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Ant Group searches for direction in a new era of Chinese fintech

Written by AJ Cortese Published on     7 mins read

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The Chinese fintech sector is changing, and Ant Group needs to find new ways to grow its business.

Ant Group’s USD 35 billion dual listing in Hong Kong and Shanghai last year was set to be a coup for the country’s tech sector and capital markets. Yet, Chinese regulators decided to put a stop to it, signaling Beijing’s wariness of big technology firms encroaching on the financial sector.

Ant Group’s digital financial services, encompassing credit, insurance, and wealth management products, powered the company’s growth from a mobile payment provider to a multifaceted marketplace for financial products. In the meantime, the company managed to steer clear of the traditional banking sector’s regulations. However, in a quick turn of events, regulatory changes introduced at the end of last year for fintech companies, issued by the China Banking and Insurance Regulatory Commission, demanded tighter rules for issuing loans. Regulators also demanded that online lending platforms must fund at least 30% of loans they offer in partnership with banks as part of a move to reduce risks in the country’s financial sector.

China’s central bank and three other financial regulators summoned Ant Group in April and asked the company to correct “serious problems” in its business to improve its competitiveness, practically forcing Ant Group to transform itself into a financial holding company, which in practice, will be supervised like a bank, and will be subject to regulations similar to those that govern banks. The suspended IPO and the new demands reduced Ant Group’s valuation, which whittled down to just USD 144 billion this month from a peak of USD 315 billion in late 2020.

Ant Group’s story is emblematic of China’s outsized digital economy, a sector that reached RMB 39.2 trillion (USD 6 trillion) last year, or about 38.6% of the country’s total GDP in 2020. In comparison, the digital economy sector of countries such as the US and the UK account for less than 10% of these countries’ GDP. This disproportion helps to explain the ensuing antitrust campaign affecting the internet industry, of which Ant Group and its parent company Alibaba have both fallen afoul as main actors.

“We’ve reached the end of the wild west for Chinese internet companies. The last decade of internet development in China can be seen as benign neglect where these companies were largely allowed a tremendous amount of freedom to build their franchises, which was generally perceived positively,” Shanghai-based fintech expert and consultant Richard Turrin told KrASIA.

In the last few years, Ant Group’s financing services have facilitated financial inclusion for millions of Chinese citizens who were previously unbanked, even playing “a role in poverty reduction, which has made a positive impact on Chinese society,” Turrin said. “Regulators aim to control but not irreparably damage one of China’s most successful companies,” he added.

However, as the competitive landscape has shifted, where does Ant Group go from here?

Alibaba and Ant Group founder Jack Ma (left) as well as Tencent founder Pony Ma may see even more transactions routed through Alipay and WeChat Pay in the future. Photo source: Tuchong.

Alipay returns to its roots

When Ant Group, then Ant Financial, launched its mobile payment service Alipay in 2004, it was meant to be a complementary function to improve shoppers’ checkout experience on e-commerce marketplace Taobao. Few could have predicted the main role it would go on to play in the development of mobile payments in China.

Ant Financial was spun off from Alibaba in 2014, with Alipay as its core business. The mobile payment platform generated the majority of the firm’s revenue until 2018. However, as Ant’s business strategy began to shift in 2019 to cultivate different growth engines based on new digital financial services, Alipay’s central role began to vanish, with the e-wallet generating only 36% of the firm’s total revenue in 2020. At the same time, the company’s credit services alone accounted for a whopping 40% of total revenues for Ant Group in the first half of 2020.

In July 2020, Ant Financial was rebranded as Ant Group to better reflect its role as “an innovative global technology provider” for businesses and financial institutions. Ant leveraged Alipay’s 900 million users to create a one-stop marketplace for financial products, including short and long-term credit loans, insurance products, and wealth management offerings. The restructuring and the new offerings were the special sauce that powered the company to within arm’s reach of the world’s largest IPO.

Leading up to the IPO in March 2020, Ant Group’s former CEO, Simon Hu, unveiled a new horizontal strategy for Alipay, looking to expand the range of services available on the platform, from food delivery to travel bookings. Alipay’s Chinese slogan was changed from the mundane but functional “Use Alipay to make payments” to the broader and catchier “Live well, Alipay.”

