The Ant that shook the tree: How micro-lending turned a mega-profit

Jiemian News takes a look inside the Ant Group prospectus and asks how the credit-tech business became a two trillion yuan consumer finance empire.

By MIAO Yiwei, WU Rumiao


Ant Group, the fintech arm of Alibaba, filed for listing in Shanghai and Shenzhen on August 25. The 500-page prospectus reveals details of the company's operations, dominated by Alipay with 700 million monthly active users. That's about half the population of the entire country, including minors.

Equally noteworthy are the disclosures on its highly profitable credit business, which consists of an array of consumer credit and micro-lending products. After five years, it has amassed a massive half-billion user base and is still growing.

Credit-tech provides small loans through two principal products, Huabei, a virtual credit card, and Jiebei, a micro-lending service. In the first half of 2020, credit-tech brought in 28.5 billion yuan (US$4.1 billion), close to 40 percent of Ant’s 72.5 billion yuan total. It has contributed over half of the company’s total 21.9 billion yuan net profit this year.

Huabei and Jiebei are the standard bearers of China’s consumer fintech industry. Since 2015, Huabei has offered revolving credit lines for individual consumers and is embedded in Alibaba’s e-commerce platforms as an easy alternative to traditional credit cards. After its success on Alibaba platforms — it reportedly boosted sales by as much as 40 percent for some sellers — the company expanded coverage in 2016, making Huabei essentially a virtual credit card that can be used in much the same way as any other.

The product turned over 3.4 billion yuan profit the next year, before regulations on highly leveraged micro-lending restricted activities. The product's base of young, urban users has been growing steadily since. In H1, Huabei recorded 433 million yuan of net profit.

Jiebei, a consumer loan product, followed a similar growth trajectory but is even more profitable, thanks to larger loans and higher interest rates. It reached 6 billion yuan profit in 2017 before the government stepped in. Huabei and Jiebei have 2 trillion yuan in outstanding loans. To expand further yet, Ant has rounded up a gang of traditional financial institutions, relying on bank funds to evade restrictions on high leverage. High leverage through asset-backed securities has been the elixir of the company’s growth almost since day one.

According to Forbes, before 2018, Ant was heavily reliant on asset-backed-securities for its lending business. By securitizing its consumer loans and selling them to institutional investors, it was able to transfer risk off its own balance sheet without downsizing its lending capacity. Jiebei reportedly issued only 4.3 billion yuan of consumer loans in the third quarter of 2017, compliant with its legal lending limits, but the 4.5 billion yuan quarterly profit implied an actual loan size far larger than its balance sheet indicated. Ant is reported to have issued around 250 billion yuan of asset-backed securities in 2017. The same year its consumer lending reached at least 600 billion yuan.

The sudden expansion of high-risk consumer loans soon came to the notice of regulators who quickly demanded disclosure of securitized loans on the issuers’ balance sheets. The new rules also required lenders to hold an amount of capital in reserve proportional to its lending, whether securitized or not. To comply, Ant made some changes to its consumer lending with respect to high-risk loans.  Alibaba also bulked up the balance sheets of Huabei and Jiebei by injecting a substantial amount of additional capital.

Given its enormous scale, Ant is still dependent on external funds as well as tightly-regulated asset-backed securities to sustain its lending. According to the prospectus, the majority of its consumer loans issued this year were financed by partnering banks. The loans issued with proprietary funds have almost all been resold as asset-backed securities. To swerve these regulations, Ant submitted an application in August for a consumer finance license to allow the firm to lend up to 10 times its assets instead of the current four.

In August, the Supreme Court capped the private lending rate at four times the lending prime rate, reducing the ceiling to an effective 15.4 percent from the previous 24 percent. In its prospectus, Ant denied that the ruling applies to institutions like itself, but acknowledged the risk of future rate limits. The company has started to benchmark its interest rates against the loan prime. Along with other fine tuning this has lowered borrowing rates and is seen as a proactive response to future regulation.

Both Huabei and Jiebei have volumes comparable to a midsized bank and have long outgrown the regulatory framework they have been operating in, one appropriate for smaller private lenders. Regulators have shown great interest in the rapid expansion of joint lending with traditional banks. This joint lending is largely uncharted waters. The central bank has started a fact-finding effort, ostensibly to assess innovations in consumer finance. Given the magnitude of Huabei and Jiebei’s market, the findings will undoubtedly lead to tighter controls.

The spending power of the aspiring middle class, together with the company’s track record of innovation and risk management — its bad debt has been consistently lower than credit card companies and remained well under control during the pandemic — has made it the darling of consumer finance. Most market watchers have an enthusiasm for Ant that cannot be dampened by mere regulatory advances.