By Raymond Zhong

When the coronavirus jammed up China’s economy last year, Rao Yong needed cash to tide over his online handicrafts business. But he dreaded the idea of spending long, dull hours at the bank.

The outbreak had snarled delivery services and made customers slow on their payments, so Rao, 33, used an app called Alipay to receive early payment on his invoices. Because his Alipay account was already tied to his digital storefront on Alibaba’s Taobao bazaar, getting the money was quick and painless.

This time last year, Ant was also preparing to hold the world’s biggest initial public offering. The IPO never happened, and today Ant is overhauling its business so regulators can treat it more like what they believe it is: a financial institution, not a tech company.

In China, “the reason fintech grew that much is because of the lack of regulation,” said Zhiguo He, who studies Chinese finance at the University of Chicago. “That’s just so clear.”

Now the question is: What will regulation do to an industry that has thrived precisely because it offered services that China’s state-dominated banking system could not?

With Ant and other big platforms cornering the market, investment in Chinese fintech has fallen in recent years. So Ant’s chastening could make the sector more competitive for startups. But if running a big fintech company means being regulated like a bank, will the founders of future Ants even bother?

Zhiguo He said he was mostly confident that Chinese fintech entrepreneurs would keep trying. “Whether it’s hugely profitable,” he said, is another question.

For much of the past decade, if you wanted to see where smartphone technology was making China look most different from the rest of the world, you would have peered into people’s wallets. Or rather, the apps that had replaced them.

Rich and poor alike used Alipay and Tencent’s WeChat messaging app to buy snacks from street vendors, pay bills and zap money to their friends. State media hailed Alipay as one of China’s four great modern inventions, putting it and bicycle sharing, e-commerce and high-speed rail up there with the compass, gunpowder, papermaking and printing.

But the tech companies didn’t enter the finance business to make it easier to pay for coffee. They wanted to be where the real money was: extending credit and loans, managing investments, offering insurance. And with all their data on people’s spending, they believed they would be much better than old-fashioned banks at handling the risks.

With the blessing of China’s leaders, finance arms began sprouting out of internet companies of all kinds, including the search engine Baidu, the retailer JD.com and the food-delivery giant Meituan. Between 2014 and 2019, consumer credit from online lenders nearly quadrupled each year on average, by one estimate. Nearly three-quarters of such platforms’ users were under age 35, according to iiMedia Research.

Last year, when Ant filed to go public, the company said more than US$260 billion in credit was being extended to consumers on Alipay. That meant Ant alone was responsible for more than 12 per cent of all short-term consumer lending in China, according to the research firm GaveKal Dragonomics.

Then in November, officials torpedoed Ant’s IPO and got to work taking apart the plumbing that had connected Alipay with China’s banks.

They ordered Ant to make it less convenient for users to pay for purchases on credit — credit that was being largely funded by banks. They barred banks from offering deposits through online platforms and restricted how much banks could lend through them. At some banks, deposits offered through digital platforms accounted for 70 per cent of their total deposits, a central bank official said in a speech.

In a news briefing last week, deputy governor at the central bank, Fan Yifei said regulators would soon be applying the full Ant treatment to other platforms.

“On the one hand, the speed of development has been astonishing,” Fan said. “On the other hand, in the pursuit of growth, there have arisen monopolies, disorderly expansion of capital and other such behaviors.”

Ant declined to comment.

As Ant and Tencent scramble to meet regulators’ demands, they have pared credit services for some users.

One big hit to Ant’s bottom line could come from new requirements that it put up more of its own money for loans. Chinese regulators have for years disliked the idea of Alipay’s competing against banks. So Ant instead played up its role as a partner to banks, using its technology to find and assess borrowers while banks staked the funds.

Now, though, that model looks to Beijing like a handy way for Ant to place bets without being exposed to the downside risks.

“If problems arise, it would be safe, but its partner banks would take a hit,” said an analyst in Beijing with GaveKal Dragonomics, Xiaoxi Zhang.

When Chinese regulators think about such risks, it is people like Zhou Weiquan they have in mind.

Zhou, 21, makes about $600 a month at his desk job and wears his hair in a swooping, reddish-brown mullet. After he turned 18, Alipay and other apps began offering him thousands of dollars a month in credit. He took full advantage, traveling, buying gadgets and generally not thinking about how much he spent.

After Alipay slashed his credit limit in April, his first reaction was to call customer service in a panic. But he says he has since learned how to live within his means.

“For young people who really love spending to excess, this is a good thing,” Zhou said of the clampdown.

China’s brisk recent economic growth has most likely made officials more comfortable with reining in fintech, even at the expense of some innovation and consumer spending and borrowing.

“When you consider that household debt as share of household income is among the highest in the world right now” in China, “then more household debt is probably not a good idea,” said a finance professor at Peking University, Michael Pettis .

Qu Chaoqun, 52, was thrilled a few years ago to find he had access to US$30,000 a month across several apps. But he wanted even more. He started buying lottery tickets.

Soon enough, Qu, a takeout-delivery driver in the megacity of Guangzhou, was borrowing on one app to pay his bills on another.

When his credit was cut by almost half in April, he fell into what he calls a “bottomless abyss” as he struggled to pay his outstanding debts.

“People inevitably have psychological fluctuations and impulses that can bring great harm and instability to themselves, to their families and even to society,” Qu said.