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Rich Turrin

Rich Turrin

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Regulators want Ant to have more “Skin in the Game”

January 1, 2021 by Rich Turrin

 

China’s regulators are still bleeding from P2P loan losses and halted AntGroup’s IPO because they simply couldn’t believe that: “This time will be different. ”

What do credit bubbles share in common between East and West?  Both the P2P crisis in China and the Mortgage-Backed Securities (MBS) fueling the 2008 financial crisis share one thing.  Arrangers of loans did not participate in the returns. In both cases, there was no “skin in the game.”

Skin in the game means “having personal monetary risk associate with any deal you make.”

“Skin in the game” is the title of N.N. Taleb’s important book discussing the moral imperative “to be harmed by an error that harms others.”  For example, a chef most certainly needs to “eat what they serve others” as a means of ensuring quality.  In financial matters, it means “having personal monetary risk associate with any deal you make.”

This brings us back to Ant and the regulators.  Ant, for all its digital prowess and unquestionable mastery of digital lending, is asking regulators to believe, “It will be different this time.”  Ant is a transformational company and has no more ardent supporter than me.  That said, Ant’s brand of tech-based lending has a problem, not with the lending, but with participation in the loans and lack of skin in the game.

Participating means taking on losses, which is at the core of the new 30% funding requirement in the draft regulations.

Ant is a marvel and justly deserves credit for “cracking the code” for digital online lending, a skill it has raised to the level of art.  The problem is that even with Ant’s documented prowess in digital lending, its model of arranging loans with no or low capital committed means that it has little skin in the game.  Ant’s use of “tech service fees” gives it some participation in the deals it creates and helps to position it as a tech company and not a bank.  In the regulator’s eyes, however, it wasn’t “eating what it served others.”  Participating means taking on losses, which is at the core of the new 30% funding requirement in the draft regulations.

This is the fundamental reason why regulators pulled the plug on the Ant deal.  I cannot account for their timing but can see that they certainly were faced with a dilemma.  Remaining silent on their new microloan regulations until after the IPO would create a global outcry by investors accusing them of changing the rules of the game after taking their money.  Changing the rules before the IPO, even if at the 11th hour, would cause outcries but not financial impairment for investors, many of whom were the “little guys” Ant seeks to protect.

Jack Ma and Elon Musk share a common trait for being outspoken.

This is not a personal vendetta against Jack Ma.  Get over it.  Jack Ma and Elon Musk share a common trait for being outspoken.  While it may not make them friends, it does not cause regulators to carry out personal vendettas.  Fear caused regulators to act.  In China, regulators are still consumed with fear that another P2P crisis might be brought on by loan arrangers to come who would not be as careful or skilled as Ant.  The regulations that serve one must serve all, including the latest crop of low-quality lenders already out there and not representative of Ant’s high duty of care and skill.

Anyone counting Ant out does not know the talent and dedication of the people working there as I do.

Ant is also coming back for an IPO.  The regulations will change, Ant will adapt, and still be tremendously profitable and successful.  Anyone counting Ant out does not know the talent and dedication of the people working there as I do.  They are back at it and retooling their operations to meet the new requirements imposed by regulators.  It won’t be easy, and the days where Ant can reserve 2% of loans outstanding are ending, signaling a change in how much capital Ant needs and a rethinking of their business model.  I will also make another prediction. During the next IPO, the regulator will be effusive in its support of Ant’s new model.

China isn’t the West, and the timing of this announcement was far from ideal.  The regulator’s decision will have far-reaching implications for the development of China’s capital markets.  Still, lack of “skin in the game” is the fundamental problem that regulators have with Ant, and why they made a belated but difficult call to suspend Ant’s IPO.  They don’t believe that even with the Ant’s astounding digital technology, “This time will be different.”

Thanks for reading, and please feel free to connect for more on fintech, innovation, and China.

 

 

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Rich Turrin

About Rich Turrin

Rich Turrin is the international best-selling author of “Cashless – China’s Digital Currency Revolution” and “Innovation Lab Excellence.” He is an Onalytica Top 100 Fintech Influencer and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Rich is a leading media commentator and advisor on China’s digital currency and tech scene. Living in Shanghai for more than a decade, Rich experienced China going cashless first-hand.

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