What are the prospects for Ant Group and, by extension, Jack Ma?
In China, the regulators battle against the FinTech giant seems to have joined.
To that purpose, Howard Yu, LEGO Professor of Management and Innovation and director of IMD’s signature program, Advanced Management Program (AMP), told Karen Webster that a restructuring could be on the horizon.
As reported earlier this month, the Shanghai Stock Exchange has delayed Ant Group’s record initial public offering (IPO). This delay occurred following a meeting of controlling shareholder Jack Ma with Chinese regulators. Several regulatory agencies – the People’s Bank of China (PBOC), the Insurance Regulatory Commission, the Securities Regulatory Commission, and the State Foreign Exchange Administration – have called Ma to answer questions.
And when an IPO suspension comes from top to bottom, it reportedly (as in the case of Chinese President Xi Jinping), it triggers what could be a long and persistent look at Ant: what it does, how it does it, and the risks involved.
Some existential questions arise: What’s next, and will Ant survive scrutiny unscathed, or will the company be nearly unrecognizable in a year’s time?
There may have been some puzzlement about Jack Ma after he reportedly said at a conference earlier this year that Chinese banks are similar to “pawn shops” and criticized existing regulatory frameworks. .
But at a high level, Yu noted, regulators are concerned about Ant’s business model, to the point that they felt compelled to hold back the IPO about 48 hours before the shares were listed.
So far Ant has had a noteworthy business model, Wu noted – and the implied valuation of the company coming to market reflected that. In fact, he told Webster, Ant was and is more profitable than Facebook when that tech giant went public in 2012.
But it’s a pattern, Yu said, that shows some level of fundamental risk, especially with its outsized presence in consumer lending and the extension of credit to the non-bank population.
“Any FinTech disruptor, when it gets that big, poses a systemic risk,” he told Webster. Ant’s highly profitable businesses – where it doesn’t hold its microloans but repackages them and taps into the public market to sell those loans – harks back to the subprime mortgage model that demonstrated the turning point of the Great Recession more than a decade ago.
As noted by PYMNTS last month, according to Ant’s statements, in its CreditTech segment, which is geared towards SME credit, Ant makes loans guaranteed by 100 financial institution (FI) partners, 98% of which the firm says which are subscribed or securitized. The statements indicate that CreditTech was responsible for 39.4% of sales for the six months through June 30 of this year.
A key area to consider: As Ant underwrites loans, it relies not on human credit officials but on algorithms. The long and broad boom enjoyed by China’s rapidly expanding economy has shaped the data that powers those algorithms, Wu said – meaning there’s no dip in the model, really, and certainly not the so-called events of the Black Swan which would help to assess the risk more accurately. Given Ant’s reach and possibly biased data, Wu said, systemic risk could spread across the country.
Recounting the slew of business lines in which Ant is present, he said that offering loans to non-banks is a social good, bringing financial stability to people who otherwise could not open checking accounts or obtain credit cards even through traditional state-owned banks. . But in addition to direct-to-consumer business, Yu said, there is a wide range of B2B and other offerings such as helping banks take out loans. In the case of these latter segments, the algorithm governs everything. Just as we hypothetically ditched paper maps for GPS, so too have businesses and lenders relied on Ant for guidance.
“The moment you give them an automated transaction score card or credit score card, the need for human intervention decreases,” he told Webster. The regional bank manager tends to rely mostly on Ant’s calculations and calculations.
Is “tall tree” worth a second look?
As such, Yu said, from a political point of view, “it makes sense to take a second look”. That second look could lead to a renewal of the company itself, he projected, where Ant would not have such an umbrella, covering payments, wealth management and consumer loans – probably all under the proverbial sun.
Yu said the timing of the IPO suspension – again, hours before the launch – shows regulators may have been hesitant, or perhaps even not feel empowered, to take on a national hero like Ma and his behemoth. a corporate creation. The IPO delay also shows, as Yu said, a stark difference in how companies are viewed in the West versus China. In the latter country, he said, businesses are viewed by regulators through the prism of what is best for the national interest rather than shareholder performance.
It might be worth pointing out a Chinese proverb: when the tree gets too tall, it attracts the wind.
And Ant, with hundreds of millions of users and trillions of yuan in loans, has certainly grown.
How could a renovation be?
What awaits us
No one knows for sure what will happen, Yu said, but there may be room for some competitors to emerge as regulators ponder what could be done with Ant. (He mentioned Tencent as a financial services peer / full-scale competitor). He indicated the IMD’s “leap readiness” index, which measures companies’ “readiness” to face the future with technology-driven innovation. Traditional banks are unlikely to be the main competition, but platform / digital first companies (without too much vertical integration, so you don’t get too big) could see opportunities.
Digital infrastructure will be critical for those would-be competitors, he predicted, as open APIs are becoming more and more important to businesses serving consumers across a wide range of offerings. As an example, he noted that Alibaba’s customers, when traveling overseas, interact with APIs to conduct trade with merchants in other countries.
“You still have only one lock-in, but then the infrastructure on the backend, data migration and elsewhere is done via API,” he said.
Looking ahead to 2021, Yu predicted Ant could indeed undergo a restructuring.
“This is one way to avoid systemic risk,” he said. And as a result, if and when Ant actually goes public, the valuation won’t be that high, because profitability could take a hit, at least for a while. There are some favorable factors in place to help margins and consumer lending in the future as life, discretionary spending and even travel return to normal.
“The current saga as it unfolded is consistent with the values of Chinese society,” Yu told Webster, adding, “Ultimately, if Ant Group becomes the largest financial institution in the world, from the perspective of a politician, what good is it besides social bragging? “