Chinese Communist Party seizes control of the global fintech revolution

Ant Group billed itself as the future of finance. In fact, its launch was going to be the occasion for the single biggest IPO in history, with some $34.4 billion in stock due to be listed on the Shanghai and Hong Kong Stock exchanges 5 November. Behind it all was Jack Ma, China’s richest man. Yet on 3 November, just two days before it the IPO was due, the Chinese government stepped in to force the IPO’s postponement. The decision is rumoured to have come from the very top – that is, from President Xi Jinping himself.

The affair has been cast as something of a showdown between the Chinese State and its most successful entrepreneur. There is, perhaps, an element of this, but, more fundamentally, these events give us a wider insight into the forces that stand to transfigure global finance.

The first key point is that Artificial Intelligence is going to absolutely central to fintech in ways that could utterly reshape how banks and other financial institutions operate. Ant Group’s keystone service was Alipay, an online payments service that came to dominate the market in China. Over 1 billion people use Alipay. In 2019, it processed 55% of all digital payments in China, worth a total over 201 trillion yuan ($29.9 trillion).

However, its main source of revenue came from its loans service, which was managed by Artificial Intelligence. Alipay had started as a spin-off the business that first made Ma a billionaire – Alibaba. This is a giant online marketplace that is often seen as China’s answer to Amazon and, like Amazon, it has outgrown its original business model by venturing into entertainment, cloud computing, and, vitally, fintech.

Alibaba and Alipay’s sprawling size and China’s relative lack of privacy protections meant that Ant could gather vast amounts of data, including information about whether people were paying their phone bills on time. Individuals using Alipay and SMEs using Alibaba’s online marketplaces were offered loans with the credit limits and interest rates set by AI.

The results seemed to speak for themselves: loan delinquency under this system was only 1-2%. So confident was Ant in its AI-run system that it barely carried any capital to secure the loans. Only 2% of the outstanding credit balance was held by Ant with the rest of the balance securitised or underwritten by third-party financial institutions, which also paid Ant a fee for lending via its platform.

For many in the financial industry, this combination of security and flexibility naturally seems to be the future. Ma certainly thought that this was the case. So, when new rules floated by China’s financial regulators that required Ant Group to hold 30% of the outstanding credit balance, the same as a bank, Ma condemned this as stemming from a “pawnshop mentality”.

Collaterals and warranties were nothing more than a pawnshop’s model writ large, Ma’s logic goes – AI credit management is the future. Everything else – traditional banks, the Basel Accords, even the CCP will have to get out of the way.

The Chinese government, it seems, disagreed.

Such a brazen challenge to the decisions of the Chinese Communist Party was a risky move, even for China’s richest man. Indeed, some see the postponement of the IPO – and the studied lack of details provided as to when it might be allowed to proceed again – as the party’s way of giving Ma a firm rap across the knuckles and reminding him of who is in charge.

However, even had Ma been the soul of obsequiousness this would still have left the Chinese government having to deal with the second key issue Ant has thrown up. Can we trust AI to manage our financial systems?

AI are regulatory nightmares. Famously they are black boxes i.e. their decision-making processes so vast and complex that people cannot fully comprehend them. This means a massive problem when it comes to attributing responsibility. The classic case being considered by many is if a self-driving car crashes who is to blame?

Analogously for Ant if the default rate on its loans suddenly shoots up, potentially causing a financial crisis, who is to blame? Even more fundamentally, can we trust AI to run vital services – in finance and elsewhere – if we can’t fully understand how it operates? Currently a credit management system with a 2% default rate looks like a path to greater financial stability. The nervous worry that this opaque system might just be the next financial crisis in the making.

The fact that these issues are being grappled with by the Chinese government, not the USA’s or the UK’s, brings us to the final point. China is miles ahead of anyone else when it comes to fintech. Already, their online payment systems dwarfed those of Western rivals. Now they are cementing the advantage in other fintech areas.

This fintech lead also translates and relates to advantages in the global financial system more generally. In 2014, the same year Alipay was spun off into Ant, Jack Ma took Alibaba public on the New York Stock Exchange. It is certainly noteworthy that this year Ma planned Ant’s IPO in Shanghai and Hong Kong.

Ant was designed in China, based in China, and, until the latest upset, it was also due to be IPOed in China. If it is indeed the future of global finance, then the future is looking firmly Chinese and, for the time being, that effectively means that it will be under the auspices of the CCP.