Is China right to tame Ant?
Economic research on the impact of fintech credit suggests a lighter touch would be wiser
There are both petty and respectable explanations for China’s assault on Ant Group. The fintech giant was less than 48 hours away from the world’s biggest initial public offering when regulators halted it in November—the first in a series of moves aimed at taming the fast-growing firm. The petty is that Jack Ma, Ant’s outspoken founder, had offended Chinese leaders with a blunt speech. The respectable is that the government needed to act because Ant threatened financial stability. As a state newspaper recently put it, Ant had become “too big to fail”, presenting itself as a tech firm but pumping out loans. The petty explanation, to the extent that it is right, can be dismissed as a China-specific problem, a reflection of the Communist Party’s tightening grip on tycoons. But the respectable explanation deserves a hearing, not least because of its global resonance. As Apple, Facebook and Google get into payments and more, the question of how to regulate Big Tech on its forays into finance will become all the more prominent.
The main charge against Ant is that it offers what can be described as consumer subprime with tech characteristics. Its model is to identify small borrowers—both individuals and businesses—and supply them with credit from banks. Ant’s customers only ever interact with its sleek app, yet it is an intermediary. It provides funding for just 2% of the value of the loans it distributes, with the rest coming from banks and other firms. Ant, in effect, serves as their agent, feeding them a constant stream of clients. The concern therefore is that, like subprime-mortgage originators in America in the early 2000s, Ant does not have enough skin in the game. What would stop it from lending carelessly? China’s response includes a draft rule that would require Ant to fund 30% of its loans, which would force it to hold more capital and slow it down. On December 27th the central bank also told Ant to return to its roots as a payments firm, a low-margin, low-risk business.
At first glance such measures may seem prudent. But there is a strong case to be made that lighter regulation would be the better approach. For a start, the parallel with subprime mortgages is not very good. Most of Ant’s loans are small (as little as 20 yuan, or $3, for consumers), with a tenor of just a few months or so, and spread across many sectors. It thus relies on a constant churning of credit. If bad loans surge, banks can scale back almost instantly. That is a far cry from subprime mortgages, much larger loans that ran for many years and were, by definition, all tied to the property market.
Given how new fintech still is, detailed studies of its impact have emerged only recently. They highlight another problem with excessive regulation: fintech is good for the economy, and smothering it could limit its potential. Three points stand out. First, fintech firms reach borrowers under-served by banks. As banks normally vet loans on a case-by-case basis, they prefer large, established clients. Fintech firms go for just the opposite. Harold Hau of the University of Geneva and other researchers examined Ant’s loan offers to 2.9m vendors on an e-commerce site. They found that 39% of vendors with low credit scores in cities with low amounts of bank lending accepted Ant’s offers, as against only 17% of those with high credit scores in cities with more bank lending.
A similar pattern exists elsewhere. Researchers at the Bank for International Settlements (bis) looked at 79 countries during 2013-19. Where banking sectors were less competitive and banks had less incentive to pursue smaller clients, fintech lenders grew larger. They also seem less likely to discriminate by race. A study of America’s mortgage market found that minority customers had similar rejection rates to white ones when using fintech firms, but 6% more rejections than white people via face-to-face lenders.
As valuable as inclusion is, it would not prove sustainable if a large share of fintech credit went bad. Hence the importance of the second point: the bedrock of data and algorithms on which it is built. Ant, for one, includes hundreds of variables in its credit model, from users’ friend networks to their consumption patterns. Before the pandemic, the delinquency rate on its loans to small businesses was about 2%, compared with 6% for banks. In a paper from 2019, Jon Frost, then of the Financial Stability Board, and other economists turned to a hard case—Argentina—to test the hypothesis that fintech firms have an information advantage over banks. Sure enough, they did. The loss rate for Mercado Libre, an e-commerce firm, on loans to high-risk clients was 2.8%, about the same as banks’ loss rate on their best small-business clients.
Lastly, far from endangering the economy, fintech lending may actually bolster its resilience. Leonardo Gambacorta of the bis and others have examined more than 2m Chinese firms that borrowed from both Ant and conventional banks. Bank credit was closely tied to local house prices; loan officers trust it both as collateral and as a shorthand for gauging economic health. Fintech credit was uncorrelated with house prices and instead linked to measures of business health such as transaction volumes. The upshot is that in a housing downturn, banks tighten credit to small firms, worsening economic pressure. By contrast, without property as collateral, fintech lending may be more stable, limiting contagion.
Friend or foe?
None of this is to deny that fintech could give rise to new problems. In making credit easily available, consumers can end up with too much debt. Firms may misuse the data they hoover up. Regulators must be vigilant against fraud, which plagued China’s peer-to-peer lending industry a few years ago. And for well-run firms, monopoly is a serious risk. Once big enough, Ant could use its market power to block competitors and extract more profits.
Perspective is needed, though. Fintech is still in its infancy. Ant is by far the biggest of the upstarts globally, but the outstanding value of all the loans it has arranged amounts to less than 1% of the total assets held by China’s commercial banks. At this stage prudent regulators would not rein it in, but give it room to run.
