On Monday, I was chatting with a friend who heads up capital markets at a Chinese unicorn. I apologized for my slow replies; I was busily fielding questions about the government’s plans to break up Alipay’s loans business into a separate app. “Oh, in China, that’s old news,” she said, with a sad-face emoji. “I’m an Alibaba shareholder. It sucks.” In Hong Kong that day, the e-commerce giant’s share price dove more than 6%. It currently hovers near record-low levels.
Remember that back in April, state regulators brought down punitive fines on Alibaba Group Holding — where Alipay is a part of the ecosystem through its parent company Ant Group. Where the regulators’ official statement begins to talk about Alipay, the word “disconnect” jumps out.
In retrospect, it was a clear signal that access to its payments platform was going to be separated from loans. At the time, Huabei (which acts like a credit card) and Jiebei (which offers small loans) were the default settings in any user’s Alipay account. It wasn’t just “connected,” it was seamlessly integrated.
To me, the real question is: How could regulators in Beijing have let it reach this point? Alibaba is the largest e-commerce platform in China (and the world!) by far, commanding almost half the market in 2020. It used Alipay as one of its main payment methods, and actively denied consumers the use of competing services such as WeChat Pay.
For years, Ant managed to exploit regulatory gaps and present itself more as an internet company, not a finance one. Finance firms are very strictly monitored in China, but internet firms far less so (before the recent wave of regulations). So, it wasn’t so much that regulators weren’t trying, but that they weren’t fully empowered against Ant’s disruptive new business models.
Alibaba, through Ant, ran a magic formula that allowed it to swallow the market. Data from its huge e-commerce platforms flowed into Alipay payments, then into an exclusive credit scoring system, Sesame Credit (officially known as Zhima Credit). That was used to power highly leveraged loans peddled at, you guessed it, point-of-sale on Alibaba. Alipay also had a huge offline presence.
Call it what you like — a closed loop, a virtuous flywheel — the formula was benefiting Alibaba at the expense of consumer choice and market competition. This is already hinting toward a conflict-of-interest problem, right?
In the regulators’ defense, it was a fairly unique situation. Even Tencent, Alibaba’s closest competitor, didn’t have anywhere near the same e-commerce clout to pull Chinese consumers into their entire payment ecosystem. Its own e-commerce success came mostly through investments, in JD.com and Pinduoduo, for example.
Don’t forget how the market developed at a blistering speed, outpacing regulation. In just 17 years, Alipay went from zero to $17 trillion in transaction volume, amassing over 700 million users. Visa processes only about three-quarters of that in total payment volume and is more than 60 years old. And if we’re talking about products like Sesame Credit or Huabei, then they are far younger — only 6, 7 years old.
Most importantly, over those years, there was a market need for easily attainable credit. The state was focused on growing consumption; credit card adoption did ramp up, but qualifying for it was out of reach for most Chinese. It meant that people were, on the whole, willing and grateful for Alipay’s credit-giving services.
Now that the regulators have finally acted on Alibaba’s anti-competitive tendencies, they haven’t held back. They’ve required a new consumer finance license for the lending businesses, with new conditions to be met; this overrides the previous microlending licenses. Old loans must be absorbed into the new entity within the next year.
They have also ordered that the credit-scoring product come under a separate joint venture with state-owned enterprises. Sure, Ant can still be the majority or controlling shareholder and the ultimate parent company. But the businesses wouldn’t be as fully integrated as before, when they were designed to serve only one customer: Alibaba.
We’ll see what further steps are taken. But so far, Ant has escaped anything ruinous. There have been no forced divestments, and a few “pretty friend” (“sweetheart”) joint ventures. Ant still owns 50% of its lending joint venture, and the credit-scoring side was tied up with some obviously pliant, provincial state-owned enterprises. (One of these is the Zhejiang tourism board — I mean, how much credit know-how is a tourism company bringing to the table? Ant is clearly still calling the shots.)
All the same, the virtuous flywheel that benefited Alibaba has been shattered in several places. It’s unclear whether Ant can recover the value that’s been lost. But with the several years’ head start it’s had in developing a loyal customer base (500 million Huabei users, for one), and the fact that everyone will be subject to the same restrictions, Ant may well remain the dominant player for a long while. The newly empowered regulators have ensured that, for now, the entire game is a lot less profitable.
