What will Jack Ma's Ant look like next?

The future of Ant Group remains up in the air after its dramatic fall from grace. Regulators seem to have stopped short of dismantling it and the company is considering a transition to a financial holding company, willing to be regulated like a bank. It'll be tough. What could Ant ultimately look like?

Bank-like companies don't command tech-like valuations. Unless and of course, you're in the booming consumer finance market in China, which is expected to hit 3 trillion yuan ($464 billion) in volumes over the next four years. That's where credit demand is - and that's where Ant's reach is. More importantly, state planners are trying to generate domestic demand and supply, keeping with their so-called dual circulation strategy. For that to work, credit will have to flow to households effectively.

Beijing knows that too. Growing disposable incomes drove consumption growth for the better part of the last decade but have been slowing. That means the authorities need another way to keep its economy humming along. In 2019, consumer finance customer numbers swelled to almost 130 million, up over 50 per cent from the year before. The state also knows that's good for the economy. Data show an increasing correlation between the growth of consumer loans and retail sales in the country. Ant could potentially play an even larger role here than it is already doing, with more skin in the game.

Over the last year, the government has encouraged the growth of consumer finance companies as well as the existing units of banks that deal in the business. Ping an Insurance (Group) Co. of China, one of the largest insurance groups, received approval for a new consumer finance company as did China Construction Bank Corp, one of the largest lenders by assets. The banking regulator also loosened restrictions on these lenders and expanded funding channels by allowing them to raise different types of capital, including tier-2 capital compliant bonds.

Ant had hitched itself to the trend. In August last year, it took a 50 per cent stake in a new consumer finance company set up with Nanyang Commercial Bank Ltd., battery maker Contemporary Amperex Technology Co. and others. The banking regulator approved it the following month.

To get back in the government's good graces, Ant could assure the authorities that it will help and not hinder their agenda. For example, the company's Zhima credit scoring system might dilute worries about banks taking on risky loans and, in the larger scheme, dovetail with the government goal of protecting household wallets.

Morphing back into a much more clearly defined financial services player and away from the fuzzy fintech giant operations won't be too tough for Ant. The hard part is capital commitment. But as a consumer finance company, Ant could raise capital via deposits from its domestic shareholders. (Bloomberg)