Ant Financial’s Mammoth Scale Unsettles Chinese Banks

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The roaring growth of Alibaba’s fintech spinoff has caused alarm in China’s banking sector as well as consternation for the country’s financial regulators.

Ant Financial Services Group, the online payments platform launched by Alibaba founder Jack Ma, processed over USD$8 trillion in transactions last year, equal to over twice Germany’s GDP, while reaping $2 billion in pre-tax profits on approximately $10 billion in revenue.

Its success in the Chinese mobile payments market has helped to make Ant Financial the world’s biggest fintech concern, and its money market fund Yu’e Bao the largest on the planet.

The Wall Street Journal reports that this roaring success has drawn the ire of Chinese banks and financial regulators, who are concerned about Ant Financial’s size as well as its impact upon traditional lending.

Banks complain that Ant Financial’s success has deprived them of deposits and forced them to pay higher interest rates, with one commentator referring to Yu’e Bao as a “vampire sucking blood from banks.”

Following its launch in June 2013 Yu’e Bao rapidly grew into the world’s biggest money market fund by providing the more than 620-million users of Alipay – the payments platform that lies the core of Ant Financial, with yields several points higher than short-term bank deposits on the billions of dollars in funds held in escrow accounts for transactions on Taobao.

The fund was capable of providing better returns to customers by channelling funds to products deemed by regulators to be too risky for China’s traditional banks.

Ma Weihua, chair of Wing Lung Bank, said in 2014 that Yu’e Bao’s success was a major blow for banks as it deprived them of savings deposits.

Alibaba founder Jack Ma wasn’t coy about his ambitions either, declaring in December 2008 that banks could do more to support small business, and that “if the banks do not change, we will change the banks.”

Banks led by Industrial and Commercial Bank of China responded to the immense success of Yu’e Bao with heavy curbs on the amount that Alipay users were permitted to withdraw on a single occasion.

China’s financial regulators have also adopted measures to curb the rampant expansion and scope of Ant Financial, putting pressure on it to ease the growth of Yu’e Bao, while also launching new rules that compel money-market funds to reduce their holdings of assets that are hard to sell.

The biggest blow for non-bank payments companies in China has been the launch of new rules requiring that they place escrow funds in non-interest-bearing bank accounts by 2019, which will prevent them from using such funds for investment purposes.

Analysts expect the move to severely undermine Ant’s revenues from online payment services, which accounted for 65% of revenue in 2016.

According to sources regulators are also mooting the possibility of designating Ant Financial as a financial holding company, which would compel it to satisfy capital requirements akin to those for banks.

In its defence Ant has said that it primarily serves as a platform that facilitates lending and risk-reduction by banks, as opposed to providing funds to borrowers sourced from its own balance sheet.

“I don’t think banks see us as disrupter,” said Ant general counsel Chen Leiming. “We complement them and are helping them reach more customers…[regulators] understand what we are doing and they are supportive of our efforts.”

Ant Financial nonetheless appears to be changing tack in response to the crackdown by Chinese regulators, seeking to position itself as a tech service provider or “lifestyle platform” as opposed to a financial company.

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