Ant Group’s restructuring marks a significant shift in how large fintech companies are expected to operate under evolving financial regulations. After its planned initial public offering was halted, the company began transforming from a technology platform that primarily facilitated lending into a regulated financial holding company with greater responsibility for the loans it originates. The transition reflects regulators’ growing emphasis on ensuring that fintech firms assume more direct accountability for the financial risks they create.
By establishing a licensed consumer finance company, Ant is positioning itself for long-term growth while aligning with China’s new regulatory framework. The restructuring allows the company to continue offering popular consumer lending products while adopting a business model that places greater emphasis on capital requirements, risk management, and prudent lending practices.
When Ant Financial pulled back its IPO plans in November 2020, investors were in a state of frenzy, as the $34 billion offering indicated that Jack Ma was out of compliance with Beijing’s long-term goals. However, halfway into 2021, the firm comes back to the table, this time as a financial holding company. In late May, according to the WSJ, “China’s banking and insurance regulator said Thursday that it had approved an application by Ant Group Co. to set up a consumer-finance company, the first milestone in the financial-technology giant’s restructuring.”
- The company, Chongqing Ant Consumer Finance Co., is licensed to conduct consumer lending and other operations. It will hold Ant credit services Huabei and Jiebei, used by almost half a billion people in China.
- Huabei, which means “just spend,” functions like a virtual credit card that people can use to make purchases online and in stores. Jiebei, which means “just borrow,” provides borrowers with unsecured loans of up to 12 months that are typically repaid in installments.
- One of the areas that drew Beijing’s ire was Ant’s colossal consumer-lending business. At the end of June last year, people who had borrowed money from Ant’s platforms had a total of the equivalent of $271.1 billion in outstanding loans.
Ant Financial mainly originated loans for other banks. Rather than keeping debt on its balance sheet, Ant uses partners who pay a fee. What is interesting here is that Ant Financial feeds itself- it arranges loans to finance items sold on its retail commerce platform.
- Regulators frowned upon Ant’s activities because they encouraged some people to borrow and spend beyond their means and created risks for the banks that supplied funds for the loans.
As a result, the financing component worked well for Ant. It kept commerce flowing, banks comfortable, and Ant in the black with increased sales. But Chinese regulators wonder if Ant might be too aggressive in its cooperative lending strategies.
- Ant said Thursday that under the guidance of regulators, it would work with the other shareholders of Chongqing Ant Consumer Finance “to serve the needs of consumers, and to continue enhancing the quality of financial services and risk management capabilities” on Ant’s platforms.
- The new company will fundamentally change how Ant conducts consumer lending. In the next six months, Ant intends to transition from its current model of operating a microlending platform into a consumer-finance business with a more diverse range of funding options.
The shift means Ant Financials will now bear balance sheet risk.
- Setting up the new consumer-finance company means Ant will end a practice that for years enabled it to avoid bearing default risks for the consumer loans it originated with banks. Under that previous model, Ant’s proprietary consumer data and risk models were used by banks, which provided the funding for loans and bore the risk of losses if people didn’t repay their debts. As a result, Ant earned a portion of the loans’ interest income.
Here in the U.S., we call that having “skin in the game.”
- There could also be some loans that the new company makes together with banks. Under such co-lending arrangements, the consumer-finance firm will supply at least 30% of the funds—and bear the corresponding default risk—and banks will provide the remainder, in compliance with new Chinese regulations, the person added. These loans would be Huabei or Jiebei offerings, according to the person.
Having skin in the game slows down the lending process. U.S. regulators have a similar requirement for Asset-Backed Securitization. Big credit card banks like American Express, Bank of America, Capital One, Discover, Chase, and Citi originate credit cards. They sell their portfolios to private investors, primarily large investment companies like the California Teacher’s Retirement Fund. The retirement fund requires investments that yield better than government securities. The banks generate a fee from the investors for servicing the account, but the risk is off the bank’s balance sheet. The skin in the game comes in because the financial institution cannot sell all the portfolios to the ABS trust. The financial institution must keep at least 10% of the receivable on the books.
Ant certainly knows how to scale a business. This time, with a broader license in lending, expect to see rapid growth. And for Ant, a little bit of balance sheet risk never hurts- when it brings in billions.
Ant Group’s transition to a financial holding company illustrates how regulatory oversight is reshaping the global fintech industry. While the new structure requires the company to retain more credit risk on its balance sheet, it also creates a more sustainable foundation for future expansion by aligning incentives between lenders, investors, and regulators.
As fintech firms continue expanding beyond payments into lending and other financial services, maintaining appropriate “skin in the game” will likely become a standard expectation across global markets. Companies that successfully balance innovation with sound risk management will be best positioned to earn regulatory confidence while continuing to grow.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
