Jack Ma’s ant in data-sharing talks with state-owned companies

HONG KONG – Ant Group Co. is in talks with Chinese state-owned companies to create a credit rating company that will put the fintech giant’s proprietary consumer data under the control of regulators, according to people familiar with the matter.

The new entity, which could be established as early as the third quarter of this year, could result in Ant giving up some control over the voluminous data it has on the financial habits of Chinese citizens. Over a billion people use Ant’s Alipay app to spend, borrow, or invest their money, and the information Ant has collected and used has been the secret sauce behind the company’s success in recent years.

Talks between Ant, which is controlled by billionaire Jack Ma, and Chinese state-owned companies are likely to result in the formation of a joint venture that would be licensed as a credit rating company. Ant and regulators have also been discussing whether the company should be run and controlled by Ant or state-owned companies, according to people familiar with the matter.

Regulators are pushing for potential state shareholders to play a bigger role in the new entity in order to have more voice in its operation, according to some of the people familiar with the negotiations. Potential shareholders include a Shanghai-based financial conglomerate. There has also been talk about what kind of data the startup would collect and how the credit scores it produces would fit into China’s broader plans to build a nationwide database, the people added.

Discussions continue and no final decisions have been made, the people said.

A spokesperson for Ant declined to comment on plans for the credit rating business. The People’s Bank of China, which oversees a broader review of Ant, did not respond to requests for comment.

Ant is controlled by billionaire Jack Ma.

Photo:
Agence France-Presse / Getty Images

The new venture with state-backed investors would nullify Ant’s previous attempts to spearhead a national credit rating system under its own brand, Zhima Credit, which began six years ago. Ant once had the ambition to use Zhima, formerly known as Sesame Credit, to provide credit scores to the majority of China’s population, but those hopes were dashed, narrowing the division down to what is essentially a loyalty program for Alipay users.

Despite all of China’s global advancements in mobile payments and fintech, the country has lacked a strong national credit rating system similar to the United States’ FICO, the ratings of which are used by many lenders and based on loan histories. and payments of the people of a bank. Variety of sources.

The PBOC operates a Credit Reference Center that collects credit information about individuals and businesses from banks and other financial institutions. But it lacks data on many people who do not qualify for traditional bank loans.

Over the past decade, Ant and other fintech companies increased lending to much of China’s population, but the information they collected about people was largely kept within their own systems.

Until recently, Ant had resisted pressure from financial regulators to share its data or put it in a central repository accessible to other financial institutions, saying it did not have the consent of its users to do so.

The tables have now turned, following the cancellation of Ant’s initial public offering and a broader regulatory crackdown on China’s tech giants. By tightening its grip on Ant, Beijing is also trying to stop what it sees as excessive data collection and lax protection of consumer privacy.

In less than six months, Chinese tech giant Ant went from planning a highly successful IPO to a restructuring in response to pressure from the central bank. As the US is also targeting big tech, this is how China is moving faster. Photo Illustration: Sharon Shi

In April, Ant said it would restructure into a financial company supervised by China’s central bank. He pledged to fully regulate his payments, loans, wealth management and other operations, and said he would establish a company that will apply for a personal credit reporting license.

Earlier this month, Ant founded a consumer finance company that also counts state and private companies as shareholders. That company will change the way Ant finances and makes some of its short-term loans.

Ant, whose Alipay platform handled the equivalent of more than $ 17 trillion in payment transactions and originated loans to more than a third of China’s population in the year to June 2020, has collected treasures of consumer data for years.

In 2015, the company launched Sesame Credit, then changed the name to Zhima, the Mandarin word for Sesame. Ant said his goal was “to help the hundreds of millions of Chinese consumers and businesses with little or no formal credit history to establish their trustworthiness in a business environment.”

Ma, who founded Alipay’s original parent company, Alibaba Group Holding Ltd., had high hopes for the division, whose name was similarly inspired by the folk tale “Ali Baba and the Forty Thieves.” In it, the magical phrase “Open Sesame” revealed the entrance to a cave where the thieves had hidden a treasure.

Around that time, the PBOC invited eight private companies, including Zhima and Ant’s rival, Tencent Holdings. Limited.

, to test your own credit rating systems. That set off a race by companies to build what they hoped would eventually be adopted as the nation’s leading credit monitoring database.

Zhima expanded aggressively, hiring people from companies like Equifax to build a risk assessment and rating system that could connect to thousands of financial institutions like banks, consumer finance companies, and online lenders.

Ant aggressively expanded Zhima Credit after launching it in 2015, but it is now a shadow of what it was before.

Photo:
Qilai Shen / Bloomberg News

Zhima’s credit rating metrics incorporated more than people’s loan and payment history into their evaluations. It also looked at alternative data such as people’s online social media and shopping habits, which are seen as complementary to information on auto loans and mortgage debt.

In early 2016, Ma made his first stop in Zhima during a post-Lunar New Year visit to Ant’s headquarters in Hangzhou. In an encouraging talk to employees, he proclaimed that “Zhima will be adopted in every home,” according to a person who was there.

Inspired, Zhima’s team sped up the launch. Between June and September of that year, more than 300 non-bank financial institutions were connected, such as peer-to-peer lending platforms, which were multiplying in China, according to people familiar with the matter. He also provided his credit scores to dozens of commercial banks, some of them providing him loan data and default information in return, the people said.

The industry expected the People’s Bank of China to distribute credit rating licenses after the pilot program ran its course.

That never happened. In 2017, regulators stepped up their crackdown on peer lending platforms after some of them turned out to be scams or lacked proper risk controls.

The People’s Bank of China also decided that it no longer wanted a nationwide credit rating system run by private for-profit companies. A central bank official told a state media outlet at the time that companies were unwilling to share information and had conflicts of interest, as well as a poor understanding of how to do credit scoring.

Instead, the central bank in early 2018 issued a three-year license to a new government-run company called Baihang Credit Scoring. The eight companies previously asked to build their own systems were told to suspend those efforts, each given an 8% stake in Baihang, with the remaining 36% held by a government-affiliated entity. . Everyone was asked to input data into Baihang to help build a national credit rating database.

It was another failed effort, because some of the companies did not want to contribute data from which their rivals could benefit. “There was no way Ant would share all of this with a company in which he only had an 8% stake, so most of the benefits from the data would potentially go to other companies,” said Eswar Prasad, former head of China. from the International Monetary Fund and professor at Cornell University.

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With his ambitions reduced, Zhima’s relevance began to fade. Ant changed his mission and turned it into a loyalty program for Alipay users. People with high Zhima scores could enjoy benefits such as no-deposit hotel reservations and car, bicycle, and mobile power bank rentals. Zhima’s team shrank, becoming a shadow of what it was before, according to people familiar with the matter.

In January this year, the central bank published a draft rule to “strengthen the supervision and management of credit rating companies.” He said such firms would require licenses to operate legally.

Zhima will not be part of the new credit rating company Ant is likely to establish with state-owned companies, according to people familiar with the matter. The new entity would have access to the same data used by Zhima, and after it is formed, Ant would leave his position as a shareholder in Baihang, the people added. Baihang’s credit rating license expired in January, according to a regulatory document. Baihang did not respond to a request for comment.

At the end of the day, Ant will have to share some of his consumer data with other institutions because “it is a matter of public interest,” said He Zhiguo, a finance professor at the University of Chicago.

The Ant headquarters, where Jack Ma made Zhima his priority for a visit in 2016.

Photo:
Qilai Shen / Bloomberg News

Write to Jing Yang in [email protected] and Xie Yu in [email protected]

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