Unveiling the reasons behind Alipay’s lending service loss

Ant Group has been dealt another blow by Chinese regulators, with reports suggesting that the group will need to split Alipay into two separate apps. Alipay’s lending services will be separated from the rest of Alipay and turned into a new app. Aside from taking a stake in the new venture, the government will also gain access to Alipay’s valuable lending decision data.

As of August 2020, Alipay had accrued 1 billion annual active users by offering a powerful super app that allows users to complete payment transactions and conduct online shopping within its extensive ecosystem. As per GlobalData’s E-Commerce Analytics, Alipay accounted for 44.9% of ecommerce transaction value in China in 2020. However, the Financial Times reports that regulators will require Alipay’s two lending services – Huabei (a consumer credit product) and Jiebei (a small unsecured loans issuer) – to be split off into a separate app. In addition, a new joint venture will be created to control the new app, with Ant Group and state-owned Zhejian Tourism Investment Group each set to hold a 35% stake.

For the past 10 months, Chinese regulators have forced Ant Group to restructure its operations, including prompting it to separate its financial branch from the rest of its business. With the latest news, the government will wrest control of Alipay’s most valuable services away from Ant Group.

Its lending services have been cause for concern among the country’s regulators. It has reportedly issued $260bn to consumers in unsecured loans using an internal credit rating review process. In order to regulate loan issuance by fintech companies, Chinese regulators required fintech companies to own 30% of loans they co-lend with banks and to meet the minimum capital adequacy ratio of 10.5%. Under new regulations, Ant will need to provide additional capital to meet this minimum.

The breakup of Alipay is clearly a blow to Ant Group, as its CreditTech branch (which includes both Huabei and Jiebei) represents the most profitable part of the business. The Financial Times reported that CreditTech generated 39.4% of Ant’s revenue in the first half of 2020 

The Financial Times reported that CreditTech generated 39.4% of Ant’s revenue in the first half of 2020. Meanwhile, this move could negatively impact loan issuance going forward. The new lending app could be forced to use a government-approved loan rating system instead of Alipay’s current internal system. This could reduce the amount of loans issued to customers and thus reduce the revenue the company can generate.

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Yet this move is clearly much more than a simple regulatory matter. If the government’s only concern was ensuring Ant Group adhered to capital requirements and competition regulations, it would not have forced a divestment. By becoming a stakeholder in the separate lending company, the Chinese government gains a measure of control over Ant Group’s operations. It will also gain access to the group’s data, as regulators will insist that all data used to assess loan eligibility and issuance is passed on to the new joint venture.

Until now Alipay was a dominant payment player in China. While the extent to which the breakup of the app will affect Ant Group remains unclear, the move will negatively impact its revenues. By becoming a stakeholder in the new company, the government will be able to exert influence on its direction and ensure its business model is in line with government policy.

This was written by Chris Dinga, Analyst, Payments, GlobalData