Jack Ma’s ant is planning a major renovation in response to Chinese pressure

The plan is a significant change for a digital payment player who, in recent years, has tried to sell its image as a financial services provider and dress up as an internet technology company, which has helped it achieve high ratings. Before its initial public offering was canceled in November, Ant was on the verge of going public at a valuation of $ 300 billion north, well above the market capitalizations of the world’s largest banks.

The full designation of Ant as a financial holding company was not something previously expected by the company’s directors and stakeholders. In its listing prospectus last year, Ant stated that it intends to become one of its subsidiaries to become a financial holding company and to host its licensed financial affairs, such as asset management and consumer lending. By doing this at the group level, Ant will be subject to a set of regulations similar to those governing banks and will affect its growth and profitability.

The restructuring plan, which is still under deliberation, could be finalized before China goes on a weekly Lunar New Year holiday in mid-February, people familiar with the matter said.

Any final plan will need a signature from the Financial Stability and Development Committee, a super-regulator chaired by Deputy Prime Minister Liu He, two of the people said.

An Ant spokesman declined to comment. The People’s Bank of China, the Banking and Insurance Regulatory Commission of China and the State Council Information Bureau did not comment.

Ant owns Alipay, a payment and lifestyle app with over one billion users in China. It managed more than $ 17 trillion in digital payment transactions a year through June 2020, secured unsecured short-term loans to about 500 million people, and sold many insurance policies, mutual funds and other investment products.

The payment activities of ants and other financial services have been subject to regulation, but the group as a whole has long been exempt from the strict capital requirements and rules to which banks, insurers and other traditional financial institutions have been subject.

In December, four Chinese regulators summoned Ant directors to a meeting and asked the company to rectify what they said were problems in its business. In a statement later, PBOC Deputy Governor Pan Gongsheng condemned Ant for “disregarding” regulatory compliance and “involvement in regulatory arbitrage,” without giving details.

Pan said regulators have filed five requests for Ant, telling him to go back to his payment roots, protect personal data in his credit business, set up a financial holding company, improve corporate governance and exercise several disciplines in terms of securities and its assets. business management.

Putting all Ant business in a financial company would give regulators oversight of all its activities and eliminate the potential for regulatory arbitrage, according to one person familiar with the plan.

The new structure will make it more difficult for Ant to mix its general portfolio between its constituent units, which has allowed it to hide risks by moving them to more regulated parts of the conglomerate, said Eswar Prasad, former head of China’s International Monetary Fund. and Professor of Trade Policy and Economics at Cornell University.

“Financial regulators were concerned that Ant regulatory arbitrage had allowed the company to give a rosy picture of its overall financial position and hide the financial risks posed by its aggressive expansion into new business lines,” he said.

Ant has formed a working group, led by CEO Simon Hu, to work with regulators on how to run their business. The company has appointed a chief compliance officer to oversee day-to-day compliance and restructuring work.

China’s top financial regulators have recently suggested they are pleased with the progress made at Ant. On Tuesday, when asked at a World Economic Forum virtual meeting whether Ant would renew his IPO, PBOC Governor Yi Gang said that if laws and regulations were followed, “you will have the result.”

He said consumers are generally satisfied with Alipay, but Ant needs to address issues such as data privacy complaints before getting back on track.

Ant is working on segregating customer data that is currently shared between its business units to implement protocols that are common to banks, according to people familiar with the issue. Alipay has amassed a lot of data about the spending habits and payment patterns of many people and used them to provide loans and sell investment products to its users. It is a key reason why the company has managed to grow rapidly and diversify its business in recent years.

China’s new rules for financial companies, launched last fall, apply to large conglomerates that own two or more financial businesses. They entered into force on 1 November, and the affected companies have one year to apply to become a regulated financial holding company at PBOC.

New measures for financially owned companies include regulatory requirements on shareholders, management, sources and uses of financing, risk management and corporate governance. They also require the injection of additional capital into financial subsidiaries whenever necessary.

If the Ant revision is implemented, the company’s revenue and profit growth could be significantly reduced. Ant may also need to raise substantial capital to meet regulatory requirements, and the company’s superior valuation – which is based on its profitability and growth potential – could also be successful. Ant has already decided to reduce lending limits for individual users of its digital lending services, a sign that it is slowing down to comply with regulations.

It is unclear how the restructuring would affect Ant’s non-financial business, such as the development of blockchain technology, digital lifestyle services and artificial intelligence technology, areas that the company has previously identified as growth factors.

Write to Jing Yang to [email protected]