Chinese financial services giant Ant Co. is set to go public next Thursday with record-breaking IPOs in Hong Kong and Shanghai. A financial technology business spun out from Alibaba, it is expected to raise at least $30 billion USD, topping the previous record of $29.4 billion raised by state-owned oil behemoth Saudi Aramco in 2019. Ant’s public debut has inspired plenty of speculation about its future. It is hailed as a pioneer in fintech and a frontrunner in e-payment technology, but has also spurred concerns about privacy and its role in enabling growing levels of household debt. Others debate whether the arrival of China’s central bank digital currency (CBDC) will complement or compete with Ant’s services.
Ant already enjoys an enormous customer base. More than 730 million people use its Alipay app every month to pay for a broad variety of goods and services, as well as to make investments and take out loans. As The New York Times’ Raymond Zhong notes in an interview, the app once positioned itself as a competitor to China’s “stodgy, state-dominated banking system.” But Zhong and Cao Li also reported in an article for the Times that the company now frames its role as complementary to the state, as opposed to a competitor:
These days, Ant talks mostly about creating partnerships with big banks, not disrupting or supplanting them. Several government-owned funds and institutions are Ant shareholders and stand to profit handsomely from the public offering.
[…] The company has played give-and-take with Beijing for years. As smartphone payments became ubiquitous in China, Ant found itself managing huge piles of money in Alipay users’ virtual wallets. The central bank made it park those funds in special accounts where they would earn minimal interest.
After people piled into an easy-to-use investment fund inside Alipay, the government forced the fund to shed risk and lower returns. Regulators curbed a plan to use Alipay data as the basis for a credit-scoring system akin to Americans’ FICO scores.
[…] Ant has learned ways of keeping the authorities on its side. Mr. Ma once boasted at the World Economic Forum in Davos, Switzerland, about never taking money from the Chinese government. Today, funds associated with China’s social security system, its sovereign wealth fund, a state-owned life insurance company and the national postal carrier hold stakes in Ant. The I.P.O. is likely to increase the value of their holdings considerably. [Source]
While Ant may have tempered its aggressive stance towards China’s big banks, founder Jack Ma continues to press barbs at international financial regulators. As The Financial Times’ Yuan Yang reported, Ma recently railed against global financial rules for being outdated and excessively risk-averse:
“The Basel Accords are like an old people’s club . . . we can’t use yesterday’s methods to regulate the future,” Mr Ma said at a conference in Shanghai on the weekend, referring to the international banking supervision framework.
Mr Ma said the challenges that the rules were designed to resolve were not relevant to China’s phase of development. “Many of the world’s problems” stemmed from “only talking about risk control, not talking about development, not thinking about young people’s or developing countries’ opportunities”, he said.
[…] He also urged moving away from a “pawnshop” mentality of banks taking collateral for loans and towards credit-ratings based on big data. The Basel Accords require banks internationally to keep sufficient collateral to absorb potential losses. [Source]
But while Ma sees the traditional banking system as excessively risk averse, Ant has also come under fire for enabling users to take on worrying amounts of debt via the popular lending functions of its Alipay app. The Wall Street Journal’s Stella Yifan Xie, Shan Li, and Julie Wenau reported on the worryingly large amount of personal debt being amassed by young people:
Short-term loans from online lenders such as Ant Financial Services Group are helping fuel the spending. Ant Financial charges rates up to nearly 16% on an annualized basis, depending on the credit profile of the borrower. A 2018 survey in China by Rong360, a loan recommendation website, found that around half of respondents who took out consumer loans were born after 1990.
Most had borrowed from multiple lending platforms, the survey found, and nearly a third took out short-term loans to repay other debts. Nearly half of them had missed payments.
One of the most popular ways to borrow is a Huabei account, a revolving credit line embedded in China’s Alipay mobile payments network. Huabei has extended loans in excess of 1 trillion yuan, or more than $140 billion, since its launch in April 2015, a person familiar with the matter said. Ant Financial, which owns Alipay, declined to disclose any figures related to Huabei. [Source]
The growing ubiquity of Alipay in China has also spurred privacy concerns, as the company has amassed vast amounts of data on its hundreds of millions of users. There is growing public concern in China about privacy issues, especially as reliance on e-payment apps such as Alipay and WeChat Pay has grown. Experts note that key provisions of China’s draft Data Security Law, which will for the first time regulate personal and consumer data, was likely written with e-payment apps in mind. Privacy concerns relating to e-payment apps are likely on the minds of consumers, too. In an article for Sixth Tone about China’s new digital currency system, Ye Ruolin reported on the perspective of one Chinese expert who spoke about relative trust in the government and tech companies in China:
Cui wasn’t too concerned about privacy [of the central bank digital currency] either, given that both Alipay and WeChat Pay already require users to verify their identities by uploading a photo of their government ID.
“It’s about who you trust,” he said. “Personally, I have more faith in the government than tech companies. But it may be a different story in the U.S., where people tend to trust private companies more than the government.” [Source]
As the Financial Times’ Editorial Board wrote this week, data privacy concerns also have serious implications for Alipay’s prospects of expanding its business beyond China. Unlike Chinese Alipay users, international consumers may have greater reservations about the involvement of the Chinese government.
But by far the biggest issue is about the management of data. Ant and its rivals hold vast amounts of user information. This needs to be carefully managed and regulated. The Bank for International Settlements has previously warned about the potential of big tech companies to quickly become systemically relevant financial institutions. Regulators need to be alert to the consequences of these companies becoming major cross-border payment systems and should hold them subject to the same strict regulations that apply to banks.
Ant’s international business is still small relative to its Chinese operations, but its ambitious expansion plans have seen it take minority stakes in 10 e-wallet ventures in Asia. Ant may face the same questions as other Chinese tech groups over whether the data of foreigners is secure from the Communist party. This could limit its growth abroad. [Source]
The relationship between Ant Group and the Chinese government, and in particular, the degree to which they can cooperate, continues to be an open question. Chinese regulators have sent mixed signals about their attitude towards Alipay. Earlier this year, China’s central bank made the unusual move of urging the State Council’s antitrust committee to investigate Alipay and WeChat Pay for holding an alleged duopoly over the digital payment market. Technode’s Wei Sheng reported on the unusualness of that move, as China has been historically reluctant to go after domestic businesses with antitrust suits. CDT has written about recent developments and changing regulators’ attitudes in China on the issue of antitrust law.
But Chinese officials with the central bank have more recently struck a different tone. South China Morning Post’s Coco Feng and Masha Borak reported this week that a central bank official, when responding to questions about whether China’s emerging digital currency would compete with the e-payment giants, emphasized that they would play complementary roles:
China’s Digital Currency Electronic Payment (DCEP) will not compete with WeChat Pay and Alipay, the head of the programme clarified for the first time on Sunday. The two digital wallets had a combined 94 per cent share of the country’s mobile payments industry in the second quarter, according to iResearch.
“They don’t belong to the same dimension. WeChat and Alipay are wallets, while the digital yuan is the money in the wallet,” said Mu Changchun, the head of the research institute for digital currency at the People’s Bank of China. [Source]