Ant Group Co. is planning to become a financial holding company overseen by China’s central bank, responding to pressure to fully align with financial regulations, according to people familiar with the matter.
Chinese regulators recently told Ant, controlled by billionaire Jack Ma, to become a full-fledged financial holding company, subjecting it to stricter capital requirements, people said. Ant, in response, presented the authorities with a draft restructuring plan, they said.
The plan represents a significant turnaround for a digital payments juggernaut that has been trying in recent years to change its image as a financial services provider and transform itself into an internet technology company, which has helped drive high ratings. Before its highly successful initial public offering was canceled in November, Ant was on its way to going public with a valuation of $ 300 billion, well above the market capitalizations of the world’s largest banks.
Designating Ant in its entirety as a financial holding company was not previously envisioned by the company’s executives and shareholders. In his listing prospectus last year, Ant said he intended one of his subsidiaries to become a financial holding company and house its licensed financial businesses, such as asset management and consumer credit. Doing so at the group level will subject Ant to a tangle of regulations similar to those governing banks and will affect its growth and profitability.
The restructuring plan, still in deliberation, could be finalized before China goes on a weeklong Lunar New Year holiday in mid-February, people familiar with the matter said.
Any final plan will need the approval of the Financial Stability and Development Committee, a super-regulator chaired by Vice Premier Liu He, two people said.
An Ant spokesman declined to comment. The People’s Bank of China, the China Banking and Insurance Regulatory Commission and the State Council Information Office did not comment.
Ant has Alipay, a payment and lifestyle app with more than a billion users in China. It managed more than $ 17 trillion in digital payment transactions in the year through June 2020, originated short-term unsecured loans for about 500 million people and sells many insurance policies, mutual funds and other investment products.
Ant’s payments and other financial services businesses are subject to some regulations, but the group as a whole has long been spared the strict capital requirements and rules to which banks, insurance companies and other traditional financial institutions are subject.
Inside the Ant Group headquarters in Hangzhou, China, in October.
Photograph:
aly song / Reuters
In December, four Chinese regulators called Ant executives to a meeting and demanded that the company rectify what it considered problems in its business. In a later statement, Pan Gongsheng, a deputy governor of the PBOC, criticized Ant for “despising” regulatory compliance and “getting involved in regulatory arbitration”, without providing details.
Pan said that regulators set five requirements for Ant, telling it to return to its payment roots, safeguard personal data in its credit business, create a financial holding company, improve corporate governance and exercise more discipline in its securities and active. management business.
Placing all of Ant’s businesses under a financial holding would give regulators the oversight of all of its activities and eliminate the potential for regulatory arbitrage, according to a person familiar with the plan.
The new structure will make it more difficult for Ant to shuffle its overall portfolio between constituent units, allowing it to disguise the risks by transferring them to less regulated parts of the conglomerate, said Eswar Prasad, former head of the China International Monetary Fund Division and professor of commercial policy and economics at Cornell University.
“Financial regulators were concerned that Ant’s regulatory arbitrage had allowed the company to provide an optimistic picture of its overall financial position and to hide the financial risks generated by its aggressive expansion into new lines of business,” he said.
Ant formed a working group, led by Chief Executive Simon Hu, to work with regulators on how to rectify their business. The company has appointed a compliance officer to oversee day-to-day compliance and restructuring work.
Leading Chinese financial regulators recently suggested that they are happy with the progress being made at Ant. On Tuesday, when asked during a virtual meeting of the World Economic Forum whether Ant would revive its IPO, PBOC Governor Yi Gang said that if laws and regulations are followed, “you will get the result”.
He said consumers are largely satisfied with Alipay, but Ant has to resolve issues like data privacy complaints before it gets back on track.
Ant is working on segregating customer data that is currently shared by its business units to implement protocols that are common in banks, according to people familiar with the matter. Alipay has accumulated a treasure trove of data on spending habits and payment patterns for many people, and has used them to provide loans and sell investment products to its users. This is one of the main reasons why the company has managed to grow rapidly and diversify its business in recent years.
China’s new rules for financial holding companies, released last fall, apply to large conglomerates that have two or more financial companies. They went into effect on November 1 and the affected companies have one year to submit requests for regulated financial participation to the PBOC.
The new measures for financial holding 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 review is implemented, the company’s revenue and profit growth can be significantly reduced. Ant may also have to raise substantial capital to meet regulatory requirements, and the company’s high valuation – which was based on its profitability and growth potential – may also suffer. Ant has already decided to reduce lending limits for individual users of its digital lending services, a sign that it is reducing its business to comply with regulations.
It is unclear how the restructuring would affect Ant’s non-financial businesses, such as the development of blockchain technology, digital lifestyle services and artificial intelligence technology, areas that the company previously identified as growth drivers.
Write to Jing Yang at [email protected]
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