Fintech on the Move: Unravelling Chinese Domestic and Global M&A Strategies

Fintech on the Move: Unravelling Chinese Domestic and Global M&A Strategies

Euan Jones
March 1, 2024

Fintech on the Move: Unravelling Chinese Domestic and Global M&A Strategies

In the dynamic landscape of Chinese fintech, a seismic shift is reshaping strategies as firms grapple with economic headwinds and increased regulatory scrutiny at home. Seeking avenues for sustained growth, Chinese fintech players are expanding their horizons beyond mainland China. This article delves into the intricate tapestry of Chinese fintech M&A, unravelling the motivations behind this global pivot. Key industry players, notably Ant Group, take centre stage in this exploration, showcasing how their strategic decisions align with broader trends. As we navigate through pivotal moments, from thwarted acquisitions to regulatory overhauls and global expansions, we aim to decode the strategies shaping the future trajectory of Chinese fintech and payment firms on the global stage.

Ant Group’s History, Product Diversity & Regulatory Challenges

Ant Group is an affiliate company of the Chinese conglomerate Alibaba Group. The group owns and operates the world’s biggest digital payment platform, Alipay, which is used by over 1.3 billion individuals and 80 million merchants and processes $16.7 trillion of transactions. The list of global users and merchants has rapidly expanded in the past two years since the release of the cross-border ‘Alipay+’ solution. Ant Group is a prime candidate to explore and investigate the Chinese payment ecosystem dynamics, and the resulting push for international expansion and partnerships /acquisitions of Chinese payment firms.

Over the course of its foundation in 2004, Ant Group has grown at a lightning pace, dominating the Chinese market on numerous fronts. Along the journey, various milestones and events have occurred that are important for us to understand and contextualise Ant's options for future business developments and M&A choices. The most notable dynamic in Ant Group’s history has been the bubbling tensions with the Chinese authorities and regulators. Whilst international scrutiny of the firm reached a height in 2018 (US authorities blocked the acquisition of US based MoneyGram due to Alibaba affiliations and general geo-political motivations between the US and China), the largest source of regulatory pressure for the group comes from domestic sources.

The Chinese government has made payments business fundamentally unsustainable for private businesses in recent years. Payment tools were once a desirable venture in China (post 2006, when global currency supply expanded) – during this time payment system operators would use capital captured in the payments process and deploy it on high-yield short-term investments. This was embraced by the Chinese state for a while as it bolstered tech innovation across the nation. However, this door has now been firmly shut by the regulators and the attraction of payments in China is no longer what it was. As a result, in recent years, Ant Group has diversified their set of products to stray away from pure payments. The below set of product category diagrams document their loosening of a payments focus during the lead up to their failed IPO in 2020.

Source: Data from Ant Group IPO Filing

The key shift of Ant Group’s product line-up occurred in the growth of the ‘CreditTech’ business – which operates a range of loan services that target individuals and merchants. Until recently, however, Ant has not acted like a traditional bank. It was relatively free from regulatory restrictions surrounding loans and wider banking products, handing out loans with very high-interest rates compared to traditional banks. Whilst untouched for some years, the Chinese authorities chose to clamp down on this activity in late 2020. Regulatory pressure mounted on Ant Group and the fallout resulted in a failed IPO in 2020 (largely attributed to the tensions between founder Jack Ma and regulatory representatives of the People’s Bank of China). These domestic regulatory pressures and surrounding scrutiny have also led Ant Group to undergo significant business restructuring as well as being hit with fines of up to $1B.

A recent internal share buyback exposes a major shrinkage in Ant Group’s valuation (75% reduction from 2020 IPO valuation, which would have been the largest in history, surpassing that of the portion of Saudi Aramco that was floated for $25.6B). Additionally, in their most recent quarterly financials, Ant Group has revealed that profits are down 92% from the same period last year. This has been pinned on regulatory strains and a lack of domestic investment. It’s now clear to Ant Group that domestic diversification is not enough to continue fast growth – international expansion is paramount.  

Ant Group’s Future and Global Ambitions

As a result of domestic pressures and slowed growth, Ant Group has shown that international markets pose as their next big target for growth. This expansion has mainly taken shape within Southeast Asia, such as the acquisitions of HelloPay in 2016 and 2C2P in 2022. Both are payments firms in Singapore, with the former now rebranded as Alipay Singapore and the latter providing additional capabilities for Ant Group in the key financial hub of Southeast Asia.

Some notable acquisitions have been attempted in Europe and the US also. An acquisition of MoneyGram, a US based company that offers digital money transfer and financial services, was blocked by the US regulators in 2018. This signified the first large scale M&A activity planned by Ant Group in western markets. The next year, in 2019, Ant Group bought UK based payments firm WorldFirst for $700m. Now, in 2024, Ant Group has formalised their acquisitions of Netherland’s MultisafePay for $200m.The expansion of Ant Group via acquisitions in the West marks a significant path beyond its traditional Asian market, reflecting a broader trend among Chinese fintech companies seeking global prominence.

