Is Jack Ma’s Ant Group MasterCard or PayPal?

Valuing billionaire Jack Ma’s Ant Group, which filed its prospectus for a mega initial public offering, will be more art than science. It looks like a financial-services company but sells itself as a technology firm. Is it a MasterCard or a PayPal?
On a number of counts, Ant is more like the former.
First, the company has made a lot of progress diversifying its business operations over the past year. Online loans to consumers and small businesses have overtaken mobile payments — the segment Ant is best known for — as the group’s largest revenue generator, accounting for 39.4% of the 72 billion yuan ($10.4 billion) business in the first half. As of June, its lending platforms had a 2.2 trillion yuan credit balance.
Then consider the company’s loan offerings. There’s Huabei, a revolving credit product that gives consumers interest-free loans for up to 40 days. And for cash loans on larger consumption transactions with no strings attached, borrowers can go to Jiebei.
Most interest rates at these two platforms are capped at 0.04% daily, or 15.6% on an annualised basis. Both are unsecured. The way Ant handles credit risk looks a lot like a credit-card company, too. The prospectus repeatedly reminds readers that Ant doesn’t use its own balance sheet or provide guarantees.
As of June, about 98% of its credit balances were underwritten by partners, such as banks or trust companies, or packaged and sold off as asset-backed securities. Ant, in turn, earns service fees from its partners.
Ant also has its own licensed small-loan subsidiaries that
provide consumer-credit loans through its CreditTech platform. Loan receivables enabled and retained by these totalled 36.2 billion yuan at the end of June.
Ant has tried to beef up its technology credentials, boasting that 63.9% of its 16,660 employees work in technology functions. But since it’s responsible for loan-collection services for its financial partners, you can bet management is more concerned with credit cycles and delinquency rates than big data algorithms.
Ant says it will rely on “intelligent decisioning systems” to ensure it takes on worthy borrowers before passing them on to partners. But what happens when that system doesn’t work? “In the event that the creditworthiness of borrowers deteriorates or we cannot track the deterioration of their creditworthiness, the criteria we use for the analysis of borrower credit profiles may be rendered inaccurate, and our risk management system may be rendered ineffective,” according to the prospectus.
In the current economic environment, that’s a big if. The company acknowledges in its filing that it hasn’t tested a full credit cycle in China.
As asset quality gets worse and household incomes drop amid Covid-19, Ant’s delinquency and default rates could climb. So while the company doesn’t hold the loans itself, Ant will likely end up being a significant doorkeeper for its partner banks and trust companies, which are already laden with bad debt. Over the past six months, delinquency rates on consumer loans past due by over 30 days rose to 2.97% in July from 1.76% in January, after peaking at 3.01% in May.
China lowered the cap on interest rates for private lending to 15.4%. While this ruling doesn’t apply to licensed players like Ant, the company acknowledges it needs to prepare for the possibility that the regulation will
be extended to its small-loan subsidiaries.

—Bloomberg