in payment links” is an “irregularity” that will be rectified. This will likely stop, reducing Ant’s ability to market loans to Alipay users.

• Ant’s statement gave little in the way of clarification: The company said its two microlending platforms will be under the consumer finance company, and that Alipay will “return to its origin… focusing on micropayments.” This phrase has been used by regulators since at least September 2020.
• Inappropriate links “refers to the operation that Alipay embedded the Huabei as one payment option, instead of setting up a separate credit-card type service,” Li said.
• Soochow Securities expects that this will limit the growth of Ant’s microlending business, because it won’t be able to attract new borrowers from Alipay.
• When asked about whether this means that the Alipay app will have to be broken up, Wan said it’s still unclear. To the best of our knowledge, regulators have never mentioned breaking up the company in public.