However, following the stalled IPO and new regulations severely limiting cash machine loan products like Huabei and Jiebei—which can no longer be offered as direct payment options—Alipay is back at the center of Ant Group’s thinking, also fueled by an announcement from the People’s Bank of China (PBOC) in December 2020, clearly instructing Ant Group to “return to its roots in payments.”

Despite the changes, Ant Group’s range of offerings will not be limited to just mobile payments. The company can still offer a wide range of services as long as it stays away from lending. In fact, the firm is actively onboarding service providers, aiming to reach 50,000 in total by 2023, up from 10,000 in mid-2020. This service-oriented approach represents the next logical development in Alipay’s maturation.

“Platforms like Alipay are increasingly becoming 360-degree lifestyle service platforms, with payments being just one element,” Turrin said.

Platforms like Alipay are increasingly becoming 360-degree lifestyle service platforms, with payments being just one service offered within the app. Photo Courtesy of Ant Group.

China’s digital yuan reinforces Alipay’s position

Just this week, Alipay was incorporated in the PBOC’s digital yuan rollout pilot program, which expanded its scope to include private operators like Ant Group and Tencent. Alipay and WeChat Pay are likely to maintain a prominent position in the future when the digital yuan will be rolled out at scale.

“It is a misconception that the digital yuan is meant to be a direct competitor to Alipay and WeChat. In fact, the expanded rollout of the digital yuan will allow new industries, payment flows, and data to be digitized in areas like employee salaries,” Turrin explained.

Instead of routing worker’s wages through a bank’s system to then be transferred into a digital wallet like Alipay, salaries could be directly integrated into these wallets using the digital yuan, Turrin said. Going forward, the aim is to facilitate more use cases for the digital currency, which is reliant on consumer platforms like Alipay. “The digital yuan will fail without these types of consumer platforms,” Turrin said.

“It is not a zero-sum game where the central bank’s digital currency takes market share away from the payment platforms. Actually, the digital yuan will enlarge the overall size of the digital payment pie,” he added.

If China’s digital yuan isn’t meant to cut into Alipay and WeChat’s duopoly in mobile payments, the two payment platforms will likely retain and even reinforce their dominant positions, especially as other verticals of their businesses face regulatory challenges.

China’s digital yuan was used to pay JD.com employees in one of the latest trials. Photo source: KrASIA archive.

Monetizing data processing capabilities

While financial regulation policy decisions have posed challenges to Ant Group, the company may also be the beneficiary of the recently released draft of China’s personal data privacy law, which clamps down on the sale of data to third parties, thus increasing the value of in-house data. Ant Group, and the Alibaba ecosystem, represent a data empire powered by over 700 million users on platforms like Alipay, Taobao, and Tmall.

Ant Group’s heritage as a technology company has also endowed the firm with throngs of data scientists and other technical staff. The company’s applied competency far outstrips the data processing capacity of state-backed banks, presenting Ant Group with an opportunity to provide data mining services to traditional institutions, Turrin said. “It is clear that if Ant Group gives the PBOC, or another rating body, all the data it uses in its credit technology, nobody’s going to know what to do with it. That’s just a practical reality,” he explained.

Ant Group may keep a tighter control on its data, while it might be more willing to farm out its data processing capabilities. “There is a means for Ant to monetize on data. It will be down to how they choose to monetize it and which bits of data they monetize,” Turrin added, referencing the example of data brokerage in Western financial systems by leading credit card companies like Visa and Mastercard.

Fintech fraternity

Ant Group wasn’t the only major fintech play forced to restructure its business. In April, JD.com’s fintech arm, JD Technology, withdrew its application for an IPO on the Shanghai Star Market. The firm is also planning to set up its own financial holding company, echoing Ant Group.

In total, 13 of the largest internet companies were summoned by regulators in April and rebuked for their consumer financing activities, including Tencent, ByteDance, Meituan, and Didi Chuxing. This actually comes with little surprise. Before this wave of new fintech regulation, 33 of China’s top 50 most popular apps offered some type of financing or loan products, mainly in the form of payday loans or consumer credit services, KrASIA reported.

With more regulations affecting the Chinese microfinance sector, other fintech firms will certainly look at the potential of payment platforms to be integrated with other services in categories like e-commerce, consumption, and entertainment. Ant Group’s strategic pivot will certainly serve as an example for other fintech players to follow.

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