Stricter rules will apply to the Chinese Ant. And for...

It should have been a party for the global online payments industry: China’s Ant Group’s double debut on the Shanghai and Hong Kong stock exchanges this Thursday. The cancellation on Tuesday due to ‘supervisory issues’ is still putting the spotlight on the sector: what is the situation with the supervision of fintech and online payment companies?

Ant owns the very popular Chinese Alipay. It once started as a payment app, but now consumers and SMEs can also take out loans and insurance via Alipay. This platform approach is seen by many strategy consultants and bank and insurance directors as the future for the financial sector: make sure that users only need your app for all their financial services.

Not only do you get fixed income, but you also learn a lot about your customers. This data can then also be used to earn money, for example by providing online retailers with advice on how and when to approach their customers.

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If the IPO had gone ahead, Ant shareholders with 11 percent of the shares would have wanted to raise $ 34 billion (nearly $ 29 billion). That would make the company worth about $ 300 billion. Ant was like that Has been worth almost as much as the largest bank in the world, the American JP Morgan Chase (over 315 billion dollars) and more than the largest Chinese bank, ICBC (256 billion dollars).

Worldwide, payment companies that arrange online payments for shops and consumers are in any case much more popular among investors and investors than banks that manage savings and provide loans. For example, the Dutch Adyen, which counts Nike, Easyjet, Booking.com and even Alipay among its clientele, with a market value of 46 billion euros, is worth considerably more than the largest bank in the Netherlands, ING (25 billion euros).

This high appreciation is due to the potential that investors see in payment companies, while it seems to be lacking in banks. Payment companies are making substantial profits and growth, that currently seems like a normal rule. In recent years, for example, Adyen has made more than 20 percent profit on the invested capital (return on equity, or RoE), while for banks like ING a return of 10 percent is seen as the highest attainable.

But while the streamers were already being hung in Ant’s headquarters in Hangzhou, so to speak, the party of Ant and the payment industry suddenly ended on Tuesday. The problem? Just before the IPO, the Chinese regulators announced that they are getting stricter on the fintech and payment sector. As a result, the IPO papers of the payment company submitted by Ant no longer outline the correct situation, according to Shanghai Stock Exchange.

Not a bank but a tech company?

The ‘light’ supervision and low capital requirements have contributed to the fact that Ant was able to grow rapidly in recent years at the expense of the slowly innovative, but also much more heavily regulated Chinese banks. Founder Jack Ma has stated several times that Ant is not a banking institution, but a technology company. And so it would be right for his company to have to meet less stringent requirements.

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The Chinese authorities now seem to think differently about this. In a meeting on Monday, CEO Ma is said to have heard from Chinese regulators that his company must from now on, like banks, hold enough capital on loans to better absorb any losses. Ant would also be obliged to partially cooperate with banks when providing loans.

Whether the measures stem from genuine concerns about China’s growing debt mountain, or whether there is retaliation from Ma’s recent critical comments about China’s banking sector is not entirely clear. But there is no question that the returns of Ant will be significantly depressed by the measures. “Not only do you have to set aside capital, but supervision also takes a lot of time for your staff,” explains Herman Spruit, partner at consultancy firm Bain & Company.

Developments in China will be viewed with suspicion by the directors and investors of other payment companies. Because what applies to Ant also applies to the sector worldwide: the high profits of recent years are partly due to a much lower supervisory pressure than at banks.

This makes it much easier for a payment institution to expand across the border than for banks.

In the EU, after the Wirecard scandal, there are also fears for more rules

The question is whether it will stay that way. In Europe, it is feared that the accounting scandal surrounding the German payment company Wirecard will lead to stricter rules. In the Netherlands, the United Payment Institutions Netherlands (VBIN) has been complaining that the supervisory costs of De Nederlandsche Bank are constantly rising. And with regard to the control of money laundering, there is enormous pressure on the payment institutions. “These rules are no different for payment companies than for banks, and therefore cause them just as many costs and risks,” predicts KPMG adviser Paul Koetsier.

Will banks and payment companies start to converge again in the coming years in terms of stock market value? That is not immediately likely. After all, light supervision is not the only thing that benefits payment companies. Payment companies, which are often young, are much less affected than banks by complicated, old IT systems. The fees that payment institutions receive from their customers are a much more certain source of income in these times of low interest rates than the interest margin of banks. And for now, online payment companies are the winners of the corona crisis, thanks to the enormous growth of online shopping.