Chinese Fintech Giants Face Setback As Regulators Prevent “Too Big To Fail” Scen...

Chinese Fintech Giants Face Setback As Regulators Prevent “Too Big To Fail” Scenario

Chinese Fintech Giants Face Setback As Regulators Prevent “Too Big To Fail” Scenario

Aron Chen

posted on 23 hours agoEditor : Chen Du

While governments relied heavily on fintech apps to boost post-pandemic economy, the time to burn the bridges have finally came.

Chinese fintech giants are facing the strongest regulatory force they have ever seen in recent years as the the government has been increasingly concerned about the their sizes and the business scopes expanding to a point where they become too big to fail.

Four top financial regulators, The People’s Bank of China, the China Banking and Insurance Regulatory Commission, the Securities Regulatory Commission, and the State Administration of Foreign Exchange, summoned Ant Group for its business regulation on December 26th, the second time following the first one in November, which resulted in the suspension of the fintech giant's highly anticipated world's biggest ever IPO. Ant Group is a subsidiary of Alibaba.

This time around, the Chinese regulators urged Ant Group to present a plan and a timetable to rectify illegal financial activities regarding its credit, insurance and wealth management businesses as soon as possible. During the meeting, Pan Guosheng, vice governor of People’s Bank of China, made a series of accusations against Ant, such as poor corporate governance, defiance of regulatory demands, engagement of illegal regulatory arbitrary, the use of its market advantage to exclude rivals, and hurting consumers’ legal interests.

The central bank is ordering it to return to its original business mission when its core product Alipay launched—as a provider of payment services, improving transparency of deal transactions, and strictly forbid business activities of unfair competition—essentially telling it to refrain from doing other businesses that more directly compete with commercial banks, which are mostly state-owned. Central bank also told Ant Group to set up a separate financial holding company to ensure it has sufficient capital and protect personal private data.

To comply with the tightening regulations, Ant has removed interest-bearing online deposit products that it offered on Alipay with the participation of several smaller regional banks

Prior to the regulatory meeting, Ant has already made key changes to its business, lowering borrowing limits for some young users of its Huabei online lending service and removing deposit products of several banks from its platform, in order to meet the regulatory requirement. Huabei runs very much like a virtual credit card, allowing people borrow money based on their credit score maintained by the company to make purchases online using smartphone, then it charges interest on their outstanding balances. 

Jiebei, or literally “Just borrow”, another Ant service that provides installment loans, together with Huabei, are biggest revenue makers for Ant, contributing nearly 40% of the total in the first half of the year. their low borrowing entrance have promoted spending among young Chinese consumers, college students and young adults without a solid credit history.

After the adjustment for the credit limit, some users of Huabei posted scanning photos that complain their credit limit were reduced by a large amount from a couple of tens of thousands RMB to ￥2,000.

Ant Group is not the only fintech company being targeted. Other major players such as Duxiaoman, a fintech platform back by Chinese search engine company Baidu, and JD’s affiliate JD digits, Tencent-backed Tenpay also offer online wealth management services tied to deposit services, and have been taking these services offline. Their banking partners are often regional banks like Xin’an Bank in Anhui Province, or Huatong Bank in Fujian Province. These online-deposit products offer have high interest rate but low entrance for accepting customers , with a lot of them only require 50 RMB to start making investment.

The removal come amid regulators’ growing concern about the fintech company's continued effort to replace banks, as well as banks’ excessive reliance on third-party platform such as Ant, Duxiaoman to approach customers and maintain businesses. Chinese regulators have began launching investigations into the bad loan ratio of online deposit products is July, an early sign for implantation of tighten regulation on Chinese fintech companies.

It seems that the partnership between fintech platform and Bank created a win-win situation, but it actually caused a series of potential risks and problems. Some of the platform marketed their online deposit product with the slogan such as “zero risk, high return, “which led a blind decision making for less financially-aware customers who ignore other risk factors.

In general, innovation within the fintech sector has vastly improved the convenience and efficiency in China's society, on the basis of inadequate and deferred regulation. For example, during post-pandemic months, even local governments like Shanghai and Beijing's relied heavily on apps like Alipay, WeChat Pay, and Meituan to to issue vouchers to incentivize consumption to boost economy. As 2020 comes to a close, regulators are finally picking up what they ignored for a long time and increasing scrutiny to keep fintech companies in check.

At a recent financial forum held in Shenzhen, Chinese Finance Minister Lou Jiwei proposed that Chinese regulator should limit the number of banks partnering with large fintech companies because bad loans might surge if a fintech platform dominate the market by controlling a large portion of the market.

“China must prevent a "winner-takes-all" and "too-big-to-fail" scenario in the Fintech sector,” Lou said.