I reported last week Jack Ma’s rant at the banking industry as having Basel Accords created by “an old people’s club” and that banks have a “pawnshop” mentality. I said that I agree with his sentiment – which I do – but it ain’t what you say, it’s the way that you say it and he said it wrong.
Just before the Ant Group IPO was meant to go ahead tomorrow, the Chinese Shanghai Exchange said that there were too many issues and would postpone the listing. This is when there’s almost $3 trillion of investor demand for the shares, with many people borrowing from mum, dad, sister, brother, aunt and uncle to get a stake in the business. This would have valued the firm’s 11% sale at near $35 billion, the biggest IPO in history.
Now, it’s postponed or, possibly, cancelled.
So, what happened?
Originally due to IPO a few years ago, the company managed to get its listing approved two weeks ago and was all set for the green light tomorrow. Then Mr. Ma, who has a habit of being very quotable, made some quotable quotes that have gotten him into trouble.
This was when the Bund Summit took place in Shanghai and Jack Ma gave a speech. He made some valid insights about how regulations focus too much on risk and not enough on development. I blogged about his comments here and got some pushback about how I’m too much of a fan of communism. I’m not but, as I made clear, I’m a fan of technological innovation and Jack Ma’s companies Alibaba and Ant Group understand this big time. However, like many, they don’t understand the rules and nuances of regulation and risk.
From The Financial Times, October 25:
“The Basel Accords are like an old people’s club” … finance should rely less on big banks and more on an ecosystem of “lakes, ponds, streams and brooks” that carry capital into the different corners of economy … escape this “pawnshop” mentality of banks taking collateral for loans and towards credit-ratings based on big data.
That would get the banks upset and is why I wrote a blog about it, as I thought the comments were great, but maybe a little bit in the face of the authorities. In fact it did as the most telling comment Jack Ma made, looking back, was:
“We shouldn’t use the way to manage a train station to regulate an airport. We cannot regulate the future with yesterday’s means.”
And it is not for the arrogance of his statements that Jack was hauled in front of the People’s Bank of China (PBoC), the central bank, and a bunch of other authorities over the last weekend, however. There’s a way to say something and a way to say something diplomatically. It ain’t what you say, it’s the way that you say it, and he often says it in a soundbite fashion.
From Caixin Global:
Ma’s criticism of the Basel Accords is reasonable to some extent. Zeng Gang, a deputy director of the National Institution for Finance and Development, a government-linked think tank, told Caixin previously that the Basel Accords use traditional risk measurement measures and historical data that fit economies that are more mature and more stable. As the digital finance models used by Ant Group and Tencent Holdings Ltd. have not been included in those risk measurement standards, oversight based on the Basel Accords may not be a good match. In the long run, it will be necessary to make changes to financial regulations. But if regulators easily loosen or roll back standards that have evolved over many years, they may trigger tremendous systemic risks, Zeng said.
But his understanding of risk management and direct attack on the regulators is where Jack got his message wrong. More from Caixin Global:
Although some points in his speech may make sense, he made many mistakes in terms of his ideas about financial innovation and regulation. Innovation comes with inherent risks. Regulation is necessary because of externalities: financial institutions manage others’ money. So the point of regulation is to keep risks controllable. Regulators should ensure no institution’s reckless growth could pose a risk to the entire system through funding chains. Without effective regulations, financial entrepreneurs can reap all the benefits from innovations while society bears the risks …
In reality, Ant Group has benefited greatly from regulatory arbitrage. For many years, the company has not been subject to the same capital adequacy and leverage requirements as traditional financial institutions, and it has launched businesses that traditional financial institutions are not allowed to …
Easy credit giving rise to increasing household debt has drawn concern from experts and regulators. Zhou Xiaochuan, the former central bank governor, said at the summit that some young people borrow and spend too much. Zou Jiayi, a vice finance minister, said that authorities should prevent fintech companies from enabling excessive consumption of financial services.
Caixin Global's key comment is this one:
Ma’s speech shows that he neglects how China’s current financial system transitioned from its origins in the planned economy to the new market economy. As an influential internet finance institution, Ant Group should have a basic understanding and respect for the principles, ideas and history of financial regulation.
So, it’s not surprising that the naughty little billionaire was asked to explain himself, along with Ant Group’s Chairman Eric Jing and CEO Simon Hu. They were ordered to come and meet the PBoC, the China Banking and Insurance Regulatory Commission, the Securities Regulatory Commission and the State Administration of Foreign Exchange for “regulatory interviews” over the weekend. The interviews were described as yuetan, which generally indicates a dressing down by authorities. This was followed by yesterday’s shock announcement that the Ant Group IPO is being postponed.
