How Jack Ma's $280 billion unicorn Ant Group just had its legs broken

Any doubts that Ant Group Co. overstepped the mark are now laid to rest. The new dilemma for the company’s management, and its bankers, is rewriting the narrative of the world’s biggest fintech giant.

Executives have been told to return the Alibaba Group Holding Ltd. affiliate to its payments roots, Bloomberg News reported Sunday citing a statement from the People’s Bank of China. This directive implies that its credit, insurance and investment product lines may need to be dumped, though the central bank stopped short of calling for the company to be broken up.

That’s a huge blow which effectively hobbles a company that was on the cusp of a $300 billion market capitalization before its November listing was pulled. It had previously had a pre-initial public offering valuation of as much as $280 billion, putting it ahead of Bytedance Ltd. on the global unicorn list.

While Ant’s origin story comes from the ubiquitous Alipay service that piggybacked off the success of Alibaba’s expanding e-commerce empire, the real money was to be made on all the extras.

According to its prospectus, 63% of Ant’s revenue in the first six months of this year came from its digital finance technology platform and 36% from digital payments and merchant services — compared to a 44%-55% split for the year to Dec. 31, 2017. The main driver of that growth has been its CreditTech business, which gets fees and commissions for loans issued by partner financial institutions enabled by Ant’s platform.

But now Beijing has told Ant to “rectify” its lending, insurance and wealth management businesses. Authorities also publicly criticized its cavalier attitude toward regulatory requirements, sub-par corporate governance and regulatory arbitrage.

By taking away entire categories of financial services, Beijing not only reduces Ant’s value but freezes its growth prospects. The company’s payments business expanded just 13% in the first half, from a year prior, while digital finance grew 57%. This means that in a worst-case scenario, Ant could lose 63% of an operation that posted almost 60% growth, leaving it with a much smaller and slower business.

Compounding the problem is the value that these non-payments services brought in the form of network effects. In Ant’s own words from its prospectus, while the financial services business benefits from Alipay’s popularity, the reverse is also true:

Our broad suite of digital payment and digital finance services attract to our Alipay platform a large number of consumers and businesses.

And while Alibaba, Ant and their founder Jack Ma ought to be worried, others in the fintech space aren’t in the clear either. Tencent Holdings Ltd. is the other major player in this arena and is too big for regulators to ignore, even if its executives have been more circumspect in how they address the nation’s regulatory flaws.

Less than two months after the dramatic cancellation of its blockbuster IPO, Ant executives are left in charge of a company whose own narrative is now unclear. Doubtless its shareholders still want a public listing since that’s the best way to liquidate their holdings, so management must come up with a new storyline that justifies even a drastically-trimmed valuation.

After all, that’s where a unicorn’s magic lies — in a fantastic fairytale that everyone wants to believe.