Ant Group IPO was suspended after Jack Ma, the actual controller of Ant Group, attacked China’s financial system. The listing process of this internet financial giant was stopped urgently, and the industry was pushed to the spotlight unprecedentedly. In recent ten years, the fields which have developed rapidly due to the lag or even blank of the regulatory system may confront stricter supervision, and the innovation and effective supervision will be re-examined.
What happened before Ant Group IPO？
At the Bund Summit in October, Jack Ma criticized global financial regulation for curbing innovation, referred to Basel Agreement as “club for the elderly“, called Chinese banks “pawnshops“, and appealed to regulation to embrace innovation. His comments have triggered extensive discussions. Financial News of the People’s Bank of China has successively issued articles pointing out that Ant Group’s business is almost the same as that of banks, but it makes the financing cost of borrowers rise sharply; it has become the most mixed operation institution in the world, and it’s necessary to prevent regulatory arbitrage by taking advantage of the differences between the rules of financial and quasi–financial institutions.
The special meeting of the Financial Stability and Development Commission of the State Council held at the end of last month also released the signal that the supervision of fintech companies will be strengthened. The meeting proposed that “financial activities should be fully included in the supervision, prevent risks effectively “ and “strengthen the law enforcement and justice of anti-monopoly and anti-unfair competition” and so on. It also announced that “the relationship between financial development, financial stability, and financial security must be well handled”.
On November 2, four ministries including the People’s Bank of China conducted a regulatory talk with Ant Group’s actual controller Jack Ma, chairman Eric Jing, and president Simon Hu. The listing of Ant Group in Shanghai and Hong Kong was also postponed. According to the CSRC, changes in regulatory interviews and fintech regulatory environment may have a significant impact on the Ant group’s business structure and profit model and said the move was responsible to investors and the market.
Shackles in succession for FinTech Companies
The regulators are worried that fintech companies realize a high degree of mixed operation in disguise by dismantling financial business, but failing to meet the same capital and leverage requirements of financial institutions. It may intensify the transmission of financial risks, bring challenges to supervision, and undermine the stability of the financial system. In fact, the regulation on micro-credit companies issued by the China Banking and Insurance Regulatory Commission (CBIRC) in September has set limits on the financing and leverage ratio in this field.
At the beginning of November, China Banking and Insurance Regulatory Commission and the People’s Bank of China issued the Interim Measures for the Management of Internet Micro-credit Business (Draft for comments), which made it clear that if such loan business will be carried out across provinces, it needs to be approved by the CBIRC. At the same time, the number of shareholders’ participation and holding shares is limited.
In addition, the balance and contribution ratio of relevant online micro-credit are clearly stipulated. Moreover, according to people familiar with the matter, the regulatory authorities recently told Ant Group that it must meet the new capital requirements and other regulations implemented by financial holding companies before it can promote the IPO; at the same time, the regulators also required financial institutions to develop joint loans and other businesses with Ant Group prudently and comply with regulations.
Where will Ant Group IPO go?
Although Ant Group’s business covers many fields such as payment, banking, insurance, micro-credit, and wealth management, the loan business is still its largest source of income. According to its prospectus, the company’s micro-loan technology platform achieved revenue of about 28.6 billion yuan in the first six months of this year, a year-on-year increase of about 59%, accounting for nearly 40% of the group’s total revenue.
The largest online consumer financial platform in China has two small loan companies, Chongqing Ant Business Credit Co., Ltd. and Chongqing Ali Small and Micro Micro Micro Loan Co., Ltd. During the 12-month period to the end of June, about 500 million users have obtained consumer credit through Ant Credit Pay and Ant Cash Now products. By the end of June, the balance of consumer credit promoted by the platform exceeded 1.7 trillion yuan.
However, only 2% of the above loan business is reflected in Ant’s balance sheet, and the rest is funded by banks or transferred through asset securitization. But the new regulation requires that in the joint loan of a single online micro-loan, the contribution proportion of micro-loan companies should not be less than 30%; according to Berstein‘s calculation, it makes the capital of Ant’s micro-loan need to expand the current scale from about 35 billion yuan to 104 billion yuan.
Challenges for FinTech Industry
The fintech industry, which has a large customer base and huge assets, is becoming more and more important in terms of system stability, while the low-income people and young people they cover may have great potential risks. Tighter regulation is designed to reduce the possibility of systemic risks.
Wang Yifeng, the chief financial analyst of Everbright Securities, predicts that the regulatory authorities will put forward requirements on the capital adequacy ratio, liquidity, risk, balance sheet and other related indicators of fintech companies, carry out corresponding consolidated supervision on various financial businesses under financial holding companies. And it is expected to promote fair competition between Internet Financial platforms and traditional financial institutions.
Internet giants such as JD.com, Tencent, Baidu, NetEase, and Suning all have micro-loan licenses, and they will also face the possibility of replenishing capital, adjusting business structure, and gradually withdrawing non-compliant assets.
In addition, fintech companies have been criticized for actually increasing the cost of financing for borrowers. Guo Wuping, director of the Consumer Protection Bureau of the China Banking and Insurance Regulatory Commission, recently wrote that the business of Ant Credit Pay is basically the same as the bank’s credit card business, but the installment fee is higher than that of the bank, which is actually “common but not beneficial“.
Chen Shujin, China’s financial industry analyst at Jefferies Financial Group Inc, believes that if the monopoly of financial technology companies increases the bank’s customer acquisition cost, it will increase the interest rate given to the real economy in disguise, which is not what regulators want to see.
Who will benefit from the suspended Ant Group IPO?
China’s traditional commercial banks have been at a disadvantage in the arena of competing with Ant Group for customers, and the new regulations are expected to bring fintech companies back to the same starting line as banks, which should welcome the introduction of new rules. China Merchants Bank, a leading retail bank in China, has seen its H–share rise by about 15% since this week.
Besides, financial consumers will also benefit. Wang Yifeng believes that stricter supervision of financial technology companies can reduce systemic risks and benefit the whole society; specifically, the new regulations on online micro-loans are conducive to preventing induced lending and online joint debt, and avoiding the infringement of financial consumers’ rights and interests.