May 21, 2018 / 4:12 AM / 7 months ago

Breakingviews - Ant Financial quacks like a bank

Security guards stand in front of an inflated Rubber Duck by Dutch conceptual artist Florentijn Hofman floating on a lake at the Century Park in Shanghai October 23, 2014. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - Ant Financial walks like a bank and quacks like one, too. As it lines up new investors ready to value it at some $150 billion, the Alibaba-affiliated outfit is flipping the fintech pitch and describing itself instead as techfin. Ant Financial has become part of the fabric of Chinese finance, though. Beijing would be wise to regulate accordingly.

The Hangzhou-based company, controlled by Alibaba (BABA.N) boss Jack Ma, operates the hugely popular Alipay. It is also touting fast-growing technology services to prospective backers. Ant uses artificial intelligence and data analysis to help financial institutions flogging their wares on the app. Insurers, for example, can settle property claims at lightning speed with Ant’s assistance. Related fees account for about a third of revenue, a proportion that could increase quickly.

In that sense, Ant resembles e-commerce titan Alibaba, matching buyers and sellers. And yet the company has amassed over 600 million users and a whopping 2.2 trillion yuan ($345 billion) of assets under management, two-thirds of which sit in Yu’e Bao, investing idle cash from Alipay wallets in short-term securities. Size alone may not be a determining regulatory factor. BlackRock (BLK.N), after all, avoided being designated systemically important by U.S. authorities despite now managing over $6 trillion.

Ant’s financial circle is expanding, though. In addition to accounting for more than half of China’s mobile payments market, it offers consumer loans, credit scoring and even owns a 30 percent stake in an online bank. Credit rating agency Fitch opined in December that Yu’e Bao has “materially weaker” credit quality and “significantly weaker” liquidity and asset quality than its closest peer, a fund run by JPMorgan (JPM.N). And though Ant doesn’t manage Yu’e Bao, it controls the company that does. A shutdown of Alipay for any stretch of time for technological or other reasons might be scary.

Watchdogs are already clamping down on asset-backed securities used by online micro-lenders, and have ordered money-market funds to set aside bad debt provisions. The central bank is mulling new rules for financial holding companies, too. If Ant is deemed to be one, it might lead to capital requirements and other restrictions that slow the group’s breakneck growth. It may be a tech company to investors, but to regulators it could be a duck.

Breakingviews

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