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July 29, 2018, 6:25 p.m. EDT

Jack Ma's fintech startup shakes up China's banks

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By Stella Yifan

It handled more payments last year than Mastercard, controls the world's largest money-market fund and has made loans to tens of millions of people. Its online payments platform completed more than $8 trillion of transactions last year -- the equivalent of more than twice Germany's gross domestic product.

Ant Financial Services Group, founded by Chinese billionaire Jack Ma, has become the world's biggest financial-technology firm, driving innovations that let people use their phones for buying insurance as easily as groceries, enabling millions to go weeks at a time without using physical cash.

That success is also putting a target on the company's back. China, even more than the U.S., is now under pressure to reckon with the disruptive power of a financial-technology giant.

China's banks complain Ant siphons away their deposits, causing them to pay higher interest rates, and is a factor leading them to close branches and ATMs. One commentator at a state-owned television channel described Ant's huge money-market fund as "a vampire sucking blood from banks."

Chinese authorities, clearly increasingly uncomfortable about Ant's scale, have started to put limits on the activities it can pursue. Earlier this year, China's central bank undermined a years-long effort by Ant to build a national credit-scoring system. The bank effectively prevented Ant's system from being used by institutions making loans.

Regulators have issued rules requiring large money-market funds to sharply reduce holdings of assets that allow them to pay high interest rates. They have pressured Ant to slow inflows into its giant money fund.

The authorities are also weighing whether to designate Ant a financial holding company and require it to meet bank-style capital requirements, people familiar with the matter say. That would likely affect its profits, which last year came to $2 billion, pretax, on roughly $10 billion in revenue.

Investors remain spellbound, rewarding privately held Ant in June with a $150 billion valuation on paper, more than twice its valuation in a 2016 funding round and above that of Goldman Sachs Group Inc.

For years, Chinese authorities "turned a blind eye and let them grow as large as they could," said Zhu Ning, deputy director of the National Institute of Financial Research at Tsinghua University, who says he has talked with regulators about risks to the financial system posed by Ant. "It is simply incredible that such a gigantic financial institution has slipped away from a comprehensive regulatory framework," Mr. Zhu said.

The vice governor of China's central bank, without specifying a company, recently warned that some influential payment institutions shouldn't think of themselves as "too big to be regulated." The central bank didn't respond to requests for comment.

Ant executives reject the notion their company is acting like a bank without oversight. They say they are simply bringing financial services to people the banks have ignored.

They note Ant doesn't fund most of the loans it originates from its own balance sheet. Instead, it largely serves as a platform that makes it easier for banks and others to extend loans and helps them lower risks.

"I don't think banks see us as a disrupter," said Leiming Chen, Ant's general counsel. "We complement them and are helping them reach more customers."

Chinese regulators, he said, "understand what we are doing and they are supportive of our efforts."

Ant is expanding its presence overseas by getting more retailers to accept payments using its online payments service, Alipay, but has struggled to replicate its China business success. Early this year, Ant called off a takeover of U.S. money-transfer firm MoneyGram International after an American national-security panel refused to approve the acquisition.

In China, increased oversight of Ant and its competitors could hold back a golden age of financial-technology growth and indicate just how much change the country's regulators will tolerate before stepping in to protect incumbents.

In recent months, fintech startups backed by Chinese internet companies such as e-commerce platform JD.com and search engine Baidu Inc. have pledged to move away from directly offering financial services and toward providing platforms for traditional institutions to use.

Ant is doing the same. It says it wants to be known not as a financial conglomerate but as a technology provider or "lifestyle platform," with future profits coming mainly from fees from institutions using its technology.

Such strategy shifts are common in China when "the state advances," said Carson Huang Mihan, a former Ant executive and the founder of a fintech firm called Camel Financial.

Consumers such as Elaine Wang show Ant's power. The 30-year-old Shanghai marketing manager transfers about a third of her salary from her China Merchants Bank account into Ant's investment products and uses Alipay several times daily for simple transactions such as buying coffee.

More than 620 million people use Alipay, a person familiar with the number said. Once people's money moves from conventional bank accounts into their virtual wallets, much of it doesn't return.

In Hangzhou, Ant occupies a glass-walled, Z-shaped complex designed by the firm behind Amazon.com's new Seattle offices. Employees are greeted by a tall red sculpture of a naked man bent down looking at the ground.

Digital cameras scan many employees' faces as they enter. Meeting-room booking rules say anyone can take over a space if users don't show up within a minute of their allotted times.

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