How Ant fell into fintech’s middle-income trap

A logo of Ant Group is pictured at the headquarters of Ant Group, an affiliate of Alibaba, in Hangzhou
A logo of Ant Group is pictured at the headquarters of Ant Group, an affiliate of Alibaba, in Hangzhou, Zhejiang province, China October 29, 2020. REUTERS/Aly Song/File Photo

HONG KONG, Feb 9 (Reuters Breakingviews) - It’s been almost ten years since the company now known as Ant tipped China’s clunky financial system on its head. The pivotal moment was the launch of Yu'e Bao, a service that lets online shoppers shift their payment balances into a money-market fund for a return far higher than what they’d get from a bank. Within three years, Yu'e Bao was the biggest money market fund in the world. Disruption had arrived with a bang.

Sometime in the ensuing decade, though, Ant lost its mojo. Having lured global investors from General Atlantic to Carlyle (CG.O), and introduced hundreds of millions of Chinese consumers to online investing, the privately-held financial affiliate of e-commerce empire Alibaba (9988.HK), fell foul of regulators. Now the company has been cut down to size. Founder Jack Ma, once China’s most globally visible tech mogul, last month gave up majority control.

Like most of China’s large technology firms, Ant doesn’t quite match anything that exists in the West. It started by handling payments for Alibaba, making it something akin to Paypal (PYPL.O). But as it expanded into consumer and business credit, wealth management and insurance, Ant has taken on features of U.S. firms like Charles Schwab (SCHW.N) or Morgan Stanley (MS.N), as well as the Chinese state-owned banks whose neglect of consumers spawned its early success.

As excitement mounted, so did Ant’s valuation – it hit $300 billion in 2020, based on where it priced its planned initial public offering – bigger than Industrial and Commercial Bank of China (601398.SS), the world’s largest lender by assets. But unlike ICBC and its peers, Ant neither took deposits, nor piled risky loans onto its balance sheet. Nearly all of the short-term credit offered on Alipay, the consumer-facing app that boasts over 700 million domestic users, was securitised or underwritten by third-party banks and partners.

Free from the red tape that binds regular banks, the loans facilitated by Ant ballooned. By the end of June 2020, it had processed a whopping 2.1 trillion yuan ($310 billion) worth of consumer and business loans. That's more than the non-mortgage personal loans at ICBC or Bank of China (601988.SS). And Ant paved a trail that others, like Lufax (LU.N) and LexinFintech (LX.O), happily trod in its wake. Digital offerings accounted for half of overall consumer loans in China, Fitch Ratings calculated in 2021.

If there’s one thing that makes regulators nervous – for good reason – it’s rapid growth in new areas of finance that they don’t directly oversee. That’s why Ant’s growth, and Ma's ties with Beijing, inevitably started to show strain. That showed through when regulators yanked Ant’s IPO in November 2020. The resulting revamp is only now coming to an end, and Ma has all but faded from view. Based on listing rules in Shanghai and Hong Kong, Ant will have to wait at least one year after a change of control before reviving its offering.

For its users, the new Ant isn’t much different. The domestic-payments business is mostly unchanged while it is growing overseas. For investors, it’s a far cry from where it started, and where the company looked like it might be going. Ant is set to become a licensed financial holding company, putting it under the close watch of China's main banking regulator.

But in other businesses, Ant’s march has slowed. Assets under management at Yu'e Bao have fallen, due to new restrictions. Huabei, a revolving line of credit for shoppers, and short-term consumer loans unit Jiebei have been folded into a 50%-owned consumer finance company subject to capital requirements and other rules. From now on, the latter must fund 30% of the loans it makes with partners, and those banks can’t originate more than half of their total loans through online companies.

To put that into perspective, the 18.5 billion yuan of registered capital at Ant's consumer finance unit currently implies it can extend roughly 500 billion yuan of credit with its partner banks, after taking into account leverage ratios and the different capital constraints. That's less than a quarter of Ant's loan balance back in 2020.

All this is glum news for investors, but probably good for China’s adolescent financial system. Small banks had gorged at Ant’s loan trough. Bank of Shizuishan, a municipal operation in the Ningxia Hui Autonomous Region, said nearly two-thirds of its credit outstanding in 2019 was consumer lending made via Ant. Nor was it clear how Ant was using its troves of customer data to facilitate its business.

Even in its less racy new form, however, Ant is on solid footing. Beijing wants Chinese consumers to consume, so is likely to indulge controlled growth of consumer credit. Less than 30% of adults in China owned a credit card in 2019, according to Fitch. Analysts at Bernstein reckon Ant's loan growth rate can hit roughly 15% a year for the next three years, which would make it roughly the same size as China Minsheng Bank’s (600016.SS) personal lending business.

Still, that’s disappointing for investors who once hoped the company would become a $300 billion giant. And Ant still has to contend with economic turbulence. Rival Lufax reported a 67% year-on-year drop in earnings in the three months to September, and analysts expect them to fall another 15% this year. If Ant mirrors those declines, its earnings could shrink to roughly $5 billion in 2023.

Put that on a multiple of 11 times forecast 2023 earnings – between where mid-sized Chinese banks and technology hotshots trade – and Ant today is worth perhaps just over $55 billion, although that could rise if other businesses keep growing. Seen another way, Ma’s creation, at its peak, would have been as valuable as U.S. mega-lender Bank of America (BAC.N); now it’s probably one-fifth the size. Bigger than its six-legged namesake perhaps, but barely knee-high to its global peers.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to fix initialism in sixth paragraph.)


Chinese financial technology company Ant Group on Jan. 7 said founder Jack Ma will give up majority control of the company as part of a broader "corporate governance optimisation".

Ma held more than 50% of voting rights in Ant through his investment vehicle, Hangzhou Yunbo. Under the latest restructuring, his voting share will fall to 6.2%.

Ant is nearing the completion of a two-year restructuring, with Chinese authorities set to fine the company more than $1 billion, Reuters reported in November.

Editing by John Foley and Thomas Shum

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for the Global Policy Programs at the Asia Society in New York where she focused on US-Iran relations, US-Myanmar relations and sustainability issues in Asia. She has also worked as a researcher at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She holds a masters degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and is a magna cum laude graduate of New York University.