Jack Ma was right: can’t regulate an online lending platform like a bank

Jack Ma was right: you can’t use the rules of a station to run an airport. Or set up a cutting edge online lending platform like a traditional bank.

Chinese authorities have effectively berated the founder of e-commerce giant Alibaba Group Holding Ltd. for such views by suspending the initial public offering of $ 35 billion from its fintech progeny, Ant Group Co., just before the planned launch. The move follows the release of new, increasingly popular online consumer loan regulations that will reduce profits and increase the cost of compliance for fintech pioneers.

The measures essentially put newcomers on the same path as their traditional peers. And this is where the problem lies. The risks that Ant poses to the financial system are nowhere near as great as the gigantic state-owned enterprises that lack credit, or the swathes of small, oversized lenders barely kept afloat with squeezing reserves of capital. reduce.

As Chinese bank balance sheets become less user-friendly and are used to support a post-Covid economy, other forms of financing for hundreds of millions of consumers will be needed. Ant’s likes should play a crucial role. But that is impossible if they are stored in a box shaped like a bank. New regulations, for example, cap debt requirements at levels close to the levels of ordinary banks. This will affect the balance and profitability of loans taken by online lenders at a time when businesses and individuals alike need efficient credit.

Unsurprisingly, mainstream lenders aren’t big fans of these new era enablers, even though working with multiple banks is a key part of Ant’s business model. Nomura Holdings Inc. analysts expect the regulation to benefit traditional lenders by increasing their “bargaining power in cooperation with online lending platforms.”

Maybe following Ma’s advice would be more helpful. What he said was not so much an affront as a push to get authorities to be more proactive about the different kinds of financial animals. For example, the United States does not regulate banks and consumer credit companies the same, nor does it regulate credit unions or card issuers.

China’s years of debt campaign to remove bad actors from its financial womb should be a lesson. Non-bank institutions that typically fill funding gaps in most countries have helped Chinese banks cover up bad loans that were often repackaged and resold. They became key players in the vast shadow banking network, seen by Beijing as an issue that made it more difficult to determine the location of real risk and the true shape of bank balance sheets. Tightening over the past four years has not solved the problem. Arguably, this has worsened as borrowers find other loopholes.

Regulators would do better this time to let online lenders be part of a package deal, getting credit where they fall short. Consider China’s rapid and furious credit cycles. When authorities decide it’s time to put the brakes on largesse and money gets tight, everyone is fighting back – mom and pop investors, households, small and large businesses. The ensuing panic puts pressure on the creaking financial system, and regulators eventually give in.

But here’s the problem: Big tech credit is “less correlated to local economic conditions than unsecured bank credit,” a September study by the Bank for International Settlements found. He examined the use of data, in relation to collateral, to assess borrower creditworthiness and eliminate information asymmetry issues.

Usually, an economic shock is amplified by financial market conditions – the so-called financial accelerator mechanism. In China, since the bank loan market is heavily influenced by collateral, any change in the value of, say, land begins to affect the supply of credit. With the big technology lenders, “this channel no longer works,” the study said. That seems reason enough to let them work.

Ant helps banks create and contact borrowers that they might not otherwise have. If they had it all figured out, we wouldn’t be seeing the rise of fintech. Instead of making the new age of credit prohibitive, the rules should make it easier to use the heaps of data generated by consumer behavior to manage loan risk and borrower creditworthiness. Accepting this fundamental point would allow officials to better regulate the future, not support the past. As Ma noted, it is quite normal for change to go beyond the rules, “but when innovation is way ahead of regulation, when the richness and depth of innovation is far beyond the imagination of the community. regulation is abnormal ”and it is chaos.

Of course, we can discuss the capital cushions and all the post-global financial crisis deals. Fintech gamers shouldn’t be allowed to go wild. But while Ant is tall, which worries regulators, that’s not China’s biggest problem. The emphasis should be less on size and more on lending practices, borrowers and collection methods.

China remains well ahead of the digital and online banking and payments front. To remain so, its regulators must take inspiration from Jack Ma and be more proactive.

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David A. Albanese