This final instalment in a five-part series on the future of China’s fintech industry looks at what the largest fintech companies must do to survive and thrive in a harsher regulatory landscape. Earlier instalments are here . When Ant Group’s executive chairman finally broke his silence this week, nearly two months after the largest stock sale in history blew up , his choice of words at a seminar in China were more akin to the speech of a state-appointed banker than a technology entrepreneur out to disrupt the financial industry. Ant Group , which grew into a US$350 billion company while still in its teens, has “spared no efforts” in studying the government’s latest five-year economic plan, and “policy insights into financial security and financial stability,” according to a translation of the speech by executive chairman Eric Jing, delivered in Mandarin Chinese. Jing’s conciliatory tone contrasts sharply with the more strident speech in late October by Ant Group’s founder Jack Ma , and shows regulators have placed firm guardrails on the blistering growth in the world’s largest market for financial technology, or fintech. As regulators finally catch up with the revolution going on around them, fintech companies will have to reach deep into their tool bags for innovative new products and re-engineer themselves to survive and thrive in a harsher environment. On Friday, Ant Group removed internet-deposit products offered by banks from the shelves of its virtual financial market place as it sought to assuage regulators’ fear of small and regional banks slipping under their radar by marketing on digital platforms. Ant Group’s smaller peers are also adapting to the torrent of new rules since August, designed to bring the swashbuckling Chinese fintech sector to heel . Profits of Wall Street-listed Chinese fintech firms – Lufax, 360 Digitech, LexinFintech Holdings and Finvolution – rose in the third quarter even after Beijing lowered the boom on outsize interest rates in the industry. The nimble fintechs are also expanding into less-regulated markets across Southeast Asia and into wealth management. “Despite not knowing exactly what the future rules may be, we are now reasonably clear of [the regulators’] intent and therefore will be pre-positioning our business accordingly,” Lufax’s chairman Ji Guangheng said on December 2 . Globally, regulators are catching up with the boom in digital finance boom this year, as the coronavirus pandemic drove millions of consumers online to avoid catching the virus in shopping malls or bank branches. Almost three-quarters of the 118 monetary authorities surveyed by the University of Cambridge said they had accelerated or introduced initiatives on digital infrastructure this year, while 58 per cent said they had boosted regulatory and supervisory technology. China used to allow start-ups to flourish and experiment as they helped spread financial services into rural regions, amid periodic crackdowns, such as on peer-to-peer lending in 2016. This time around, China is leading the assault on Big Tech lenders, stamping out monopolistic behaviour and fending off systemic risks. “Fintech is a winner-takes-all industry. With the advantage of data monopoly, Big Tech firms tend to hinder fair competition and seek excessive profits,” said Guo Shuqing , chairman of the China Banking and Insurance Regulatory Commission (CBIRC), earlier this month. Analysts at UBS expect China’s regulators to intervene to limit growth case-by-case; set capital requirements and firewalls within a financial holding regulatory framework include fintechs’ lending partnerships with banks in China’s macroprudential assessment framework on banks; and set more stringent rules on data-sharing and mis-selling of financial products. Regulators may also guide banks to slow growth of loans under lending partnerships, said UBS. “Ant Group’s IPO halt reflects a turning point of regulators’ stance on fintech regulation towards a tightening bias,” said UBS analyst May Yan. Chinese regulators hit Big Tech with antitrust laws on November 10, targeting bundled sales and excessive price discrimination. The barrage continued on December 14 with tighter rules for online insurance sales from February. The number of online wealth management and insurance products available to Ant Group’s customers has fallen in the past couple of months as the product providers temporarily withdrew from the market to adjust to new guidelines, according to market sources. The deluge of regulation will raise regulatory and compliance costs and put fundraising plans on hold as investors weigh the risk of further regulatory action. A fundraising plan by JD Digits, the fintech unit of China’s second-largest e-commerce platform JD.com, is still awaiting approval by Shanghai’s financial authorities. Ironically, larger platforms may benefit from the harsher but clearer rules. Entrants into the market may struggle to win a licence or raise meet capital requirements, stifling competition. “The proposals will increase barriers to entry in the sector,” said Katie Chen, director of financial institutions at credit rating agency Fitch Ratings last month. One of the