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Ant Group's revamp to hit biggest revenue source as regulators nix cross-selling

Ant Group Co. Ltd.'s financial services business, which contributes more than 60% of its revenue, will likely take a significant hit as cross-selling to payments users will no longer be allowed under a restructuring plan pushed by the Chinese government on anti-monopoly grounds.

The restructuring plan, on which Chinese regulators have been working with the company since its mega IPO plan was abruptly halted in November 2020, also includes overhauling Ant's entire operation into a financial holding company and revamping its user data policy. The plan came days after parent company Alibaba Group Holding Ltd. was fined a record $2.8 billion, also on anticompetitive concerns.

"The biggest negative outcome could be the attempt to restrict the company's ability to create a virtuous cycle of financial services activities," said Sampath Sharma Nariyanuri, financial technology analyst at S&P Global Market Intelligence.

"Ant's monetization strategies largely hinge on cross-selling other financial services to its payments user base. With that coming under threat, Ant will likely scale down its financial services business, including its money market fund, to a level that may be acceptable to the regulatory authorities," Nariyanuri said.

Chinese technology giants, once seen as a rising threat to banks, have had to scale back their financial services ambitions after regulators tightened rules for them since last year. Ant was forced to pull its IPO two days before its scheduled twin debut in Shanghai and Hong Kong on "regulatory and disclosure concerns." Hours prior to the halt, the central bank and banking regulator proposed tighter restrictions on capital, licensing requirements, funding sources and business scope for the nation's online microlenders.

Expansion curtailed

Alipay, Ant's flagship online payments platform that is also the largest in China, was created by Alibaba in 2004 primarily to process payments for its own e-commerce platforms. Since then, the platform has expanded into processing third-party online, offline payments among merchants and individuals, as well as microlending and other third-party financial products.

In the six months ended June 2020, the latest data available ahead of Ant's scrapped IPO, the company's largest revenue source was online microlending, totaling 28.59 billion yuan, or 39.4% of its total revenue. Mobile payments came in second, totaling 26.01 billion yuan or 35.9% of the total. Online wealth management products generated 15.6% of revenue, while online insurance broking contributed 8.4% of the total.

Although details of the restructuring have yet to be unveiled, the plan points to a potential downsizing of Ant's lending, insurance and investing businesses, which form "a substantial part" of the company's income, Nariyanuri said.

Mitchell Kim, an analyst at SmartKarma, said the fate of its money market mutual fund Yu'ebao is uncertain due to its origins: Ant was unable to hold Alipay customer deposits without paying interest, so that money was instead channeled to the initial Yu'ebao fund. The fund, which has a minimum investment threshold of just 1.00 yuan, once surpassed JP Morgan Chase & Co. as the world's largest money market fund by assets under management in 2017, according to the Financial Times.

In addition, the Chinese government had previously asked all online lending platforms, including Ant, to back up at least 30% of their loans with their own capital. Kim said this policy will be the "greatest burden" for Ant, which said it deployed less than 3% of its capital for lending ahead of the halted IPO.

"This will limit Ant's ability to grow its loan portfolio size unless the company is willing to raise a lot of capital and finance 30% of its loan book," Kim added.

However, some think the impact may be transitory. Ant may initially face a "little bit of a drag" on its revenue and a slight increase in cost as it will be regulated more like a bank, said Zennon Kapron, director of fintech consulting firm Kapronasia. "I think longer term, it doesn't really change things too much for the company."

Data concerns

Another part of the revamp is to overhaul Ant's policy governing user data collection and usage. Ant said it would apply for a license to create a personal credit reporting company, without elaboration.

Under the restructuring plan, Ant is required to refrain from obtaining or "abusing" consumer data, based on the data minimization principle, said Shirley Ze Yu, a political economist and a fellow at Harvard Kennedy School's Ash Center.

"Data is the most valuable asset for Ant, and indeed for all tech companies. When Ant generates data on nearly a billion consumers in China, and from more consumers globally, data governance remains the gray area," Yu said.

There also needs to be a framework that clearly governs to what extent Ant has usage rights over the data, who owns the data and how exactly that data will be shared between companies and with the central bank, if at all, Yu added. The answer to these questions will not only apply to Ant, but to other big techs in China as well.

"China may request the data from Ant to be shared with the central bank and national credit agencies, and be used by all financial institutions," she said.

IPO plans

Despite the uncertainties on the operational front, analysts said the restructuring plan likely paves the way for the fintech giant to revisit its IPO plan. People's Bank of China Governor Yi Gang signaled that the IPO could push through once the company resolves its problems.

Ant, however, has yet to comment on any possible revival of its IPO, which had raised at least $34.4 billion from investors in November 2020 before it was canceled. If it had been successful, the IPO would have been the biggest on record.

"The news of restructuring shows the company's willingness to work with the government and points to wider room for ongoing conversations with the government about the company's varied interests in the financial services business," Nariyanuri said. "This is not the first time, and it probably won't be the last, that Ant has had to adjust its business model in response to regulation."

Yu added: "The restructuring, in a nutshell, means that Ant is now a financial company, not a technology company. Ant's push with corporate restructuring since 2017 to run itself as a technology company has failed."

As of April 13, US$1 was equivalent to 6.54 Chinese yuan.