Jack Ma’s Ant plans major overhaul in response to Chinese pressure

The plan represents a significant turnaround by a digital payments juggernaut who in recent years has been trying to shake off its image as a financial services company and establish itself as an internet technology company, earning it high ratings. Before the blockbuster November IPO was called off, Ant was on track to go public with a valuation north of $ 300 billion, well above the market caps of the world’s largest banks.

Designating Ant as a financial holding company in its entirety was not something previously suggested by the company’s executives and stakeholders. In his listing prospectus last year, Ant said it planned for one of its subsidiaries to become a financial holding company and house its licensed financial activities, such as asset management and consumer lending. Doing this at a group level will subject Ant to a jumble of regulations similar to those for banks, and will impact Ant’s growth and profitability.

The restructuring plan, which is still under consideration, could be finalized before China embarks on a week-long Chinese New Year holiday in mid-February, people familiar with the matter said.

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

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

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

Ant’s payment business and other financial services are subject to certain regulations, but the group as a whole has long been spared the stringent capital requirements and regulations governing banks, insurers and other traditional financial institutions.

In December, four Chinese regulators called Ant executives to a meeting demanding that the company correct what they believe were problems in its businesses. In a subsequent statement, Pan Gongsheng, a deputy governor of the PBOC, chided Ant for “despising” compliance and “involved in regulatory arbitration,” without providing specific details.

Mr. Pan said regulators made five demands on Ant, telling him to return to his base of payments, protect personal data in his credit business, establish a financial holding company, improve corporate governance and practice more disciplines in its securities and assets. management companies.

If all of Ant’s businesses were placed under a financial holding company, regulators would oversee all of its operations and eliminate the possibility of regulatory arbitrage, said one of those familiar with the plan.

The new structure will make it more difficult for Ant to shuffle its overall portfolio among its constituent units, which has allowed it to hide risks by shifting them to more lightly regulated parts of the conglomerate, said Eswar Prasad, a former head of the International. Monetary Fund. China division and professor of trade policy and economics at Cornell University.

“Financial regulators were concerned that Ant’s regulatory arbitrage had enabled the company to provide a rosy picture of its overall financial position and conceal the financial risks arising from its aggressive expansion into new industries,” he said.

Ant has formed a working group, led by Chief Executive Simon Hu, to work with regulators to correct its operations. The company has appointed a chief compliance officer to oversee day-to-day compliance and restructuring work.

Top Chinese financial regulators recently hinted that they are happy with the progress being made at Ant. On Tuesday, when asked at a virtual meeting of the World Economic Forum if Ant would revive his IPO, PBOC Gov. Yi Gang said that if laws and regulations are followed, “you will have the result.”

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

Ant is working on separating customer data currently shared between the business units to establish protocols common to banks, according to people familiar with the matter. Alipay has collected a wealth of data on the spending and payment patterns of many people and has used it to provide loans and sell investment products to its users. It is a major reason why the company has been able to grow rapidly and diversify its activities in recent years.

China’s new financial holding company rules, released last fall, apply to large conglomerates that have two or more financial companies. They took effect on November 1, and the companies involved have one year to submit applications to become a regulated financial holding company with the PBOC.

The new measures for financial holding companies include legal requirements for shareholders, management, sources and uses of financing, risk management and corporate governance. They also require the insertion of additional capital into financial subsidiaries when needed.

Implementing Ant’s overhaul could significantly limit the company’s sales and profit growth. Ant may also need to raise significant capital to meet regulatory requirements, and the company’s high valuation – which was based on its profitability and growth potential – could also take a hit. Ant has already started lowering the loan limits for individual users of its digital loan services, a sign that it is downsizing its business to comply with regulations.

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

Write to Jing Yang at [email protected]