biggest changes is lower annual interest rates (APRs) after an August ruling by China’s Supreme People’s Court capping APRs on personal loans at no more than 15.4 per cent, or four times the government’s one-year loan prime rate at 3.85 per cent. Thousands of court cases since August show that China is curbing loans by licensed financial institutions at 24 per cent, according to an analysis. While Lufax, 360 Digitech, Lexin and Finvolution have all lowered their APRs, most still managed to post higher third-quarter profits despite lower margins and the public uproar about aggressive lending practices. Founded in 2013, Lexin offers instalment payments to 18 to 36 year-olds to buy products on its e-commerce platform Fenqile. “I used Fenqile to buy my first computer in my second-year year of university. As it was for study, my family helped repay the loan. Still, the experience made me fall into the trap of borrowing from other apps,” said a member of an online support group under the alias “U”. He owed more than 10,000 yuan in debt, on a monthly salary of 2,000 yuan (US$306). Fenqile aggressively promoted buy-now, pay-later deals to students for iPhones, iPads and other gadgets, according to the support group Debtors’ Union. Even after lowering its APR, Lexin’s third-quarter gross profits rose from the second quarter. Profits across the industry were bolstered by the market’s growth, China’s swift recovery from the pandemic which reduced credit costs, and fintechs’ diversification. China’s consumer credit market will almost double to 24 trillion yuan by 2025, according to Oliver Wyman. Ant Group is the largest player with a market share of 16 per cent as of June 30, followed by Tencent-backed WeBank with a market share under 5 per cent. WeBank offers micro loans under the brand Weilidai. Fintechs are looking to spin the narrative in their favour. “In the spirit of reducing customers’ borrowing cost, providing better services to them, also in line with our strategy of targeting better quality customers, we have voluntarily lowered the borrowing rates for new loan originations since August,” said Feng Zhang, CEO of FinVolution, which has changed its name from PPDai. FinVolution’s third-quarter operating income rose by 21 per cent quarter-over-quarter to 689 million yuan. After the Supreme Court’s ruling on interest rates, China’s regulators published draft rules to force the country’s 7,227 microlenders to contribute 30 per cent of the loans that they jointly extend with banks. This will benefit f intechs with the most accurate credit scoring . Digital platforms’ use of alternative data – from online spending patterns, residential addresses to returning a shared bike on time – results in fewer defaults than in the loan portfolios of traditional banks, studies showed. To be sure, academics also warn that Big Tech lending is still new so the data set is limited. Ant Group put up about 2 per cent of the 2.2 trillion yuan of credit agreed over its platform as of June. The firm may bolster the disclosure in its co-lending partnerships, according to people familiar with the firm’s thinking. Shanghai-based Lufax said it would put more “skin in the game” to 20 per cent of the loans it digitally matches between banks and borrowers by June. Lufax is backed by China’s biggest insurer Ping An Insurance (Group) and raised US$2.4 billion from its recent listing in New York , so has ample capital to put to work. Lufax’s third-quarter adjusted net profit rose 2 per cent from a year earlier. “This lends confidence that Lufax could manage the impact of a tighter regulatory environment, as it did after the crackdown on peer-to-peer lending in 2017,” said HSBC’s Asia-Pacific head of internet research Binnie Wong. Public consultation on the draft lending rules closed on December 2, with the results expected in six to nine months. Regulators may clarify what prices banks can offer borrowers over digital platforms, and which banks can continue to partner with digital platforms, said industry insiders. Ever nimble fintechs are looking at new ways to keep earnings growing, such as building new alliances. “The market probably won’t grow as fast as it has in the past, given these changes,” said chief executive officer Greg Gibb, so Lufax is looking to widen its cooperation with more banks and asset management companies. 360 Digitech is cementing its tie-up with Kincheng Bank of Tianjin, which should lower its funding costs. Some are looking overseas for growth. Ant Group won a digital banking licence in Singapore this month. Lufax is expanding in Hong Kong, Singapore and Indonesia while FinVolution has a fast-growing business in Indonesia and is exploring opportunities in the Philippines and Vietnam. “Southeast Asia will have higher profitability compared to China,” said Finvolution’s chief financial officer Ho Tak Leung. Fintechs are also using their scads of data to cherry-pick more creditworthy borrowers, as well as selling infrastructure as a service to other firms. Wealth management units are still relatively small but growing. “We are able to maintain healthy and sustainable profitability despite this lower [lending] pricing,” said Ho.