Jack Ma’s group Ant may survive this bump but no longer be a super unicorn

The future of Ant Group remains in suspense after its dramatic disgrace. Regulators appear to have stopped dismantling it and the company is considering a transition to a financial holding company, ready to be regulated as a bank. It will be hard. What could Ant ultimately look like?

Banking-type businesses do not require technology-type assessments. Unless, of course, you’re in China’s booming consumer credit market, which is expected to grow to 3 trillion yuan ($ 464 billion) in volume over the next four years. This is where the demand for credit is and this is where Ant’s reach is. More importantly, state planners attempt to generate domestic demand and supply, in accordance with their so-called dual circulation strategy. For this to work, credit will need to be disbursed effectively to households.

Beijing knows it too. Growth in disposable income has boosted consumption growth for most of the past decade, but has slowed. This means that the authorities need another way to keep its economy running. In 2019, the number of consumer credit customers reached nearly 130 million, up more than 50% from the previous year. The state also knows it’s good for the economy. The data shows a growing correlation between the growth of consumer loans and retail sales in the country. Ant could potentially play an even bigger role here than she already does, with more skin in the game.

Over the past year, the government has encouraged the growth of consumer credit companies as well as existing units of banks that deal in the business. Ping An Insurance (Group) Co. of China, one of the largest insurance groups, has received approval for a new consumer finance company, as has China Construction Bank Corp, one of the largest lenders in terms of assets. The banking regulator has also eased restrictions on these lenders and broadened funding channels by allowing them to raise different types of capital, including bonds that meet Tier 2 capital standards.

Ant had clung to the trend. In August last year, it took a 50% stake in a new consumer finance company formed with Nanyang Commercial Bank Ltd., battery maker Contemporary Amperex Technology Co., and others. The banking regulator approved it the following month.

To get back into the good graces of the government, Ant could assure authorities that it will help them and not hinder them. For example, the company’s Zhima credit rating system could dilute concerns about banks taking risky loans and, in the larger framework, align with the government’s goal of protecting household portfolios.

Returning to a much more clearly defined financial services player and moving away from the fintech giant’s hazy operations won’t be too difficult for Ant. The difficult part is the commitment of the capital. But as a consumer finance company, Ant could raise capital through deposits from its domestic shareholders. It would also be allowed to borrow from banks or issue financial bonds. Many Chinese licensed consumer credit companies have commercial banks as lenders.

That probably won’t bring Ant back to his super-unicorn ratings. However, a stronger business model, less reliant on low acquisition costs and additional business, can actually survive alongside Ant’s more established payments business.

Consider what happened to LendingClub Corp, one of the largest fintech consumer lending platforms in the United States. The company started out as a marketplace for borrowers and lenders, hoping to disrupt the banking system. Six years later, he bought a bank. This provides both cheaper funding for LendingClub and more clarity for regulators, who approved the decision. The stock has since exploded.

From market forces in the United States to regulators in China, there appears to be a convergence on the place of large fintech players in financial systems and the purpose they serve.

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