Towards the endgame

There are signs that China will ease its fintech crackdown as part of a broader move to stimulate the ailing economy, which has struggled amid punishing zero-Covid restrictions. The first clear indication of this possibility came in June, when China’s state media reported that Chinese President Xi Jinping chaired a top-level meeting that approved a plan for the “healthy development” of China's large payment firms and fintech sector. The meeting noted that China will boost the supervision of large payment firms to combat systemic financial risks and will support platform companies in servicing the real economy. At the meeting Beijing recommended fintechs “return to their roots,” likely meaning they should focus more on payments and less on certain banking services.

Also in June, Reuters reported that the PBoC had accepted Ant Group's application to set up a financial holding company. That would be a major milestone in restructuring the company and preparing Ant to revive its IPO. However, neither Ant nor the PBoC has yet confirmed that the Reuters report is accurate. Ant has refuted a Reuters report that the company had been given permission to restart its IPO process. It is hard to say whether the Reuters report is accurate or not. However, it is possible Ant wants to keep the process low key given the debacle that ensued on the first attempt, and hold off on making a formal announcement until it is absolutely certain the IPO can go forward without a hitch.

Still one app to rule them all?

Crucial to the successful restarting of its IPO process will be Ant’s ability to preserve its Alipay super app. In October 2021, various media reported that the PBoC might force Alipay to break up the app and create a separate app for its lucrative lending business. Breaking up the Alipay super app would be more impactful than the separation of Huabei (similar to a traditional credit card) and Jiebei (which provides small, unsecured loans) into a new entity – which has already occurred. Despite that restructuring, Alipay users to date can still access the lending services conveniently from the Alipay app. If they could not, the app would lose some of its famed stickiness.

Huabei and Jiebei’s continued steady growth will likely play a major role in investor confidence to move forward with Ant’s IPO. Ant’s CreditTech arm, which includes Huabei and Jiebei, is a big moneymaker for the company. It accounted for 39% of the group’s revenues in the first half of 2020, overtaking Ant’s main payment processing business for the first time.

Both Ant and Tencent remain formidable companies at the top of the fintech industry in China, without any credible challengers given their scale and systemic importance. However, their days of breakneck growth and extraordinary profitability are over, now a part of history along with China’s whole go-go consumer tech era. Even as Beijing has signaled it will ease its fintech crackdown, it continues to urge fintechs to focus on less-profitable segments of financial services like payments.

In the future, Ant and Tencent will have to be content with more modest margins and greater restrictions on their core businesses than in their nascent fintech days. Such is the price of both their success and Beijing’s re-orientation away from big soft tech towards hard tech.