China's finance undergoing dramatic internet transformation

Want China Times, Xinhua 2014-01-10

A user's account webpage displays his Yu'E Bao account profit. (Photo/CNS)

A rush by China's big internet companies such as Alibaba and Baidu into online finance in the second half of 2013 is altering the landscape of China's financial sector in a dramatic and unprecedented way, industry insiders have said.

Last year was widely seen as "ground zero for Chinese Internet finance," partly because of the phenomenon involving "Yu'E Bao (Leftover Treasure)," a personal online finance product introduced in June by internet giant Alibaba. It allows users to place their driblet savings — no less than one yuan — into a money market fund.

As of the end of 2013, Yu'E Bao had 43.03 million users with aggregate deposits of 185.3 billion yuan (US$30.4 billion), the biggest single public fund in China. Internet finance has for the first time become part of life for many Chinese people.

Its users come from all over China — more than 2,000 counties and cities in 31 provincial-level administrative regions with an average deposit of 4,307 yuan (US$711.5) per user.

There is a substantial difference between depositing money into a savings account with a commercial bank and placing money with Yu'E Bao, since the latter offers users wealth management services and a much higher return rate, said Zu Guoming, one of the founders of Yu'E Bao.

Zu said that Yu'E Bao is popular partly because of its return, which comes from the money fund, with rates varying every day.

Return rates could be as high as 7% for Yu'E Bao users. That is remarkably higher than the roughly 0.35% interest rates offered by commercial banks, and also much better than the one-year deposit rate of 3.25%.

By the end of 2013, Yu'E Bao had brought 1.79 billion yuan (US$295.7 million) in profits to users since its launch, according to the operator.

"The launch of Yu'E Bao is like the tipping point for internet finance in China," Zu said.

Tang Bin, CEO of e-payment service provider YeePay, said that Yu'E Bao is revolutionary since it integrates the two functions of wealth management and payment and is user-centered with an extremely low threshold.

"Most traditional banks are high and mighty with hefty thresholds. Some banks' wealth management products reject customers with less than 50,000 yuan (US$8,259). Yu'E Bao is fine with just one yuan, which illustrates the spirit of the internet — being open with a bottom-up approach," Tang said.

Zou Pingzuo, a researcher with the People's Bank of China, attributed Yu'E Bao's popularity and high rates of return to the government's restrictions on interest rates — a major source of bank revenue.

"Interest rates have not been liberated. To ordinary people, deposit interest rates are very low while loan rates are very high. At this point, the market remains quite unfair," Zou told the dialogue program.

The government's grip on interest rates created the chance for Yu'E Bao. And in return, Yu'E Bao's huge success might help push forward interest rate liberalization in China, he added.

Tang said China's traditional banking services have two problems — a monopoly and being inadequately market-oriented, which has left many customers under-served and dissatisfied.

Zou dismissed the idea of confrontation between internet financing and traditional banking, saying that the two could serve different groups of customers.

Zu agreed. Traditional banks tends to serve big enterprises with very good credit records, while small and medium-sized enterprises and individuals have been under-served, which created a good opportunity for micro-loan business, he said.

The rise of internet finance has had a strong impact on mindsets both in and outside the traditional financial sector, and some old concepts have been overturned, according to the Yu'E Bao founder.

Its stunning success has led to more internet bees buzzing around the honeypot in China.

In October, China's search giant Baidu announced its own online wealth management product, Baifa. Two months later, NetEase, another leading Internet technology firm, launched its first online wealth management product, Tianjin.

Back in June of 2013, one week after the launch of Yu'E Bao, Alibaba founder Ma Yun promised to shake up the established order of China's financing in an article run by the People's Daily.

"China's financial industry needs disrupters. It needs outsiders to come in and transform it," Ma wrote.

To some extent, he has already succeeded in instigating that shake-up. Globally, the encounter between the internet and finance has seldom been as dramatic as that which is unfolding in China.