Jack Ma’s Ant plans major overhaul in response to Chinese pressure

The plan represents a significant turnaround from a digital payments giant that in recent years has tried to shed its image as a financial services provider and transform itself into an internet technology company, which has helped it to get high ratings. Prior to the cancellation of its successful IPO in November, Ant was on track to go public with a valuation north of $ 300 billion, well above the market caps of the world’s largest banks.

Designating Ant in its entirety as a financial holding company was not something previously envisioned by the management and stakeholders of the company. In its listing prospectus last year, Ant said it intended for one of its subsidiaries to become a financial holding company and host its licensed financial activities such as asset management and lending. the consumption. Doing this at the group level will subject Ant to a thicket of regulations similar to those that govern banks, and affect its growth and profitability.

The restructuring plan, still under deliberation, could be finalized before China spends a weeklong Lunar New Year holiday in mid-February, people familiar with the matter said.

Any final plan will need to be approved by the Financial Stability and Development Committee, a super-regulator chaired by Vice Premier Liu He, two of the people said.

A spokesperson for Ant 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 owns Alipay, a payments and lifestyle app with over 1 billion users in China. It processed over $ 17 trillion in digital payment transactions in the year to June 2020, made short-term unsecured loans to around 500 million people, and sells numerous insurance policies, mutual funds and other investment products.

Ant’s payments business and other financial services have been subject to certain regulations, but the group as a whole has long been spared from the strict capital requirements and rules to which banks, insurers and other traditional financial institutions. were submitted.

In December, four Chinese regulators called Ant executives to a meeting and asked the company to rectify what they considered to be problems with its business. In a subsequent statement, Pan Gongsheng, a deputy governor of the PBOC, berated Ant for “disregarding” regulatory compliance and “engaging in regulatory arbitration”, without providing details.

Mr Pan said regulators made five demands for Ant, telling him to go back to his payment roots, protect personal data in his lending business, create a financial holding company, improve corporate governance, company and exercise more disciplines in its titles and assets. management companies.

Placing all of Ant’s activities under a financial holding company would give regulators oversight of all of Ant’s activities and eliminate the potential for regulatory arbitrage, according to one of those familiar with the plan.

The new structure will make it more difficult for Ant to reorganize its overall portfolio among its constituent units, which has allowed it to disguise risks by moving them to more lightly regulated parts of the conglomerate, said Eswar Prasad, former head of the International Monetary Fund. . China Division and Professor of Trade Policy and Economics at Cornell University.

“Financial regulators feared that Ant’s regulatory arbitrage had enabled the company to give an optimistic picture of its overall financial situation and to hide the financial risks engendered by its aggressive expansion into new lines of business” , did he declare.

Ant has formed a task force, led by chief executive Simon Hu, to work with regulators on how to rectify its activities. The company has appointed a chief compliance officer to oversee the day-to-day compliance and restructuring work.

China’s major financial regulators recently hinted that they were happy with the progress made at Ant. When asked at a virtual World Economic Forum meeting on Tuesday whether Ant would relaunch its IPO, PBOC Governor Yi Gang said that if the laws and regulations are followed, “you will get the result”.

He said consumers are generally happy with Alipay, but Ant needs to resolve issues like data privacy complaints before getting back on track.

Ant is working on separating customer data that is currently shared between its business units in order to implement common protocols in banks, according to people familiar with the matter. Alipay has amassed a wealth of data on the spending habits and payment methods of many people, and used it to provide loans and sell investment products to its users. This is one of the main reasons why the company has been able to grow rapidly and diversify its activities in recent years.

China’s new rules for financial holding companies, released last fall, apply to large conglomerates owning two or more financial firms. They entered into force on November 1 and the companies concerned have one year to submit applications to become a regulated financial holding company to the PBOC.

The new measures for financial holding companies include regulatory requirements regarding shareholders, management, sources and uses of funding, risk management and corporate governance. They also require the injection of additional capital into the financial subsidiaries whenever necessary.

If Ant’s overhaul is implemented, the company’s revenue and profit growth could 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 profitability and growth potential – could also suffer. Ant has already decided to lower borrowing limits for individual users of its digital lending services, a sign that it is reducing its activities to comply with regulations.

It’s 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 the company has previously identified as drivers. growth.

Write to Jing Yang at [email protected]