Are SME Lending Partnerships Under Threat?
Ant Financial’s latest experience could be a warning sign to the West
Jack Ma had a bad week. It’s not often I feel sorry for a billionaire, but being on the verge of a world-record IPO and for it only to be scuppered by last-minute regulator ‘questions’ must be painful.
I witnessed a similar and painful experience first hand during Prospa’s (ASX:PGL) initial try at an IPO in 2018. The months of preparation were immense. Our IPO project team pushed long hours and Prospa’s founders were on flights every week drumming up investor interest. The listing of Australia’s largest online lender to SMEs was set to be the highlight of the year for Australian Fintech.
However, on the eve of the IPO as party balloons and catering were rolled in, the ASIC, Australia’s financial regulator, sent out a seemingly innocent (but poorly-timed) email with a list of questions to the wider Fintech lending industry. While the questions eventually turned out to be standard process, Prospa’s leadership were advised to pause the IPO until it could respond. This blew the wind out of the IPO’s sails and the decision was made to postpone the listing for another year. It was a tough day.
Unlike in Prospa’s experience, the 11th hour questions that were raised from Chinese regulators this week towards Ant Financial’s IPO didn’t appear to be that innocent.
Theories are growing of underlying concerns from Chinese government officials around the growing influence of Ant Financial in the Chinese market. These concerns include the sheer volume of referral business the tech giant generates for Chinese banks and online lenders.
By leveraging the use of smart data, Ant Financial’s platform introduces millions of its customers and SMEs to lending products, while collecting referral fees and outsourcing the underwriting and capital risk to partners. It’s been extremely lucrative, and allows the Chinese firm to by-pass the need to hold subsequent capital reserves.
While referral partnerships between platforms and lenders are common place globally, no one is operating this model at the size and scale of Ant Financial in China. The result of the tech giant’s activity has seen a surge in the number of loan providers within its ecosystem, causing concern about the stability of the Chinese consumer and SME lending market.
On the back of this concern, new laws set to be introduced in China will now require platforms, such as Ant Financial, to underwrite at least 30% of any loan within referral partnerships.
China’s situation with Ant Financial undoubtedly remains unique compared to the rest of the world. So platforms that generate income streams from similar referral partnership models need not panic about debt syndication any time soon.
Although, with the rise of consumer and business bad debt and increases in accessibility of alternative lending partners within platforms, risk-adverse governments will be watching the Chinese/Ant Financial example with interest.
Lets just hope they raise any questions early enough.