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US reportedly considering restrictions on Alibaba, Tencent payment systems

US China
US China

The US government is considering placing restrictions on Tencent Holdings and Ant Group due to national security concerns over their digital payment platforms, Bloomberg reported citing anonymous sources. While the debate over how and whether to restrict the two tech giants’ payment systems has gained momentum in recent weeks, a final decision is reportedly not imminent. Ant Group is the payments and fintech arm of Jack Ma’s Alibaba Group and the company behind Alipay, the world’s largest mobile payments provider.

Reasons for considering restrictions: American officials are concerned that by dominating global digital payments, China would get access to banking and personal data of hundreds of millions of people, as per the Bloomberg report. This was discussed in a meeting on September 30 in the White House Situation Room.

Why no ban yet? Officials are reportedly trying to find a legally sound approach to placing restrictions. The administrations is reportedly debating over which government authority would be used to restrict the companies. As per the Bloomberg report, the idea has not been presented to US President Donald Trump yet as he fell ill with COVID-19 a day after the September 30 meeting. It is also unlikely that these measures could be implemented before the November 3 presidential elections, and officials are reportedly concerned that any restrictions could face significant litigation.

Options on the table: According to the Bloomberg report, there are a few options under consideration:

  1. Use authorities granted under a 2019 order to protect the digital supply chain. However, this is a slower process.
  2. Issue an executive order. This is likelier to succeed as unlike the TikTok and WeChat orders that were stayed by courts on free speech grounds, Tencent and Alipay are payments services and thus don’t have those concerns.
  3. Put Ant Group and Tencent on the Treasury Department’s specially designated national list that would make it impossible for American companies, and for foreign companies doing business with American firms, to do business with them.

Why this matters: Ant Group is currently in the process of going public and restrictions on its payments operations in the US could adversely affect its initial public offering (IPO). Alipay, its mobile payments app, has 711 million monthly users. Ant Group’s IPO in a dual listing in Hong Kong and Shanghai is expected this month and is likely to be the world’s largest IPO. According to its IPO prospectus, Ant Group gets less than 5% of its revenue from outside China and only a tiny portion of that from the US, as per the Bloomberg report.

This will not be the first time that the Trump administration goes head-to-head against Chinese tech giants. The Trump administration has already banned Huawei from 5G trials in the US and effectively banned TikTok and WeChat through executive orders. In the latter case, courts have temporarily stayed the bans over free speech concerns and overreach by the White House.

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The India connect: Impact on start-up investments?

The concern around digital payments and national security is not unique to USA. In 2018, Rajya Sabha MP Narendra Jadhav (BJP) had raised concerns about Alibaba’s stake in Paytm. In an interview with the Indian Express, he had then said, “Through Paytm, Chinese authorities can gain access to personal and financial data of millions of Indians and corporations. This means they can influence Indian financial sector. The Chinese have an incredible amount of capital. They can dump their capital in our markets and indulge in predatory pricing.”

Even the Commerce and Industry Minister Piyush Goyal, in a pre-G20 meeting with e-commerce players, had asked Paytm about its shareholding when a Paytm representative had said that the government should not trust foreign companies. This suggests that at least the Commerce and Industry Ministry may not see Paytm as a fully Indian entity.

Alibaba and Ant Group (earlier called Ant Financial) own over a 25% stake in One97 Communications, the entity that runs Paytm. Alibaba is also an investor in BigBasket, Snapdeal, Zomato and Xpressbees. Aliababa and its affiliates Alibaba Capital Partners and Ant Group have invested more than $2 billion in Indian start-ups since 2015 and participated in funding rounds of at least another $1.8 billion. Tencent has invested in Practo, Swiggy, Flipkart, Ola, BYJU’s, Dream11, and Udaan.

Such is the scale of investments by Chinese companies, especially Tencent, Alibaba and Ant Group, in Indian start-ups that the Confederation of All India Traders (CAIT) had asked the Commerce and Industry Minister to investigate Chinese investments into 141 Indian start-ups. As it is, Alibaba has put its plans to further invest in India on hold for six months due to the worsening Indo-China relations.

Restrictions from the US could result in a few things: it could make Ant Group and Tencent Holdings lose value and thus further chill their investing ability, a bad omen for Indian start-ups. Or, owing to restrictions in the US, these companies could amplify their activities in other large markets like India. The latter is unlikely, at least in the short-term, owing to strained Indo-China relations post the Galwan Valley clashes and subsequent Indian ban on 224 Chinese-owned apps. As it is, Ant Group’s $100 million funding to Zomato was scuppered because of the Indo-China tensions.

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