China’s Ant Group is about to make the largest sale of shares ever but it poses a major conundrum: what type of firm is it – a tech giant or a financial colossus?

That issue is important to be clarified before and after the initial public offering (IPO) of around $34.4 billion. That amount surpasses Saudi Aramco’s record of $29.4 billion float in 2019. Shares will start trading on November 5 in Hong Kong and Shanghai.

Ant, a spinoff from billionaire Jack Ma’s Alibaba Group, represents itself as a tech giant, while financial regulators suggest that the firm remains under their purview. The Hangzhou-based behemoth benefits from the far richer valuations that the market affords to tech firms than to financial institutions. It aims to escape the closer scrutiny of financial regulators, according to analysts.

China’s central bank and financial regulators met on November 2 with Jack Ma and top Ant executives as the government published draft rules for online micro-lending. One rule would need companies like Ant to take on default risks just like the banks, while simultaneously limiting leverage and lending amounts – all of these approaches are used to regulate banks.

According to one Ant spokeswoman, the firm might “implement the meeting opinions in-depth”. Ant was launched in 2004 operating as Alibaba’s payments processor at the time. Its primary Alipay app has over 730 million active monthly users in China.

The firm has also managed to set up an empire that connects China’s borrowers and lenders. Users can secure short-term loans within minutes. It has increased its offerings, using artificial intelligence and several other sophisticated techniques to support payments and loans. Additionally, this Chinese giant firm offers products from wealth management and insurance.

Thus, Ant insists that it is a technology vendor for financial institutions. Jack Ma has previously referred to it as a “techfin” instead of a “fintech” outfit. Naysayers and skeptics are not convinced by this argument. They believe financial regulators are highly unlikely to turn down the pressure on a firm that only this 2020 changed its name from Ant Financial.

Ant Group Says ‘Tech Is The Core Of Our DNA’

Tech teams at most of the Ant’s underwriter banks are leading the IPO as opposed to finance bankers as it is the case in such IPOs. Interestingly, they have also secured tech-style pricing.

The dual listing now values Ant at $312 billion which is 31.4 times its projection of 2021 net profit. That valuation places the company in the same ballpark as Alibaba, trading at around 27.6 times forward earnings together with New York-listed peer PayPal at a 45 multiple. Some investors believe that Ant should be valued at almost $400 billion or even more in the IPO.

Compare the valuation with maybe the world’s biggest bank by assets, Industrial and Commercial Bank of China, standing at a multiple of almost 6. About three years ago, Ant Group started its fin-to-tech shift as Chinese regulators increased scrutiny to control financial risks in the system.

In 2019 the firm for the first time made most of its revenue from fees arising from its digital finance technology platform. On many occasions, Ant executives insist that technology is in the company’s DNA. CEO Simon Hu stated:

“Since our inception over 16 years ago, digital technology has been part and parcel of everything we do.”

Over 60% of Ant’s employees are programmers and engineers, its prospectus states. It offers its users high-tech risk analysis but leaves all lending decisions to the banks, according to sources familiar with the issue. Unlike banks that traditionally rely on collateral to determine creditworthiness, Ant Group has risk-modeling algorithms that mostly leverage the data that it collects, analysts say.

Patriarch Ma has managed to propel the shift to a tech identity successfully. He recently termed financial regulation as outdated and badly suited to companies that are striving to incorporate technology to power financial innovation.

Fintech Cannot Escape Regulation

However, China’s financial regulators are just growing warier about financial technology. They believe that Ant’s business model of matching lenders and borrowers is, to some great extent, a financial service.

Ma’s comments on the regulators reveal a deep conflict that exists between financial regulation and fintech development, according to Ji Shaofeng. Shaofeng is an ex-official at the China Banking and Insurance Regulatory Commission. He wrote in a column for the Caixin financial news:

“Although Ant is trying to phase out of its financial identity and emphasize itself as a digital technology firm, the dominant part of its revenue, which comes from its credit business, and its high leverage ratio have always attracted the wide notice of both regulators and the capital markets.”

Consumer credit is Ant Group’s most lucrative business, and it is mainly based on interest income. The company takes a 30% – 40% cut of the interest on the loans that it facilitates, according to analysts’ estimation. One source said:

“That’s why the profit written in Ant’s prospectus is so lucrative, even more, lucrative than banks. Business-wise, you can see Ant as the interbank counterpart of all the lenders.”

Zou Jiayi, Vice Finance Minister, spoke at a conference which Ma attended, he said that fintech must never be allowed to avoid regulation, operate illegal arbitrage, and advocate for a winner-take-all style of monopoly. She commented:

“Fintech has not changed the nature of finance that relies on credit and uses leverage.”

In a November 1 statement that was believed to be responding to the debate over Ant’s nature, China’s cabinet-level Financial Stability and Development Committee stated:

“Innovation and entrepreneurship should be encouraged, but at the same time we need to strengthen supervision and include all financial activities into the regulatory framework by law.”

About the author

Wanguba Muriuki is an Editor at Large for E-Crypto News and author of the book- "The Exploitative Intrigues of Cryptocurrency Scams Explained." He is also a passionate creator who sees every aspect of life from a written perspective. He loves Blockchain, Cryptocurrency, Technology, and Traveling. He is a widely experienced creative and technical writer. Everything and everyone is describable. The best description is written.

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