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

The plan is a significant turnaround by a digital payments youth who has been trying to reject his image as a financial services provider over the past few years and pursue it as an internet technology company, which has helped him achieve high valuations. Before ceasing its proceeds from the initial public offering in November, Ant was on track to move a valuation north of $ 300 billion, which was well above the market capitalizations of the world’s largest banks.

The designation of Ant as a whole as a financial holding company was not something that the executives and stakeholders had previously envisioned. Ant said in its listing prospectus last year that it intends to make one of its subsidiaries a financial holding company and will house its licensed financial businesses such as asset management and consumer loans. By doing so at the group level, Ant will be subject to similar regulations as banks, and this will affect its growth and profitability.

The people familiar with the matter could finalize the restructuring plan, which is still being considered, before China goes on a weekly lunar New Year holiday in mid-February.

Two of the people said that any final plan needed a signature from the Financial Stability and Development Committee, a super-regulator, chaired by Deputy Prime Minister Liu He.

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

Ant owns Alipay, a payment and lifestyle app with more than one billion users in China. It handled more than $ 17 billion in digital payment transactions during the year to June 2020, had unsecured short-term loans to about 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 strict capital requirements and rules to which banks, insurers and other traditional financial institutions are subject.

In December, four Chinese regulators summoned Ant managers to a meeting and demanded that the company correct what they believe are problems in its businesses. In a statement after that, Pan Gongsheng, a deputy governor of PBOC, confided in Ant because he despised compliance with regulations and had an arbitration regulation, without providing details.

Pan said regulators have made five demands on Ant, saying they need to return to its payment roots, protect personal data in their credit company, set up a financial holding company, improve corporate governance and create more disciplines in its securities and assets. exercise. management enterprises.

According to one of the people who know the plan, all of the Ant’s businesses under a financial holding company will oversee all of its activities and remove the potential for regulatory arbitrage.

The new structure will make it more difficult for Ant to move its total portfolio among its constituent units, which has made it possible to disguise risks by moving it to lighter regulated parts of the conglomerate, said Eswar Prasad, a former head of the International Monetary Fund, said. China Division and a Professor of Commercial Policy and Economics at Cornell University.

“Financial regulators were concerned that Ant’s regulatory arbitrage had enabled the company to give a rosy picture of its overall financial position and to conceal the financial risks posed by the aggressive expansion of new business worlds,” he said.

Ant formed a working group, led by Simon Hu, general manager, to work with regulators to rectify his affairs. The company has appointed a chief compliance officer to oversee the day-to-day compliance and restructuring work.

Top Chinese financial regulators have recently shown that they are happy with the progress made at Ant. On Tuesday, when asked during a virtual meeting of the World Economic Forum whether Ant would revive his IPO, PBOC Governor Yi Gang said that if you abide by laws and regulations, ‘you will have the result.’

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

Ant is separating customer data currently shared across its business units to set up protocols commonly found at banks, according to people familiar with the matter. Alipay has gathered a lot of information about many people’s spending habits and payment patterns and uses it to offer loans and sell investment products to users. This is an important reason why the company has been able to grow rapidly in recent years and diversify its business.

China’s new rules for financial holding companies, introduced last autumn, apply to large conglomerates that own two or more financial companies. It went into effect on November 1 and affected companies have one year to submit applications to become a regulated financial holding company with the PBOC.

The new measures for financial holding companies contain regulatory requirements with regard to shareholders, management, sources and uses of financing, risk management and corporate governance. They also need additional capital in financial subsidiaries where necessary.

If Ant’s refurbishment is applied, the company’s revenue and profit growth could be significantly curtailed. Ant may also have to raise significant capital to meet regulatory requirements, and the high valuation of the company, based on its profitability and growth potential, could also suffer. Ant has already moved to lower 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 will affect Ant’s non-financial businesses, such as the development of blockchain technology, digital lifestyle services and artificial intelligence technology, areas that the company has previously identified as growth operators.

Write to Jing Yang by [email protected]