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Tuesday, October 27, 2020
Ant Group's High-Profile IPO: Implications and Challenges
ANBOUND

Ant Group's nearly RMB 2.1 trillion valuation and RMB 230 billion financing scale have set new records both in China and in the global market. The initial public offering (IPO) of Ant Group has brought new vitality and opportunities to the stock market under the impact of the COVID-19 pandemic, as well as a new definition of the influence and trend of fintech in the capital market. As The Economist points out, Ant Group's listing not only attracts global investors, but also heralds greater changesin the global financial system.

As a representative of the fintech unicorns, the capital market has given Ant Group a high evaluation. In terms of its valuation, the estimated market capitalization of RMB 2.1 trillion at the IPO price is not only more than the RMB 1.7 trillion market capitalization of Industrial and Commercial Bank of China (ICBC), China's largest commercial bank, but also comparable to that of the nearly 200-year-old JPMorgan Chase in the United States. It is amazing that Ant Group can hold up such a high valuation.

Compared with ICBC's total assets of RMB 30 trillion, RMB 15 trillion of assets under management, RMB 2.7 trillion of net assets, and nearly RMB 300 billion of annual net profit, Ant Group is "dwarfed". In the first half of this year, although the total asset of Ant Group just exceeded RMB 300 billion, its operating income and net profit were as high as RMB 72.5 billion and RMB 21.9 billion respectively, while the value of related off-balance sheet asset reached RMB 4.10 trillion and the credit balance reached RMB 2.10 trillion. It is hard to measure the difference between the Ant Group and financial giants such as ICBC, from both financial or tech perspective. The only thing that can be explained is that Ant Group has huge potential in terms of technical capabilities and its market, which also represents the strong confidence of investors in the potency unleashed by fintech.

At present, the profits of Ant Group still mainly come from its off-balance sheet financial business, and it is fundamentally a mode of realizing profits through the realization of a huge amount of customer resources. As noted by The Economist, Ant Group, which was spun off from e-commerce company Alibaba Group, has more than a billion users and a payment network that connected 80 million merchants with USD 16 trillion in transactions last year. Ant Group not only provides payment services, but also allows users to borrow money, shop from 6,000 investment products, and buy medical insurance. Therefore, although Ant Group has only about RMB 300 billion of assets on its balance sheet, its most important business actually comes from the three off-balance sheet platforms, namely, the micro-lending platform, the wealth management platform, and the insurance platform. Its micro-lending platform, Alipay's payment business, and Tianhong Asset Management contributed more than 98% of the net profit. In fact, these three platforms are also the business model of cashing in the huge amount of customer traffic of Ant Group and Alibaba, by cooperating with a large number of financial institutions and helping these financial institutions with risk control and big data application for lending, wealth management, and insurance business.

In terms of the business structure, Ant Group provides a digital resource platform in the financial field, similar to Alibaba's online retail platform. Ren Zeping, dean of the Evergrande Research Institute, proposed that the core competitiveness of Ant Group is its technology and big data. It provides financial services by means of diversion, loan assistance, joint loans, etc., without directly assuming interest rate risk, credit risk, and liquidity risk, which is fundamentally different from the conventional financial business of earning deposit-lending interest rate margin. Ren Zeping said it would be inappropriate to classify the "Ant Group's model" simply as finance or technology. Without a financial services scenario, Ant Group's technology would be useless; at the same time, without the core competitiveness of technology and data, Ant Group will become a pseudo-financial company like P2P.

This new platform-based model is backed by strong technological capabilities. The prospect of its development lies in making conventional financial services, especially financial inclusion, substantially more efficient. The Economist notes that, in the best-case scenario, fintech can dramatically improve efficiency. If the world's listed banks cut their expenses by a third, the savings could yield USD 80 a year for every person on the planet. Ant Group reaps negligible profits from its payments business and makes loans in minutes. But these seemingly piecemeal profits will generate enormous profits in the accumulation of massive amounts of business. This is what makes the Ant Group so attractive to capital-market investors, putting them on a par with financial giants such as ICBC and JPMorgan Chase. From this perspective, it does reflect the huge impact fintech has had on conventional finance. As mentioned by The Economist, investors smell a structural shift similar to the one going on in retailing. Conventional banks now account for only 72% of the equity market value of the global banking and payments industry, down from 96% in 2010.

Ant Group's business model, of course, remains hugely controversial for financial stability. Unlike similar outsourcing of conventional technology services, Ant Group provides services on a fee-for-service basisof a similar commission sharing with financial institutions. This model makes Ant Group not responsible for the risk of specific financial products, nor subjected to the capital constraints of financial business. The off-balance sheet assets of Ant Group are more than 20 times its on-balance sheet assets, and hundreds of financial institutions have been introduced to sell financial products and services on its platform. The risk of financial services brought by Ant Group's digital services cannot be separated from Ant Group. Ren Zeping also mentioned that without proper regulation, conflicts of interest will inevitably arise for Ant Group on major issues such as the appropriateness of risk level, profit sharing with conventional financial institutions, and the rights and interestsin the client. The risks posed by such a platform would be systemic. Therefore, the risk prevention and control of such a financial platform is a subject to be faced and studied in future financial development, as well as a new challenge to the supervision of the fintech field.

Another major challenge faced by Ant Group is the controversy in the digital field. The rules for data rights and data security are still in the exploratory stage in countries around the world, and they will become stricter in the future. The rights to the vast trove of user data that Ant Group has, including personal information and behavioral data, have yet to be definitively determined. The Economist also pointed out that, with the rise of fintech, "we must protect people's privacy from big companies". While mining data resources and providing big data services, whether Ant Group can achieve safe, standardized, and bounded use of user data is an issue of concern and vigilance for supervision and society. The rights to the user data will also be the issue for the development of the fintech industry. In the future, with the formation of monopolistic "unicorn", this issue will become increasingly difficult to ignore.

Final analysis conclusion:

Ant Group's high-profile IPO reflects the capital markets' expectations for fintech and the effects of China's financial reforms. This will bring a demonstration effect. It is believed that Tencent, JD.com, and other domestic digital giants will also enter the financial field by virtue of their advantages and become the leaders in the financial field. It can be seen that fintech is bringing great changes to the conventional financial industry, which will bring profound impacts and challenges to economic and social development.

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