The blockbuster IPO of Alipay’s parent company Ant Group is sending a signal to China’s traditional finance industry: with access to financial licenses, tech companies can bite.
Backed by tech giant Alibaba, Ant Group brands itself as a tech firm rather than a financial service provider. Yet the company holds more financial licenses than any other financial institution. Together with other tech behemoths like Baidu, Tencent, and JD.com (or more commonly known as “BATJ”), the company has aggressively expanded its grip over the banking, insurance, and securities industries by applying for a wide range of financial licenses and acquiring existing financial institutions.
According to data released by Chinese regulators, the BATJ giants have collected over 40 financial licenses covering micro-lending, third-party payment, consumer finance, and other key financial sectors. Smaller tech companies, such as ride-hailing service provider Didi Chuxing, cybersecurity company Qihoo 360, and retailer Suning, have adopted a similar business strategy in an attempt to replicate the success of Ant Group. The online shopping platform Meituan Dianping, for example, has been touting its special loan service on the app since it obtained a micro-lending license in November 2016.
As tech companies eye for a share of the financial industry, those with key financial licenses will have great leverage over their peers who don’t hold any licenses and may even pose a threat to traditional financial institutions. We here at Pandaily have compiled a list of key financial licenses that many of the tech giants have been chasing, and here’s everything you need to know about them.
Third-Party Payment License
Third-party payment services can be divided into four categories: internet, mobile, point of sale (POS), and cross-border, of which the first two are the dominant third-party forms. Like their American counterpart PayPal, China’s third-party payment service providers serve as intermediaries between banks, consumers, and business owners. With the help of third-party platforms, customers no longer have to carry a credit card from each different bank. Instead, customers can now use a “third party” service that links all of their bank accounts together.
While internet payment methods preceded mobile payment apps, the latter have emerged to be the main force of the third-party payment market as smartphones and 4G networks penetrate every aspect of people’s daily life. With its crown jewel Alipay, Alibaba became the first tech giant to break into the third-party payment industry, followed by its strongest rival Tencent, the parent company of WeChat Pay. According to a report published by Guotai Junan Securities in August, the duopoly of Alipay and WeChat Pay currently takes up about 94% of the mobile payment service sector, the remaining 6% is shared by fintech subsidiaries of other tech firms such as JD.com, Suning, NetEase, Baidu, and others.
Although the majority of Chinese tech giants have obtained permits to operate third-party payment businesses, the regulators have issued very few third-party payment licenses in the past three years. In 2010, China’s State Council published its “Administrative Measures for the Payment Services Provided by Non-financial Institutions,” setting a high bar for non-financial enterprises eyeing the third-party payment market. In 2015, the People’s Bank of China (PBOC) issued its “Notice on Issuing the Main Tasks of Payment and Settlement,” in which it explicitly encouraged “mergers and acquisitions of existing financial institutions holding third-party payment licenses.” According to PBOC data, there were 237 license holders in 2019, down from 271 in 2015.
Micro-Lending & Consumer Finance Licenses
While firms that hold micro-lending licenses and those that hold consumer finance licenses both make money through interest charged on small loans, the latter type of license holders are allowed to operate a wider range of business and are therefore slightly more rare to find in the market. Typical micro-lending subsidiaries of tech giants are Huabei and Jiebei, both of which belong to Ant Group. Yet even the fintech pioneer has not obtained a consumer finance license.
According to the China Banking and Insurance Regulatory Commission (CBIRC), there are only 27 companies with consumer finance licenses, of which 22 are either directly or indirectly related to commercial banks. In May 2019, Baidu became the first tech giant to obtain the consumer finance license, which it acquired by taking a 30% stake of Harbin Bank Consumer Finance Co. Today, Baidu is still the only tech firm that takes part in the consumer finance market.
Analysts point out that although consumer finance companies are permitted to conduct a broader range of small loan businesses, they will likely focus on loans for “durable digital goods,” such as mobile phones and laptops, and loans for personal events, such as weddings and moving expenses. This is because the loan business for digital goods and personal events have a strict credit system and sometimes require intervention from the PBOC. Under the close watch of the Central Bank, consumer finance companies can leverage themselves up to 10 times their principle when loaning out money, while micro-lending businesses can only use 0.5-3 times leverage under the supervision of local regulators.
Banking licenses, much like consumer finance licenses, are also an essential but hard-to-get ticket into the financial market. Baidu, Alibaba, and Tencent all acquired banking licenses by founding e-banks, while JD.com has not taken part in the banking industry.
In December 2014, Tencent founded the first tech giant-backed bank, WeBank, of which it holds 30% of the stake and is the biggest shareholder. The bank features facial recognition and big data technologies, which it uses to assess borrowers’ credit risks and lower the operating costs of individual accounts. In 2019, WeBank made a net profit of ￥3.95 billion, up 60% from the previous year.
In 2015, Ant Group opened MYBank, of which Alibaba holds a 30% stake and is the largest shareholder. According to the bank’s founder Jack Ma, MYBank was created to serve “small and micro businesses.” Ant Group’s 2019 annual report reveals that the bank earned an annual net profit of 1.25 billion RMB and accumulated 20.87 million users, up by 70% from the previous year. Alibaba holds 30% of the shares of MYBank.
In early June, cybersecurity company Qihoo 360 announced that it bought a 30% interest in the Kincheng Bank of Tianjin, which makes it the third tech company to hold a large stake of a commercial bank.
Among the BATJ, Alibaba and Tencent were early entrants to the the insurance industry. In 2013, the two companies and Ping An Insurance jointly founded Zhong An Insurance and obtained the first internet insurance license. Later, Ant Group and Tianhong Fund established Trust Mutual Life Insurance Company, earning their backer Alibaba a second insurance license.
Compared to Alibaba and Tencent, Baidu entered the insurance market at a later stage. In 2015, Baidu, Allianz Insurance and High Link Capital attempted to establish an internet insurance company, but the venture was never approved by regulators. In 2016, the search engine giant turned to Pacific Property & Casualty for a second attempt but that, too, failed two years later.
In July 2018, JD.com invested 483 million RMB in Allianz Insurance and obtained 30% stake of the insurance company. This move left Baidu as the only tech giant among the BATJ without an insurance license.
A Glimpse into BATJ’s FinTech War
Although BATJ and smaller tech giants have all more or less broken into the financial service industry, Alibaba and Tencent are still the two strongest players in the sector. According thinktank Lingyi Zhiku, the number of financial licenses that Alibaba, Tencent, JD.com, and Baidu have amassed are 12, 11, 9, and 8, respectively. The duopoly is entitled to conduct some of the most essential fintech services, such as banking, insurance, third-party payment, and micro-lending. Both companies have entered into the securities industry by purchasing an approximate 5% stake of China International Capital Corporations (CICC), one of China’s leading domestic investment banking firms.
In the foreseeable future, consumer finance licenses will likely become the most wanted permit as it allows companies to expand their micro-lending businesses. In mid-August, Alibaba is reported to be negotiating a consumer finance license with regulators for a subsidiary based in Chongqing, where it holds major stakes of two micro-lending companies. If Alibaba succeeds, it will become the second tech giant to be in possession of a consumer finance license and cement its dominance in China’s growing fintech ecosystem.