Fintechs under more scrutiny - China edition

A fintech haven

One of the big assumptions behind Ondorse is that fintechs and large tech companies are now out of the regulatory sandbox and will be more and more scrutinized by financial regulators. As these companies become larger and bolt more financial services on to their core offering, they will be treated holistically as financial institutions. Today we explore the extreme case that is China.

The two largest fintechs in the world are Chinese. They are Ant Financial and WeChat pay. Both are part of much larger tech companies, Alibaba and Tencent respectively. Both companies ventured into fintech by first offering consumers a way to pay digitally, though the brands Alipay and WeChat Pay fail to reflect the breadth of services touted by the platforms today. Alipay, Ant’s flagship app, is now a comprehensive marketplace selling Ant’s in-house products and myriad third-party ones like micro-loans and insurance. The app, like WeChat Pay, also facilitates a growing list of public services, letting users see their taxes, pay utility bills, book a hospital visit and more.

The Alipay app recorded 711 monthly active users and 80 million monthly merchants in 2020. Among its 1 billion annual users, 729 million had transacted in at least one “financial service” through the platform. As in the PayPal-eBay relationship, Alipay benefits tremendously by being the default payments processor for Alibaba marketplaces like Taobao.

As of 2019, more than 800 million users and 50 million merchants used WeChat to pay monthly, a big chunk of the 1.2 billion active user base of the messenger. It’s unclear how many people tried Tencent’s other fintech products, though the firm did say about 200 million people used its wealth management service in 2019.

Not so fast

Ant Financial has a host of different financial licenses but, during its IPO roadshow late in 2020, it went out of its way to convince investors that it’s not a financial institution. It changed its name, asked to be covered by tech analysts and coined the novel term techfin.

In October 2020, Ant was preparing for a record-setting $34.5B dual-listed IPO when regulators pulled the offering days before the listing. The company was said to be valued at $315B at the time. Beijing was concerned about tech company overreach and the lack of regulations surrounding their financial products. In February 2021, Ant Group was ordered by Chinese regulators to restructure into a financial holding company, subject to all the capital and prudential requirements that banks face, and Alibaba (BABA) had to pay a record $2.75B antitrust fine in April 2021.

Last week, we learnt that Tencent was facing a potential record fine for violations of some central bank regulations by its WeChat Pay mobile network.

Financial regulators recently discovered that WeChat Pay had flouted China’s anti-money-laundering rules and had lapses in compliance with “know your customer” and “know your business” regulations, among other things, some of the people said. Tencent’s ubiquitous mobile payments network was also found to have allowed the transfer and laundering of funds with illicit transactions such as gambling, the people added. For WeChat Pay, “know your customer” and “know your business” procedures mean it must verify the identities of users and merchants transacting on its platform and the source of funds for those transactions.

The People’s Bank of China, the country’s central bank, uncovered the breaches during a routine inspection of WeChat Pay that concluded in late 2021, the people familiar with the matter said. The size of the fine is still under deliberation and it could be at least hundreds of millions of yuan, some of the people said. That would be much larger than the fines regulators typically imposed on nonbank payment companies for anti-money-laundering rule violations in the past.

We are still waiting for the end of the story of Chinese fintech plateform but the impending fine for Tencent confirms that these companies are bracing for a fundamental change in the government’s approach to curbing money laundering activities. Last June, the government published a draft amendment to its anti-money-laundering law that sought to broaden and deepen the scope of its regulations. The PBOC also said last year that nonbank payment companies have obligations to detect and prevent money laundering, just like banks and other financial institutions.

We created Ondorse because we experienced and witnessed first-hand how difficult it was for fintechs and marketplaces to keep pace with the latest regulatory requirements and the most recent fraud landscape. We couldn’t find a comprehensive and simple solution, most specifically when it came to “know your business” requirements. So we built it. So that when fintechs get out of the regulatory sandbox, they are well equiped and have confidence moving forward.

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