As Ant Reconfigures Loan Business, China’s SMBs Could See Credit Headwinds

When companies are refashioned not by competitive forces but by government fiat, the ripple effects can be broad — and, for at least some stakeholders, decidedly negative.

Alibaba’s Alipay is being broken up and reconfigured, per government efforts. Ant Financial is the owner of the financial platform, which has more than one billion users in place.

In terms of the mechanics, the government would force the company to create a separate app that would focus on Ant’s lending business. The move follows earlier directives that the lending businesses themselves be carved out from Ant’s main operations. In that case, the two lending operations — tied to traditional credit cards and to small, unsecured loans — would be consolidated into a new entity.

The app would act in part to bring user data to the government, funneling into and fueling a new credit scoring joint venture that would be operated by the enterprise and by Beijing. In the JV-controlled credit scoring process, according to reports, credit applications will come to the JV where once they had come solely to Alipay’s own decisioning engine, and then the lending app set up — and carved out from — Alipay would issue the credit.

See also: China to Split Loan Business From Alipay, Calls on Ant Group to Turn Over User Data

On a grand scale, as the U.S. and other countries grapple with whether and how to regulate Big Tech, Beijing’s tactics show how entire industries can be reconfigured. For many firms operating outside of China that want to enter that market to tap into consumer and small business spending, the impression that credit may be dialed back might give them pause.

We contend that the new setup gives the government greater oversight into lending decisions, in a way that would, under the guise of safety, also allow the government to turn the proverbial spigots off to consumers and industry verticals that might be getting overheated. In this last point, there could be a negative ripple effect that might impact B2B services, which is extending credit to smaller sellers and even micro-businesses that need capital to grow or even get off the ground.

Recall that Alibaba has its roots in helping small businesses, particularly exporters, as detailed in its S-1 filing last year. In that same filing, the company stated that “our SME loan business utilizes open data processing services to perform credit assessment and risk management of small and micro-loan borrowers using transaction data on our retail marketplaces.”

MyBank, and a Changing Credit Landscape

In a further extension of a shift in how data is collected, who views it and who scores it, Ant has disclosed in other documents that it owns 30% of MYbank. “MYbank carries out independent credit assessment as part of its underwriting process. By leveraging our customer insights, MYbank conducts risk assessment on small businesses and then recommends credit terms to third-party partner banks.” MYBank operates as one of Ant’s largest customers.

Overall, Ant said that CreditTech, as a business, enabled loans for more than 20 million small businesses during the 12 months that ended in June 2020, and 1.7 trillion yuan (about $263 million USD) over the same period, or 24% of total sales.

Clearly, any wholesale changes in how SMB credit is extended and calculated would have an impact up and down China’s economic landscape — and would of course impact Ant’s own top line and operations.