Ant Group Co. Ltd.'s new license to establish a consumer finance company will address some of the regulatory concerns that sank the world's biggest-ever initial public offering, though it may constrain growth and profitability of one of the most valuable businesses for the fintech giant.
The license, granted by the China Banking and Insurance Regulatory Commission, or CBIRC, on June 3, requires Ant Group to form the new consumer finance company within six months. Chongqing Ant Consumer Finance Co., in which the Alibaba Group Holding Ltd. affiliate will own a 50% equity stake, plans to absorb Jiebei and Huabei, Ant's popular microlending operations that otherwise wouldn't be allowed to operate nationally due to regulatory concerns on leverage and lending risks.
Chongqing Ant will also have to underwrite and bear the default risk of at least 30% of loans with its own funding, up from around 2% as of June 2020.
"Ant will be deprived of lucrative fees that it earlier collected on consumer finance loans without bearing any default risks arising from those loans. While its consumer finance company will stand to earn interest revenue, profitability will depend on costs of capital," said Sampath Sharma Nariyanuri, financial technology analyst at S&P Global Market Intelligence.
Chinese regulators have been expressing concerns about the consumer lending businesses of fintech giants and that was a reason for Ant Group's mega IPO being called off two days ahead of its planned debut in November 2020. The People's Bank of China and the CBIRC earlier said that Ant Group's high leverage and lending practices could give rise to systemic financial risk as it was operating like a bank without being regulated as one. Rival Tencent Holdings Ltd., with a market share almost as big as Ant's, is considering folding its fintech business into a holding company to comply with regulatory requirements.
"It is mandatory and without a doubt that the rest of the big fintechs follow the same rules once the precedence is set with Ant's restructuring," said Shirley Ze Yu, a political economist and a fellow at Harvard Kennedy School's Ash Center. Companies such as Meituan and Beijing Byte Dance Telecommunications Co. Ltd. may welcome the new rules, as it opens up the space for them to compete, Yu added.
Revenue spinner
Chongqing Ant's new license will allow it to issue financial bonds to domestic financial institutions and access the onshore interbank market to raise capital, which the company will likely need more of under the new regulatory framework. Ant Group is awaiting two other licenses to operate as a financial holding company and a personal credit reporting company. But it can continue lending to small businesses and shoppers across China and to raise capital from more sources under the new license.
The microlending business was Ant Group's biggest revenue source till last year. In the six months ended June 2020, the segment generated 28.59 billion yuan in revenue, up 59% year over year and accounting for 39.4% of the group's total, according to the company's IPO prospectus published last year.
Ant Group's dual-IPO in Hong Kong and Shanghai collected at least $34.4 billion. The offering would have eclipsed Saudi Arabian Oil Co.'s IPO proceeds of $29.4 billion in 2019, according to S&P Global Market Intelligence data, making it the biggest initial share sale on record if the listing process was completed.
"Under the guidance of regulators, Ant will work with other shareholders of Chongqing Ant Consumer Finance Co., Ltd. to serve the needs of consumers, and to continue enhancing the quality of financial services and risk management capabilities," an Ant Group spokesperson said.
The requirement on funding capital of loans puts a "high requirement on Ant's capital scale," said Kou Xiangtao, a payments industry analyst and founder of fintech consultant ShowFin. "It will take about six months for the unit to rectify Huabei and Jiebei in compliance with regulations," he said, adding that the consumer finance unit will also bear the default risk of loans, which, in the past, was mostly shouldered by banks that provided the funding.
Some positives
Nariyanuri said Ant Group may be allowed to refer customers to banks that will completely fund the loans in the future, though it is not clear whether the company can collect fees for such referrals.
Earlier, Ant Group earned service fees from partnered institutions that used the group's platform to reach consumers. As of June 30, 2020, about 98% of the loans offered by Ant Group's platform were underwritten by its approximately 100 partner financial institutions or were securitized, according to the group's prospectus.
"In addition, there could be other restructuring requirements to ensure lower risk of customers becoming over-leveraged," said Kevin Kwek, managing director at research and brokerage firm Sanford C. Bernstein.
The new license will reduce the risk of a potential business disruption for Ant Group and may move the company one step closer to resuming the IPO, some analysts say.
"These changes all will help Ant get back on track for its IPO. Without the national license, Ant would be forced to get licenses in each of the provinces which is both slow and costly," said Richard Turrin, Shanghai-based fintech expert and author of a book called 'Cashless'.
"The next logical step for Ant is to assemble all of the pieces into a new operation. They will need to understand how to best deploy capital with their new structure and will need to show what their returns will be," Turrin said.
As of June 7, US$1 was equivalent to 6.40 yuan.
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