Tencent set to face data, cross-selling issues if it sets up holding company

Chinese internet conglomerate Tencent Holdings Ltd. will require more clarity on its data governance and links between financial products if the company folds its fintech business into a financial holding company, experts told S&P Global Market Intelligence.

Tencent was asked by regulators to set up a financial holding company for its financial assets, Caixin reported May 26 citing unnamed sources. The move, while unsurprising given regulators had alluded to this in April when they summoned 13 internet companies to talk about their fintech operations, is likely to create more confusion about Tencent's operations, experts say.

When asked for comment on Tencent's plans to restructure and form a holding company, a spokesperson for the company cited remarks by Tencent President Martin Lau during the latest earnings call: "The financial holding company structure is an important concept put forth by the regulators to manage the risks within the financial system. ... If so required, we would achieve full regulatory compliance by making reasonable structural adjustments in a way that does not impact our existing businesses."

Data sharing clarity

One issue that will arise from grouping together Tencent's financial services is how data can move and be shared under the financial holding company, said Tam Tsz Wang, TMT analyst at DBS Vickers Securities.

"For example, Tenpay has some payment behavior information that could be shared with other services for data analytics," Tam said. "Can it continue to be shared going forward?"

Tencent's fintech assets include Tenpay's digital payment tool WeChat Pay, wealth management products provided by third-party financial institutions, and lending products from WeBank Co. Ltd. The services are distributed through Tencent's instant messaging app WeChat. Tencent owns and manages Shenzhen Tenpay Technology Co. Ltd. and holds around a 30% stake in WeBank, a regulated bank.

If data sharing is restricted among these financial divisions, Tencent's advertising business, which relies heavily on data analysis of users' behavior for a targeted advertising strategy, will be impacted, Tam added.

In the first three months of 2021, Tencent's revenue from online advertising accounted for 16.1% of its total revenue. The company earned 21.8 billion Chinese yuan from online advertising in the first three months of 2021, up 23.2% year over year. Tencent's financial and business services generated 39.0 billion yuan, up 47.2% year over year, and accounted for 28.8% of total revenue.

The lack of clarity about whether WeChat Pay can share data with Tencent also will impact whether Tencent can introduce users of its other services to its WeChat Pay services, said Bruce Pang, head of macro and strategy research division at China Renaissance.

Cross-selling confusion

The financial holding company, if set up, may expose Tencent's fintech business to cases of improper cross-selling, the act of selling a product or service to an existing customer, experts said.

With questions on how the company's WeChat Pay, WeBank and other fintech services will operate under one roof, comes uncertainty around how Tencent's financial products can be sold, said Xia Hailong, a lawyer who practices TMT and cyber law at law firm Shanghai Shenlun.

He added that the regulators had earlier raised the issue of cutting "improper links" between payment tools and financial products to "restrict Tenpay, WeBank and fund providers from breaking the business boundaries."

Among several amendments, regulators earlier stated that "payment services have to return to their roots and must sever improper links to other financial products."

If the payment business and other financial products belong to the same financial holding, the possibility of "cross-selling" will increase, experts said.

"There are risks of improper links between the holding companies' business and a spread of risks from one product to another, if the [fintech businesses] are included in the holding company," Pang added.

China's officials are yet to give an "accurate definition" of what constitutes as "improper links" or inappropriate cross-selling between financial products, experts said.

Ultimately, with so many blurred lines related to data governance and product selling, regulators are likely to require more access to tech companies' data, Pang said.

"Under the current tightened regulatory environment, financial holding companies will need to prioritize the setup of a data reporting channel to regulators, helping them understand data usage and related risks," he said.

Reports of Tencent being asked to set up a financial company follow similar instructions from China's financial regulators to Ant Group Co. Ltd. in April. The Alibaba Group Holding Ltd. affiliate said it would apply for two licenses to operate as a financial holding company and a personal credit reporting company after it received official guidance from the People's Bank of China to restructure.

As of June 4, US$1 was equivalent to 6.40 Chinese yuan.