Payment Declined: Ant Group’s Record-Breaking IPO Halted by Regulators

Three trillion US dollars. Equivalent to the UK’s gross domestic product, this stunningly high number presents the dollar amount of interest in Ant Group’s initial public offering (IPO) initially set to occur on November 5th. The shares were priced at 68.8 yuan and HK$80 and would have traded under the tickers 688688 and 6688 in Shanghai and Hong Kong respectively. Ant Group’s ownership of Alipay, one of China’s largest digital payment platforms, makes it the most valuable FinTech company in the world. FinTech, the crossover between financial services and technology, presents one of the most innovative and quickly growing subsectors. From online payment platforms such as PayPal and Venmo to mobile payment and merchant service aggregators such as Square, companies in the space have grown from niche start-ups to some of the most valuable corporations globally over the past two decades. More recently, as the coronavirus pandemic halted retail consumer spending – and, in turn, many traditional banking services – financial technology businesses thrived.

Valuations of many FinTech firms shot through the roof, and Ant Group is using this sudden growth spurt as an opportunity to go public by dual listing in Hong Kong and Shanghai. The IPO, set to generate $34.5 billion in equity financing, would beat Saudi Aramco’s $29.4 billion in December last year as the largest in history and would value the company at $315 billion. Given the firm’s vast size and control of market share in China, the timeline of the offering has been surprisingly quick: the company announced its intent to go public in July, received permission from Chinese securities regulators on October 18th, priced its shares on October 27th, and was supposed to begin trading on Thursday, November 5th. The sheer magnitude of the IPO and Ant Group’s extravagant growth raise several interesting questions: where did it come from, who does it compete with, why is it such a dominant player in the space, and what impact will its public offering have? 

Jack Ma’s Alibaba Group founded Ant Group in 2004 under the name Alipay, renaming to Ant Financial in 2015 and to its current name this past July. The company provides an all-in-one e-wallet, similar to PayPal’s, wherein users save their debit and credit card information and then use their phones to make payments – essentially acting as a matchmaker between banks and consumers. Paired with significant improvements in technological infrastructure and smartphone technology, mobile phone payments took China by storm – by 2018, 92% of the population in China’s largest cities used WeChat Pay or Alipay as their primary method of payment, while rural areas had about half the penetration rate at 47%. Whereas other countries around the world transitioned from cash to credit cards and are just now beginning to integrate digital payments, worries about fraud, convenience, and recognition led China to skip directly to digital, a move that has largely benefited both consumers and businesses by simplifying the transaction process. Recently, e-wallets implemented QR scanning wherein a merchant can simply scan the buyer’s QR code to receive the money.

While Ant Group’s product leads the market with 55% of Chinese mobile payments, the firm faces intense competition from Tencent’s WeChat Pay and QQ Wallet which cumulatively hold 40% of the market. Interestingly, the parent companies of these digital payment systems operate in very different industries, and both leverage their inherent competitive advantages to attract consumers. Boasting over one billion active users, WeChat thrives as the most popular social media network in China, and its payment system integrates seamlessly into the communication platform. By connecting their credit cards to the service, users are not only able to make direct payments to merchants but can also send money to friends – similar to Venmo and Interac e-transfer in North America. Tencent’s second platform, QQ Wallet, fits into its social networking service QQ which is targeted towards younger users. The QQ instant messaging application mirrors Facebook and offers music, shopping, movies, and online social games: a perfect venue to incorporate digital payments.

While Tencent leverages its social media expertise to integrate online payments, Ant Group uses Alibaba’s extensive e-commerce network. From the get-go, Alipay partnered with major Chinese banks to promote its growth across the country; once financial institutions signed on, businesses quickly joined the mix as well. Today, the company provides payment services for hundreds of thousands of Chinese businesses of all sizes, ranging from Taobao and Amazon to small local shops. Over the past few years, international expansion and product diversification have driven Ant Group’s prominence. In November 2019 Alipay launched an international e-wallet, giving visitors to China a 90-day “tour pass,” which supports accounts from various global financial institutions. Moreover, the company’s payment system is accepted by merchants all over the world, covering countries in Asia, Oceania, Europe, and North America. In terms of product offering, Ant Group understood the demand for efficiency in financial services and created the all-encompassing Alipay. It offers services across five domains – payments, wealth management, lending, credit scoring, and insurance, increasing its customer switching costs and providing significant leverage when establishing partnerships.

Given its integration with the Chinese economy and position as the largest FinTech company in the world, Ant Group’s immense IPO foreshadows the firm’s future growth prospects and strongly influences Chinese equity markets. From a macro lens, the listing would provide another technology giant to China’s stock exchanges and align with the country’s goal of assuming technological leadership. On a firm-specific level, the company can use the capital it raises to fight for market share in its home market, to quicken its international expansion and develop digital payment systems globally, and to innovate new methods of making payments a seamless part of everyday life. Further, given the data privacy and security concerns many countries have around China, diversifying Ant Group’s shareholder base would improve corporate governance and help the company’s public relations outside the country significantly.

That being said, the initial public offering is far from complete. On Monday, November 2nd, four financial regulators called in Jack Ma for a private discussion regarding the “health and stability of the financial sector.” The next morning, just two days before the shares were supposed to begin trading, the Shanghai Stock Exchange suspended Ant’s listing due to “regulatory changes.” Shortly after, Ant suspended its Hong Kong listing until further notice. A deeper look into Ant’s growth drivers shows the potential motivation for China’s regulators – the CreditTech segment. This area makes up 39.4% of Ant’s revenue and directly competes against China’s banks, many of which are state-owned. Currently, the firm provides just 3.5% of the funding for loans it makes, compared to the mandated 30% for traditional banks in the country. This difference lets Ant provide riskier loans to consumers that otherwise would not receive them, such as smaller businesses. Accordingly, to mitigate this hefty advantage, the state is working to force new capital requirements on Ant which would require the company to provide 30% of the funding for its loans. If the requirements go through, there will be a material negative impact on Ant’s bottom line and in turn on its valuation. 

Interestingly, halting the IPO may not be in the best interests of the Chinese state. For one, rather than impeding the growth and success of Ant Group, China’s state-owned banks should take a lesson from the FinTech giant and adapt their own business methods to the changing needs of consumers. Next, while the Ant IPO will most likely still occur in the near future at a lower valuation, the state’s interference sends the world a clear message of the government’s reluctance to give private enterprise more space – a dangerous message which could deter investors and inhibit the country’s economic growth. However, there remains too much uncertainty to determine the consequences of this pullback. As Ant Group and regulator discussions continue, the coming few weeks will be critical in determining the fate of the incredibly impactful and largest IPO in history.