Ant Group’s Failed IPO: Is it a Bank or a Fintech?

Updated: Nov 14, 2020

Ant Group’s initial public offering (IPO), which would have been the world’s largest IPO with a valuation of $316bn, was quashed by Chinese regulators last week, leaving the group in a state of shock. This article will give an overview of the situation at present. You can check out our previous article on IPOs here if you missed it!

What is Ant Group?

Ant Group, formerly known as Ant Financial and Alipay, is an affiliate company of the Chinese Alibaba Group. It started life as Alipay, a third-party online payment tool created by Alibaba in 2004. At the time, online shopping in China was not widely trusted and so to address this issue, Alipay acted as a simple escrow service. In other words, customers would transfer money to Alipay to pay for their purchases online, Alipay would hold onto that money until goods were received and then suppliers would get paid. The mobile version was launched in 2008 which led to the number of users soaring.

Today, Alipay has more than 700 million monthly active users (mostly in China), who use it to buy everything from a quick coffee to properties, which has allowed it to monopolise more than 55% of China’s digital payments market.

Ant Group’s ambitious and disruptive nature, driven by its billionaire founder and visionary Jack Ma, pushed it to diversify its business further. It then launched an asset management, lending, and insurance service, making it a Chinese fintech powerhouse and ultimately changing the way billions of Chinese consumers and small businesses pay, borrow, and invest. The image below shows how disruptive the company is within a number of sectors.


China’s largest financial technology company was set to list, on Thursday 5th November 2020, in Shanghai and Hong Kong, in a record-breaking IPO that had attracted huge interest from institutions and smaller investors.

The listing carried great significance as it was a powerful symbol of China’s growing confidence. It would also send a striking message to the West that China is not a rookie in any sector, or dependent on the West’s implementation of business and technology to succeed. Ant’s planned flotation is greater evidence that regardless of America and China’s political trade war, when it comes to technology Wall Street is clearly steering east. U.S. investors are still pouring capital into China, the Ant IPO, and other assets.

This was until the Beijing authorities abruptly dashed Ma’s dreams, suspending the IPO a day before it was due to take place citing ‘major issues’.

So, what exactly happened?

The Shanghai Stock Exchange said in a statement that Mr Ma had been called in for ‘supervisory interviews’ a day before the suspension, whereby regulators grilled him. They told him that changes in “the financial technology regulatory environment,” due to new draft regulations for fintechs that Beijing unexpectedly announced at the late stages of the listing, may cause Ant Group to fail to meet the issuance and listing conditions or information disclosure requirements.

Beijing Tightens its Grip

The underlying message by the regulators is that they would begin treating fintechs more like banks - a move that could drastically slash Ant Group’s valuations and attractiveness to investors.

The newly released draft regulations on online lending by The People’s Bank of China and China’s regulator will oblige Ant to cap loans at either Rmb300,000 ($44,843) or one-third of a borrower’s annual pay, whichever is lower. This could damage Ant’s fast-growing CreditTech consumer lending business, which leverages high-tech to match borrowers and banks, and had become a crucial driver of sales and Ant’s rich market valuation.

Further regulation states that internet platforms will have to provide 30 per cent of the funding of “joint loans”, a term that is yet to be defined by regulators, that are offered through their platforms. This will be a huge setback for Ant as it currently funds only 2 per cent of its total Rmb1.7tn ($257bn) in consumer loans itself, with most of the remainder coming from its partner banks.

As part of Ant’s CreditTech business, once it matches borrowers with banks, it extracts an estimated fee of 2.5 per cent from its partner banks for each loan it arranges and takes on none of the risk. Again, the new regulations could shake this up forcing Ant to move substantially more of those loans on to its own books. This would lower its return on invested capital, bringing down Ant’s valuation by anything between 10 per cent and 50 per cent in a worst-case scenario. Ant posed threat to China’s centralised control

An important question that one may ask themselves is: what is driving China to halt the success of its biggest technology-services titan which is essentially a Chinese success story?

Whilst China is taking steps to embrace a multi-faceted fintech future, such as by completing technical preparations for the launch of a digital renminbi, the Chinese currency, fintechs remain a regulatory headache. In the eyes of Beijing, a fintech future could pose a threat to China’s centralised control. Authorities fear facing a new, relatively unknown, beast to which they would have to concede much of their power.

As one Chinese state banker told the Financial Times after the Ant IPO suspension last week, the attitude of China’s regulators is simple: “If I don’t understand you and can’t control you, I won’t let you grow”.

It is easy to see where Beijing’s fears come from, as Ant’s lending business has some 500m customers, and a big proportion of personal borrowing in China these days comes from online platforms. The sector’s boom cannot go unnoticed.

Furthermore, China is no stranger to financial manias, and it seems to have learnt some lessons from the peer-to-peer (P2P) lending crash in 2018. Whereby more than 400 peer-to-peer lending platforms collapsed from June through August 2018, whilst owing their depositors some $115bn. Beijing is still trying to recover these funds. Since then, Beijing launched a crackdown that slashed down the number of surviving P2P lenders from around 6,000 to a current 29.

Although Beijing’s stance is understandable, what cannot be justified is its choice of timing to pull the plug on Ant’s IPO. Moving forward, China needs to be more transparent at an earlier stage about its regulatory processes to avoid further deteriorating its damaged capital markets’ reputation.

What next?

The first step to recover from this chaos is to quell the fermenting outrage of retail investors. Retail investors in the funds which were offering exclusive access to Ant Group’s IPO, were subject to an 18-month lock-up period. However, they are now becoming increasingly agitated after the funds declined to immediately return their cash, with many taking to social media to voice their discontent and demand a refund.

Although the funds have since offered various exit routes, quite profound and irreversible damage has been done to retail investor trust.

As for Ant Group’s IPO, well, it has a long regulatory path ahead of it before it can attempt a ‘re-listing’. First, Ant will need to wait for the online lending regulations to be passed into law. Then, it must apply for a cross-provincial license to provide online microloans from the China Banking and Insurance Regulatory Commission (CBIRC).

Wang Dan, analyst at Hang Seng Bank China, said Ant could still try to convince regulators it was only an intermediary and not a bank. “If Ant only provides big data and customer information, and the banks pay service fees and provide loans … then this rule has little effect on them,” she added.

Even if regulators accepted this argument, the risk still lies in the fact that banks may continue to encourage fintechs to take on more risk by helping to fund more joint loans in the future.

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