From The Financial Times
The Shanghai stock exchange said in a statement that Mr Ma, Ant’s founder, had been called in for “supervisory interviews” and there had been “other major issues”, including changes in “the financial technology regulatory environment”. “This material event may cause your company to fail to meet the issuance and listing conditions or information disclosure requirements,” the exchange said. “Our exchange has decided to postpone the listing of your company.” It told Ant and its underwriters to make an announcement about the suspension.
In particular, loans and credit exposures are viewed as an issue in the listing.
The risk that Ant poses to the financial system is that it acts like a financial institution but isn’t regulated like one. Ant runs China’s ubiquitous payment app, Alipay, and facilitates investments for its customers’ savings, sells insurance and originates short-term loans. Ant provides just a small amount of the money it lends. The bulk of the funds come from more than 100 commercial banks that it has partnered with and from the sale of securities. Ant collects fees for facilitating the transactions.
However, that’s where regulators think the risks come in: Ant takes business away from traditional lenders and leaves them with the credit risk from both consumer and small-business loans. Big state-owned banks, traditionally a powerful lobbying force in China, also increasingly see Mr. Ma’s big-tech invention as a threat to their own businesses. They argue that Ant hasn’t been required to abide by the tough banking regulations on capital and leverage that they face.
Ant’s credit unit contributed close to 40% of the group’s revenue in the first half of the year … Ant’s consumer lending balance was 1.7 trillion yuan ($254 billion) as of the end of June, accounting for 21% of all short-term consumer loans issued by Chinese deposit-taking financial institutions.
Beijing has become more uncomfortable with banks heavily using micro-lenders or third-party technology platforms like Ant for underwriting consumer loans, amid fears of rising defaults and deteriorating asset quality in a pandemic-hit economy. Furthermore, Ant Group only covers 2% of the total loan amount and most banks would need to cover a minimum 30%.
More from Reuters:
China’s central bank and banking regulator separately published draft micro-lending rules on Monday which seek to increase the bar for micro-lenders to be able to provide online loans directly to consumers or jointly with banks, while limiting the amount they can lend.
The draft, open for public feedback until Dec. 2, requires small online lenders to provide at least 30% of any loan they fund jointly with banks, which is widely considered to be a key rule that will hurt the profitability of Ant’s current business model.
Only 2% of the 1.7 trillion yuan consumer loans Ant facilitated were on its balance sheet as of the end of June, its prospectus showed. The company takes an average 30%-40% cut of the interest on loans it facilitates, analysts estimate, without bearing such products’ credit risks.
The new lending regulations are interesting:
Tightened rules. Fintech companies must now have:
- a minimum capital of RMB1bn (was RMB50m). Nationwide lenders need RMB5bn capital;
- fintech must fund at least 30% of every single loan (none before);
- leverage is capped at 16-17x of capital;
- loans to individuals cannot exceed a) RMB300K or b) one-third of average annual income in the past 3 years.
- corporate loans cannot exceed RMB1m.
- Why are regulators doing this? This is aimed to curb excessive lending to consumers who cannot afford it. It also prevents fintech from taking on too much leverage and have `skin-in-the-game' by making them fork out 30% of the loans. Currently fintech are taking on very high leverage while microlending rules are lax.
- How will this impact Ant? IPO has been suspended. Ant has no problems meeting the capital requirements, but full compliance to tighter lending rules will require an extensive overhaul, which may take a while. An alternative is to shift from co-lending to loan facilitations – where fintech just do the loan processing on behalf of banks, but fees are lower here. The new rules will impact its margins and how fast it can grow.
And some say that Jack's comments were aimed to weaken these restrictions.
All in all, a mixture of unfortunate misunderstanding and regulatory nervousness has led to the world’s biggest IPO in history being postponed … suddenly … ruthlessly. I’m pretty sure it will happen one day, just not this day and, when it does happen, Jack Ma will not be quite as dismissive of the Basel Accords and financial system run by old guys.
Or is there another side to this?
Running an IPO on the same day as a US election ...
Jack realising that Chinese regulators would force them to change their risk models ...
Ant Group recognising that banks are for banking and technology is for technology ...
We could run a load of conspiracy theories here, and yes there is speculation that Jack Ma was as outspoken as he was to try to clip the wings of the new PBoC regulations, but it is what it is, as Mr. Trump would say.
Meantime, a lot of schadenfreude out there and some even saying all the stuff Ant Group does is just smoke and mirrors. It’s not. Over 700 million active monthly users processing over $17.5 trillion of payments a year is not smoke and mirrors in 2019. For perspective, PayPal processed just over $700 billion of payments last year and any company seen by investors as more valuable than JPMorgan Chase and that has almost 25 times the volume of processing of PayPal, is no smoke and mirrors.
Finally, and for crystal clarity, I am a fanboy of Ant Group. Have been for many years, because their FinTech capabilities, technology prowess, vision, scale and pragmatism is second-to-none … on most occasions … just not on this one.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...