When the coronavirus rattled China’s economy last year, Rao Yong needed cash to navigate his online handicrafts business. But he dreads the idea of spending long, boring hours at the bank.
The delivery outbreak has plagued delivery services and delayed payments for customers, so Mr. Rao, 33, used an app called Alipay to get early payments on his bills. myself. Because his Alipay account was tied to his digital store on Alibaba’s Taobao marketplace, receiving money was quick and painless.
Alipay also helped Mr. Rao a few years earlier, when his business was just starting to expand and he needed $50,000 to set up the supply chain.
“If I went to the bank at that time, they would ignore me,” he said.
China is a pioneer in finding new ways to make money for underserved people like Mr. Rao. Tech companies like the owner of Alipay, an Alibaba associate known as Ant Group, have turned finance into a kind of digital pipeline: something thoroughly embedded and invisible in life. of people that they hardly think about. And they have done so on a massive scale, turning tech giants into influential lenders and money managers in a country where smartphones became ubiquitous before credit cards.
But for much of the past year, Beijing has erected new regulatory walls around so-called fintech, or financial technology, as part of an expansive effort to rein in the country’s internet industry.
The campaign ensnared Alibaba, which was fined $2.8 billion in April for monopolistic behavior. It has stumbled upon Didi, the ride-hailing giant, which was hit with a formal investigation into its data privacy practices just days after listing its shares on Wall Street last month. .
This time last year, Ant was also preparing to hold the world’s largest initial public offering. An IPO never happened, and today Ant is overhauling its business so regulators can treat it like what they believe in: a financial institution, not a technology company .
Zhiguo He, who studies Chinese finance at the University of Chicago, said in China, “the reason fintech has grown so much is due to lack of regulation.” “That’s so obvious.”
Now the question is: What will regulation do to an industry that has thrived because it provides services that China’s state-dominated banking system cannot?
With Ant and other major platforms dominating the market, China’s fintech investment has declined in recent years. So Ant’s pursuit could make the field more competitive for startups. But if running a large fintech company means being governed like a bank, would future Ant-Man founders bother?
Professor He said that he mainly believes that Chinese fintech entrepreneurs will keep trying. “Whether it’s profitable,” he said, is another question.
For most of the last decade, if you wanted to see where smartphone technology has made China look the most different from the rest of the world, you could look at people’s wallets. Or rather the apps that replaced them.
The rich and the poor both use Alipay and Tencent’s WeChat messaging app to buy snacks from street vendors, pay bills and send money to their friends. State media hailed Alipay as one of China’s four great modern inventions, putting it and bike-sharing, e-commerce and high-speed rail up there with compasses, gunpowder, products paper production and printing.
But tech companies haven’t gotten into the financial business to make it easier to pay for coffee. They want to be where the real money is: extending credit and loans, managing investments, providing insurance. And with all their data on people’s spending, they believe they will be much better than old-fashioned financial institutions at handling risk.
With the blessing of China’s leaders, financial branches began to spring up from internet companies of all kinds, including search engine Baidu, retailer JD.com and food delivery giant Meituan. From 2014 to 2019, consumer credit from online lenders grew nearly four times a year on average, according to one estimate. According to iiMedia Research, nearly three-quarters of the users of these platforms are under the age of 35.
Last year, when Ant filed to go public, the company said more than $260 billion in credit was being extended to consumers on Alipay. That means Ant alone is responsible for more than 12% of all short-term consumer lending in China, according to research firm GaveKal Dragonomics, according to research firm GaveKal Dragonomics.
Then in November, officials triggered Ant’s IPO and began dismantling the plumbing that connects Alipay to China’s banks.
They ordered Ant to make it less convenient for users to pay for purchases with credit — credit financed largely by banks. They forbid banks from offering deposits through online platforms and limit the amount banks can lend through them. At some banks, deposits offered through digital platforms account for 70% of their total deposits, a central bank official said in a statement.
During a press conference last week, Fan Yifei, the central bank’s deputy governor, said regulators will soon apply the full Ant treatment to other platforms.
“On the one hand, the growth rate is amazing,” said Mr. Fan. “On the other hand, in the pursuit of growth, monopolies arose, disorderly capital expansion and such behaviour.”
Ant declined to comment.
As Ant and Tencent tried to accommodate regulators’ requests, they provided credit services to some users.
A big impact on Ant’s bottom line could come from new requirements that cause the company to put more of its own money into lending. Chinese regulators for years did not like the idea of Alipay competing with banks. So Ant instead acts as its partner with the banks, using its technology to find and evaluate borrowers while the banks deposit.
Now, however, that model is headed to Beijing as a convenient way for Ant to bet without incurring downside risk.
“If problems arise, it will be safe, but its partner banks will be affected,” said Xiaoxi Zhang, a Beijing-based analyst at GaveKal Dragonomics.
When Chinese regulators think of such risks, they think of people like Zhou Weiquan.
Mr. Zhou, 21, earns about $600 a month from his desk job and has swooping, sepia mullet hair. After he turned 18, Alipay and other apps started giving him thousands of dollars in credit every month. He makes the most of it, travels, buys gadgets, and generally doesn’t think about how much he’s spending.
After Alipay cut his credit line in April, his first reaction was to panic call customer service. But he says he has learned to live within his means.
“For young people who really like to overspend, this is a good thing,” Zhou said of restraint.
China’s recent rapid economic growth has most likely made officials more comfortable controlling fintech, even at the expense of some innovation as well as consumer spending and borrowing. .
“When you consider household debt as the highest proportion of household income in the world today” in China, “then debt more households is probably not a good idea.”
Qu Chaoqun, 52, was thrilled a few years ago when he found himself with $30,000 a month access to several apps. But he wanted more than that. He started buying lottery tickets.
Before long, Mr. Qu, a door-to-door delivery driver in the megacity of Guangzhou, borrowed one app to pay bills for another. He borrowed from friends and relatives to pay off app debt, then borrowed back on the app to repay his friends and relatives.
When his credit was cut almost in half in April, he fell into what he called a “bottomless abyss” as he struggled to pay his outstanding debts.
“Humans inevitably have psychological fluctuations and tempers, which can bring great harm and instability to themselves, their families and even society,” said Mr. Qu.
Albee Zhang Contributing research.