Headlines late last year breathlessly chronicled the whereabouts of former Alibaba CEO Jack Ma and tensions between Ma and the Chinese government. The missing billionaire, the last-minute cancellation of a history-making IPO, and the speech that apparently started this tailspin of events captured the attention of the world. But beyond the headlines, this story is part of a larger signal that China is sending to big tech: put on your helmets, because we are getting off the sidelines.
China to big tech: put on your helmets, because we are getting off the sidelines.
In the last four months, China has published a slew of regulations (some still in draft form) aimed at big tech and their outsized role in the economy. This includes the draft Personal Information Protection Law (PIPL), new rules including capital requirements and caps for online lenders, as well as draft anti-trust rules for digital platforms. And, dramatically, China called off Ant Group’s globally anticipated IPO in November, in December launched an anti-trust probe into Ant’s ecommerce parent Alibaba, and in February 2021 told Ant to restructure itself into a financial holding company.
The scale of big tech’s reach into China’s financial sector is worth reiterating. A billion Chinese consumers use Alipay, owned by Ant, to pay for everything from groceries (even in the U.S.) and utilities, to school tuition and traffic tickets. Alipay, and its competitor WeChat Pay (owned by TenCent), have deftly created business models that leverage increasing use of smartphones, allow for easy funding of digital wallets through linked bank accounts, and coax users into their digital ecosystem through low transaction fees and an ever-increasing array of services. Cross-selling through this ecosystem can be lucrative. For instance, Alibaba’s product Yu’E Bao rapidly became the largest money market fund in the world for a time.
More recently, Ant has received attention for facilitating hundreds of millions of online loans to consumers, many of whom could not qualify for bank-issued credit cards. Despite the mammoth amount of outstanding debt, Ant has taken on limited risk and acted as more of a facilitator than a lender. For instance, at the end of June 2020, Ant had approximately $267 billion in outstanding consumer debt, but just 2 percent of that amount was funded by Ant.
Whose portfolios are on the hook? Ant has partnered with more than 100 commercial lenders and regional banks, collecting fees on interest income from them, and utilized colossal troves of transactional Alipay data to facilitate underwriting. This frenzy of unsecured lending has raised concerns around the concentration of risk that sits with lenders and not facilitating platforms.
Ant has utilized colossal troves of transactional Alipay data to facilitate underwriting.
New Rules of the Road
New regulation from China’s Banking and Insurance Regulatory Commission clamps down on both sides of the online lending partnerships. For the lenders, regional banks are no longer permitted to lend outside their geographies, and there will be new caps on how much of a bank’s capital and portfolio can be lent online. And for the platforms, starting in 2022, they will have to fund at least 30 percent of every loan they make in concert with banks. These measures may take some needed steam out of the ballooning online lending market.
Digital platforms are also the subject of new draft anti-monopoly rules by the State Administration for Market Regulation, which targets practices such as the use of data and algorithms to offer different prices to different consumers, as well as self-dealing through elevating their in-house products compared to competitors who are selling on their platform. As they take comments on proposed revisions, antitrust authorities have increased the number of investigations and in recent months fined Alibaba, Tencent Holdings as well as smaller platforms like Pinduoduo and Meituan.
The PIPL, when approved, will be the country’s first comprehensive data protection regime applicable to all data processors, including big tech. The draft PIPL contains some similarities to the European GDPR, including provisions for the legal basis for processing data and enumerating data rights for consumers such as the right to rectify data mistakes. PIPL diverges from GDPR in terms of a larger focus on data localization, however.
Taken in aggregate, the package of emerging regulations demonstrates resolve among Chinese authorities to get tougher in the face of the enormous market power of big tech, which during the pandemic only embedded itself further into daily life.
However, beyond the heavyweight bouts between big tech and political authorities and implications for the companies, it is important to monitor how consumers are impacted by the new rules. Hopefully, consumers will benefit from more responsible online lending practices, fewer scams and predatory pricing, and more communication around the use of their data. As one Chinese internet regulator stated, consumers should not be “prisoners to algorithms.” We’ll be closely watching the market to understand how fintechs and consumers are responding and to understand what lessons other markets might draw from the Chinese approach to checking the power of big tech.
In the meantime, read our recent publication, The Stories Algorithms Tell: Bias and Financial Inclusion at the Data Margins, about how FSPs are using algorithmic data to make credit decisions, how those affect low-income consumers globally, and what regulators can and should do.