The motivations for Ant Group, and other Chinese fintech, to make Western acquisitions are numerous.  Diversification and risk management is the first that is often mentioned – reducing their over exposure to the fluctuations and regulations of the Chinese economy that has been struggling in recent months.  Another motivation is that of increased access to established markets. Western financial markets are sophisticated and will provide a stable environment for Ant Group to grow their capabilities, with exposure to best market practises that can be applied to their global strategy.

By expanding into the West, Ant Group highlights their vision of creating a seamless global digital payments network. Through establishing themselves in Western markets, Ant Group can facilitate cross-border transactions and offer its services to a more extensive user base. Based in Singapore, Ant International (the international business division of Ant Group) started off supporting the rise of eCommerce and cross-border tourism in China. In recent years, Ant International has since developed a suite of pivotal technology capabilities to improve long-term growth in Asia and beyond. One of these technologies is ‘Alipay+’, which has been transforming cross-border payments since its release in 2020. The solution “connects online and offline merchants with digital payment methods, such as mobile wallets, bank apps and BNPL apps, across the world” says Jia Hang, Vice President for Southeast Asia, Ant Group. This allows users with a digital wallet connected to the Alipay+ system to make QR code-based payments at merchants around the world using their local currency, whilst merchants are provided settlement in their own local currency too.

In November of last year, Ant International revealed their strategy for the coming years during the Voyage Conference in Singapore. This most notably included plans of expanding partnerships across cross-border mobile payments and enhancing cross-border SME digital payment and financial services. Digital banking services were also a key part of the strategy plans. This paints a similar product diversity strategy as already deployed in China, but now on the global stage.

Additional developments for Ant Group include the development of their AI solution ‘NextEvo’ and obtaining a financial holding license (a milestone that will surely mark the end of the tit-for-tat feud currently held with the Chinese regulators). A new IPO attempt is likely to follow this, with the Hong Kong stock exchange primed to be the market of choice for Ant Group.

Ant Group Within the Wider Chinese Fintech Landscape

Ant Group finds itself within a group of Chinese fintech businesses that are currently looking to expand throughout international markets. In April 2021, 34 technology firms were warned to “curb excesses” following an antitrust review by the regulators. Following some new IPO restrictions around the same time, 84 Chinese technology companies ended up withdrawing their applications.

Tencent, the multimedia firm based in China that operates WeChat, had $46B wiped off their market cap following new restrictions on the gaming industry late last year. Lufax, a key leader of personal financial services in China, acquired virtual banking services provider PAOB (Ping An OneConnect Bank) for $120m as the seller was struggling to meet new regulatory requirements around capital adequacy and hence chose to cash out. This all goes to say that Ant Group is far from being the only fintech in China that is suffering from regulatory changes. Some of their compatriots are also reigniting international IPOs (such as LianLian payments) and acquisitions whilst others are selling assets and sometimes their entire business.

International Expansion: The Carrot or Stick?

In the dynamic realm of Chinese fintech, the pursuit of international expansion by companies like Ant Group reveals a nuanced narrative of challenges and opportunities. Facing evolving domestic regulations, Ant Group has navigated a complex landscape, prompting strategic shifts from singular payments focus to a diversified portfolio.

Adapting to regulatory requirements within China has become a defining aspect of Ant Group's journey. The regulatory pressures, though challenging, have propelled a necessary transformation, prompting fintech firms to reassess and broaden their offerings. Diversification emerges as a response to these challenges, offering the benefit of risk management and access to more stable markets.

Firms, including Ant Group, are compelled to lessen their reliance on a domestic Chinese market, that comes with economic and regulatory uncertainties, and seek opportunities in Western markets where matured financial and regulatory ecosystems can inform global strategies. Mergers and acquisitions become strategic tools in this pursuit. Ant Group's endeavours in the West, marked by both successes and setbacks, signify a proactive strategy beyond regulatory hurdles. These moves underscore the industry's ambition to establish a global digital payments network (the ‘carrot’), going beyond a reactive response to challenges at home(the ‘stick’).

The vision of a cross-border future acts as another compelling motive amid the domestic complexities. Ant Group envisions a seamless global digital payments network. The expansion into the West not only facilitates cross-border transactions but paints a picture of international moves as proactive steps towards shaping the future of global fintech.

At EDC, as we continue to track all M&A activity within the payments and fintech industries, we believe the movement of Chinese fintech, such as Ant Group, to make international acquisitions is a case of both the carrot and the stick.

The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).

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