Jack Ma has built his fortune disrupting the status quo. In just over two decades the entrepreneur has helped to revolutionise China’s economy by changing the way millions of its citizens buy, sell and invest. This time, however, the limelight-seeking billionaire appears to have flown a little too close to the sun. Mr Ma’s swipe at China’s state-dominated banking system, just days before the expected flotation of Ant Group, his online finance business, caused consternation in Beijing. The result has been the dramatic suspension of Ant’s market debut.
Beijing’s eleventh-hour decision carries obvious risks. Predictable regulation helps to underpin confidence in markets and the economy. Unexpected changes, especially if politically-driven, are usually damaging. By, in effect, bringing Mr Ma to heel, Beijing has shown two things: one, no individual or company is more important than the state, and two, its central priority is to ensure domestic economic stability.
The tussle with Ant is also a high-profile example of the wider global debate over regulation in digital banking. Most of today’s challenger banks emerged after the 2008 crisis. Their slick, web-based offerings contrasted sharply with the frequently poor service of traditional lenders. The pandemic marks the first downturn to confront the new entrants. It should have been an opportunity to grab market share. Instead, indications in Europe at least are that established banks have benefited from a flight to safety.
The trend highlights the trade-off faced by regulators to encourage innovation while protecting consumers and ensuring financial stability. Some of the fintech players lack the state-backed consumer protection that comes with a formal banking licence. The question regulators must wrestle with is — what is a bank? Is it a company that takes deposits or is it one that just lends and processes payments?
This is a live debate in the US, where the Office of the Comptroller of the Currency has proposed a fintech charter which would, in essence, give fintechs one set of national regulations while excluding them from the most burdensome ones linked to deposit-taking. There are important repercussions both for the Federal Reserve, as well as state regulators, to consider. Another issue is whether the charter would enable large technology groups to enter the financial system by the back door.
To avoid a failure of regulation or rules fragmenting further requires a federal approach and lawmaking by Congress. The US is still scarred by a system of banking regulation that failed to prevent two financial crises in recent decades. Risk tends to concentrate in the least regulated area of the system. Regulators — in China or the US — cannot afford to let fintech become its Achilles heel.