What Will Ant Group Look Like A Year From Now?

What’s next for Ant Group – and by extension, Jack Ma? 

In China, the battle of the regulators versus FinTech behemoth has seemingly been joined. 

To that end, Howard Yu, LEGO Professor of Management and Innovation and director of IMD’s signature program, Advanced Management Program (AMP), told Karen Webster that a restructuring may be on the horizon.   

As reported earlier this month, the Shanghai Stock Exchange delayed Ant Group’s record initial public offering (IPO).  That delay came following controlling shareholder Jack Ma’s meeting with Chinese regulators.  Several regulatory agencies — the People’s Bank of China (PBOC), the Insurance Regulatory Commission, the Securities Regulatory Commission and the State Administration of Foreign Exchange — summoned Ma to answer questions.   

And when an IPO suspension comes from the top down, reportedly (as in, from Chinese President Xi Jinping), it triggers what might be a long, lingering look at Ant — what it does, how it does it, and the risks involved. 

Some existential questions arise: What’s next, and can Ant survive the scrutiny unscathed, or will the company be all but unrecognizable a year from now? 

There may have been a bit of a bead drawn on Jack Ma after he reportedly said at a conference earlier this year that Chinese banks are akin to “pawn shops” and criticized existing regulatory frameworks. 

But at a high level, noted Yu, regulators are concerned with Ant’s business model — so much so that they felt compelled to put the brakes on the IPO roughly 48 hours before the shares were set to list.   

Ant has had a noteworthy business model so far, noted Wu — and the company’s implied valuation coming to market reflected that.  In fact, he told Webster, Ant was and is more profitable than Facebook was when that tech giant went public in 2012. 

But it’s a model, Yu said, that shows some level of fundamental risk, especially with its outsized presence in consumer loans and extension of credit to the unbanked population.

“Any FinTech disruptor, when it becomes so big, represents systemic risk,” he told Webster. Ant’s highly profitable activities — where it doesn’t hold its microloans but repackages them and taps the public market to sell those loans — harken back to the subprime mortgage model that proved the tipping point for the Great Recession more than a decade ago. 

As noted by PYMNTS last month, per Ant’s listing filings, in its CreditTech segment, which is geared to SMB credit, Ant extends loans backed by 100 financial institution (FI) partners – 98 percent of which the firm says are underwritten or securitized. Filings indicate that CreditTech was responsible for 39.4 percent of sales for the six months through June 30 of this year. 

One key area of consideration: As Ant underwrites loans, it relies not on human credit officers but on algorithms.  The long, wide boom enjoyed by China’s rapidly expanding economy has shaped the data that feed into those algorithms, Wu said — which means there’s no downturn in the model, really, and certainly no so-called Black Swan events that would help gauge risk more accurately.  Given Ant’s reach, and arguably skewed data, Wu said, systemic risk could spread throughout the entire country. 

Recounting the slew of business lines in which Ant has presence, he stated that offering loans to the unbanked represents a societal good — bringing financial stability to people who otherwise could not open checking accounts or get credit cards even through traditional state-owned banks.  But beyond the direct-to-consumer business, said Yu, there’s a wealth of B2B and other offerings such as helping banks to underwrite loans.  In the case of the latter segments, the algorithm rules all. Just as, hypothetically, we’ve ditched paper maps for the GPS, so, too have companies and lenders relied on Ant for guidance.  

“The moment you give them an automatic transaction scorecard or credit scorecard, then the need of human intervention becomes less,” he told Webster. The regional bank manager is apt to rely on the calculations and computations of Ant above all else.  

‘Tall Tree’ Worth a Second Look? 

As such, Yu contended, from a policy standpoint, “it makes sense to take a second look.”  That second look may lead to a revamp of the company itself, he projected, where Ant would not have such an umbrella, spanning payments, wealth management and consumer loans — arguably everything under the proverbial sun. 

Yu said the timing of the IPO suspension — again, mere hours before launch — shows that regulators may have been hesitant, or perhaps even did not feel empowered, to take on a national hero like Ma and his behemoth of a corporate creation.  The IPO delay also shows, as Yu said, a stark difference in how companies are viewed in the West as opposed to China.  In the latter country, he said, businesses are viewed by regulators through the prism of what’s best for the national interest, rather than shareholder return. 

It may be worth pointing to a Chinese proverb: When the tree gets too tall, it attracts the wind. 

And Ant, with hundreds of millions of users and trillions of yuan in loans, has certainly grown tall.   

What might a restructuring look like? 

What Lies Ahead 

No one knows for sure what will happen, Yu said, but there may be room for some competitors to emerge while regulators ponder what might be done with Ant. (He mentioned Tencent as one financial services peer/competitor of scale).  He pointed to IMD’s own “leap readiness” index, which measures the “readiness” of firms to meet the future with tech-driven innovation.  Traditional banks are unlikely to be prime competition, but platform/digital first companies (without too much vertical integration, so they don’t get too big) may see opportunity.  

Digital infrastructure will be key for those would-be competitors, he predicted, as open APIs are becoming more important for companies that serve consumers across a range of offerings. By way of example, he noted that Alibaba’s own customers, when traveling abroad, interact with APIs to conduct commerce with merchants in other countries.

“You still have just one single lock-in, but then the infrastructure on the backend, the data migration and elsewhere is done through API,” he said.  

Looking out into 2021, Yu predicted that Ant may indeed undergo a restructuring.  

“This is a way to avoid systemic risk,” he said. And as a result, if and when Ant does indeed go public, the valuation will not be as high, because profitability may take a hit — for a while, at least.  There are some tailwinds in place to help margins and consumer lending going forward as life, discretionary spending and even travel return to normal.  

“The current saga as it unfolded is consistent with the values of Chinese society,” Yu told Webster, adding, “In the end, if Ant Group becomes the biggest financial institution in the world, from a policy maker’s perspective, what does it serve beyond the social bragging?”