China wont stop slicing and dicing its fintech giants

September 14, 2021 â€" 11.58am

Step by step, slice by slice, the Chinese authorities appear determined to carve up and neuter what was once the most powerful fintech in the world, Jack Ma’s Ant Group.

Having pulled the plug on Ant’s planned $US37 billion ($50.2 billion) initial public offering last year, the authorities have been systematically transforming Ant from an unregulated tech platform for financial services into a series of state-supervised and tightly-regulated units forced to operate at arm’s length that constrain its ability to exploit its most valuable asset, its users’ data.

Ant Group is an arm of the sprawling empire of Alibaba founder Jack Ma.Credit:AP

Ant and its parent, Alibaba, aren’t being singled out. They are part of a sweeping crackdown on fintechs, and big tech more broadly, this year that includes Alibaba’s great rival, Tencent Holdings and its WeChat Pay. Between them Ant and WeChat Pay have close to two billion users.

The dramatic assault on fintechs appears partly motivated by a desire to reign in the power and wealth of the billionaires who created them; partly as a result of the near-monopoly power and the network effects within the big techs that entrenches it; partly because of concerns about private dominance of Chinese citizen’s data and partly because the fintechs have operated outside the official payments system and state controls.

The most recent assault came on Monday, with the Financial Times reporting that the authorities, having previously ordered Ant Group to separate its lending businesses from its payments platform and introduce external shareholders, now wants those businesses to have their own unrelated apps.

Ant’s two financial apps â€" Huabei, similar to a credit card, and Jiebei, a microcredit provider â€"had been generating about 40 per cent of its revenues and were the fastest-growing units in the group.
The authorities want them to hand over their users’ data â€" the data they use to make the lending decisions that supported Ant’s 10 per cent share of all unsecured consumer loans made in China last year â€" to a new credit-scoring joint venture majority owned by state-owned entities.

Ant will no longer be able to evaluate creditworthiness itself, with the new joint venture fulfilling that role. The apps will simply be originators and processors of the credit but the decision-making will lie within the new joint venture and its majority state-owned shareholders, the biggest of which will be, peculiarly, the Zhejiang Tourism Investment Group.

The latest move to dismember Ant came after it was called in by the authorities in April and told it had to cut the “improper connections” between Alipay and its other financial products to stop embedding credit decisions in its payment platform.

Earlier this year the authorities had directed Alibaba and Tencent to set up new holding companies for their financial services that could be supervised and regulated like more conventional financial institutions.

Beijing’s concern about the growth and power of the big fintechs and the billionaire entrepreneurs behind them is multi-faceted but has some common themes with the broader crackdown on tech companies.

The authorities are concerned about dominance and market power and the way the companies like Ant, or ride-sharing giant Didi and other big tech companies with near-monopoly positions, have leveraged their user data while resisting the efforts of a state obsessed with knowing what its citizens are doing to get access to that data.

The head of the Bank for International Settlements’ innovation hub, Benoît CÅ"uré last week echoed the concerns of the Chinese authorities when he said the growing footprint of big techs in finances raises market power and privacy issues and challenges current regulatory approaches.Credit:Bloomberg

They are also, concerned, moreover, about the growth of these privately-owned payments networks and credit providers for their ability to control China’s financial system. Ant and WeChat Pay have effectively built digital payments systems using what could be regarded as their own digital currencies.

Their growth could explain why China has been fast-tracking the development of a digital yuan even as it has clamped down on the big fintechs. At next year’s Winter Olympics in Beijing, the organisers are hoping to embed payments functions in gloves and clothing.

While it is unlikely that other governments and their regulators could or would adopt such a draconian approach to the perceived threats posed to their systems by the growth of fintechs and digital currencies, those threats are increasingly front-of-mind for authorities elsewhere as fintechs nibble away at their payments systems and cryptocurrencies and decentralised finance platforms gain increasing acceptance.

Whether it’s the efforts by the banks here to convince their regulators and the government to force companies like Apple to open up access to their digital wallets and apps or the continuing research by central banks into their own cryptocurrencies, there’s now a sense of urgency within Western economies to respond to the growth of the fintech sector.

The authorities are concerned about dominance and market power and the way the companies like Ant, or ride-sharing giant Didi and other big tech companies with near-monopoly positions, have leveraged their user data while resisting the efforts of a state obsessed with knowing what its citizens are doing to get access to that data.

In a speech last week, the head of the Bank for International Settlements’ innovation hub, Benoît CÅ"uré, essentially echoed the concerns of the Chinese authorities when he said the growing footprint of big techs in finances raises market power and privacy issues and challenges current regulatory approaches. The time had passed, he said, for central banks to “get going.”

The BIS has been advocating an acceleration of efforts by the world’s central banks to develop their own digital currencies to, among other benefits, maintain democratic control of currencies. It would take years, however, for central bank-issued digital currencies to be rolled out while “stablecoins and cryptoassets are already here.” This made it even more urgent that central banks should start working on the “nitty gritty” of their design.

The Reserve Bank, with three other central banks, is working with the BIS to develop shared platforms for cross-border transactions using multiple digital currencies as part of that ambition of developing the “nitty gritty” elements of the infrastructure required to enable central bank digital currencies to be deployed internationally.

China is responding to the perceived threat to control of its own financial system posed by Alibaba, Tencent and other fintechs. Elsewhere, it is Facebook, Apple, Google, Amazon and bitcoin and other fintechs and crypto assets that are invoking similar concerns, if not yet decisive responses.

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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.

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