The end of Chinese fintech’s ‘barbaric growth’

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The country at the forefront of the world’s fintech revolution has decided to hit the brakes. 

In the past six months, China’s central bank proudly declared that it had stomped out every single peer-to-peer lender in the country — from a peak of 6,000 — and introduced a flurry of new rules to tame the other types of fintechs left standing. Meanwhile, at least three initial public offerings of homegrown fintech champions have been called off, including Ant Group, which would have been the world’s largest IPO. 

“The cancellation of Ant’s IPO was a milestone. The era of fintech’s barbaric growth is over,” concluded Charles Feng, Beijing-based lawyer at East & Concord Partners.

Until recently, China’s fintechs had benefited from a long period of lax regulation, which Ant’s founder Jack Ma said led to his success. 

“We don’t have the rules, the laws,” Ma said at a conference in 2019. “Most government officers, they don’t know how to make rules, laws for [the] internet because nobody realised what the internet looked like, so that [left] us a chance to grow fast.”

Regulators now want to shrink Ant, the company that made mobile payments ubiquitous in China and led the country’s digital finance revolution. In the first quarter, its main money market fund, where more than 600m users of its Alipay app park their extra cash, shrank 18 per cent as the company was forced to help users move their money elsewhere. 

The increasing regulatory pressure also caused two other leading fintechs to withdraw IPO applications from the Shanghai Stock Exchange this month.

JD Digits, the RMB200bn ($31bn) fintech arm of ecommerce giant JD Group claimed the decision was due to “consideration of its development strategy”. The cancellation came despite several efforts to try to placate regulators, including merging with JD’s cloud computing unit and rebranding as JD Technology. It even promoted Li Yayun, the company’s Communist Party secretary, from chief compliance officer to CEO despite his limited management experience.

Vzoom Creditech, which is backed by Ant and provides credit reporting services to small and medium-sized businesses, also cancelled its listing, and it is unclear if or when Ant, JD Technology or Vzoom will be able to resume their IPOs.

Tina Hu, analyst at corporate research firm Gavekal Fathom China, says the message to fintechs has been clear: the central bank is in charge, and its priorities are reducing systemic financial risk and promoting traditional state-owned banks.

“Fintech firms have largely shifted to facilitating loans with banks,” she says. “[But] we are not yet clear on whether companies can successfully pivot their business models.”

Meeting all the new regulatory requirements has already been costly — US-listed LexinFintech, for example, reported a 74.1 per cent decrease in net income for 2020, partly because of accounting changes.

Further rule changes are likely to bring additional costs for many firms, according to East & Concord’s Feng.

“Antitrust laws and investigations and the incoming Personal Information Protection Law all add up to increasing risks as well as increasing compliance costs,” he said. “It’s possible that some smaller firms will not survive this.”

The changing winds in Beijing have led some investors to swear off the industry entirely. “There are too many regulatory uncertainties to invest in fintech,” said one Chinese investor who suffered from soured bets on peer-to-peer lenders.

Some, however, are more relaxed. Ms Chen, an employee at a leading fintech firm who asked not to use her full name, said the key was to “always be ahead of regulations”.

She pointed to a court decision last autumn to lower the interest rate lenders can charge their borrowers. “We sensed that the trend was to lower interest rates so we reduced ours to be just below [the new cap],” she said. 

Others are even finding new business out of the increased regulation. Du Xiayu, a business development manager at Beijing-based fintech firm Xiwei Tech, said some of the smaller banks that had grown fat through lending to Alipay users will now need to find new sources of revenue due to the crackdown on their partner

Xiwei Tech is helping these banks analyse customers’ electricity usage and tax bills to make lending decisions. “Regulations means more services [for us],” said Du.

Quick Fire Q&A

What’s your name? Alan. It is inspired by Alan Turing, mathematician and father of modern computing, and Alan Watts, philosopher and humanist.

When were you founded? Founded in 2016, we are the first independent company to have obtained ACPR [French insurance regulator] approval since 1986. 

Where are you based? Based in France, live in Spain and Belgium too, with a 350-person team distributed all over Europe.

Who are your founders? Chief executive officer Jean-Charles Samuelian-Werve and chief technology officer Charles Gorintin, who have known each other for more than 10 years.

What do you sell, and who do you sell it to? We are the healthcare superapp for 160,000 members coming from over 9,400 companies: delightful, instant and accessible health insurance and health services.

How did you get started? From our frustrations with healthcare opacity and complexity. It felt impersonal.

How much money have you raised so far? Following our recent €185m Series D, that’s €310m raised in total.

What is your most recent valuation? We are now valued at €1.4bn as of April 2021.

Who are your major shareholders? Index Ventures, Coatue, Temasek, Dragoneer, Exor, Partech and Xavier Niel among others. 

There are a lot of fintechs out there — what makes you so special? Our mission. We leverage fintech to transform healthcare, making it fairer, more transparent and personal. 

Fintech fascination

Revolut pushes into India: London-based neobank Revolut unveiled plans for its latest major expansion push with the appointment of a local chief executive to lead its nascent business in India. Paroma Chatterjee joined from Indian fintech Lendingkart. The company also plans to hire a further 300 staff for a new operational hub in the country, following the example of other UK fintechs such as OakNorth.

Lendify’s “quick-fire” sale: Lendify, the veteran Swedish digital lender, has been bought by upstart Danish bank Lunar, according to Sifted. The takeover, at a sharp discount to Lendify’s previous valuation, highlights the dramatic turnround in fortunes experienced by many peer-to-peer lenders in recent years. P2P specialists, which originate loans on behalf of retail and institutional investors, grew rapidly in the aftermath of the last financial crisis but have struggled as their funding sources proved less stable than those of banks.

Wirecard’s bags of cash: As usual, fallout from the Wirecard scandal continued to attract attention this week. Highlights included German finance minister and Social Democrat candidate for chancellor Olaf Scholz defending the government’s record, and an expansion of the parliamentary probe into EY’s auditing of the fallen fintech. By far the most eye-catching news, however, was the report that Wirecard employees spent years hauling millions of euros of cash out of the group’s Munich headquarters in plastic bags.