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Alipay, should banks worry?

By Cong Mu (Global Times)

10:38, July 05, 2013, China's largest third-party online payment platform in terms of transaction volume, stirred some controversy last month with the launch of a high-profile wealth management product (WMP) called Yu'E Bao.

According to Alipay's website, Alipay users can "transfer" the balance in their accounts into a new Yu'E Bao account, thus receiving daily yields from their investments in Yu'E Bao. The investors can redeem their investment on any day without paying any transaction cost.

When users transfer their money, it is invested into a money market fund, called Zenglibao, managed by a partner of Alipay's Beijing-based Tianhong Asset Management Co.

Use of the word "transfer" appears to compare the investment product to a traditional bank deposit, which carries lower risks.

Since Yu'E Bao immediately attracted a large number of retail investors, thanks to the potentially high yields on offer, Alipay, an affiliate of Alibaba Group, the country's largest e-commerce company in terms of transaction volume, issued a clarification Monday on its Sina Weibo.

Alipay stated that Yu'E Bao "is not" a deposit product, and it encourages investors to study the risks and yields associated with a money market fund before making an investment.

Zhu Jian, a senior PR manager at Alipay, told the Global Times Wednesday that it is possible that investors could "lose money," but said that the risks involved in investing in such a money market fund are low.

Yu'E Bao might be too much of a niche product to represent a direct challenge for banks, but analysts predict that a storm is building for traditional banks in China, whose retail businesses are being steadily encroached upon by non-financial institutions such as Alibaba.

Yu'E Bao bonanza

According to statistics released Wednesday by Tianhong, the ­Zenglibao fund's annualized seven-day yield has climbed from 3.23 percent on Yu'E Bao's debut on June 13 to 6.03 percent on Wednesday, more than double the interest rate on a one-year term deposit at a bank.

In 18 days (from June 13 to June 30), Yu'E Bao had attracted over 2.5 million subscribers, and the total outstanding investment in the product stood at 5.7 billion yuan ($929.5 million) as of Sunday, Alipay said in the same Weibo post Monday.

"Yu'E Bao has helped turn its partner Tianhong Asset Management's Zenglibao Money Market Fund into China's largest money market fund in terms of number of investors," Alipay claimed.

Customer appeal

One of the factors behind Yu'E Bao's rapid expansion might be Alipay's more customer-focused attitude than its bricks and mortar banking rivals.

Most banks in Asia, including China and India, are focused on their products or business channels, and "there is clearly room for deeper engagement" with their customers, US consulting firm McKinsey & Co said in a research report released Monday.

In a survey of 20,000 customers in 13 Asian markets about their use of financial services in 2011, McKinsey found that banks' "product holdings per customer remain low and customer loyalty in many markets is declining."

In contrast, Yu'E Bao is designed primarily with small investors in mind, according to Alipay. The minimum investment is just 1 yuan.

It said in the Weibo post that the average investment amount by Yu'E Bao users was 1,912.67 yuan per account, significantly lower than the 70,000 to 80,000 yuan in a WMP account offered by traditional banks or funds.

Chinese banks have only served 20 percent of the customers, while earning 80 percent of the profits in the financial services industry, Ma Yun, Alibaba's founder and owner of Alipay, told a forum in Shanghai in early June.

Alibaba aims to serve the remaining 80 percent of the customers, whom the banks have failed to serve, with new ideas and new technology, Ma said.

"This may promise a bright prospect for the Chinese financial services industry in the future," he noted.

Services revolution

With the revolution in new technologies, Asian customers are less reliant on the physical branches of banks and are turning to Internet and mobile banking, McKinsey noted in its report.

"By the end of 2011, China and India already ranked first and third in the global league table for number of Internet users … In China, 65 percent of mobile phone users regularly access the Internet via their phones," it said.

Meanwhile, Chinese and Indian bank customers' monthly usage frequency of Internet and mobile banking increased by 39 percent between 2007 and 2011. During the same time, their monthly usage frequency of branch and telephone banking together declined by 28 percent, McKinsey's survey showed.

In a bid to strengthen its competitive edge, Alipay announced Monday that it has introduced a new mobile technology to allow Yu'E Bao users to manage their money market fund investments directly on their mobile phones, getting rid of the hassle of using PCs.

The news prompted a surge in the share price of Shanghai-listed Shenzhen Kingdom Technology Co, which is a provider of technology to connect Tianhong's fund sales system with Alipay's system.

Shares in Shenzhen Kingdom rose by the daily limit of 10 percent Tuesday, closing at 14.1 yuan a share. The price rose by another 5 percent to end at 14.8 yuan a share Wednesday. It remained 14.8 yuan Thursday.

However, the instant success of Yu'E Bao may have prompted some more established players in the sector to put pressure on the regulator, Beijing-based market research firm iResearch Consulting Group said in a research note on June 25.

During a press conference on June 21, a spokesperson for the China Securities Regulatory Commission pointed out two problems with Yu'E Bao: its failure to report to the regulator information regarding a part of the money market fund's settlement accounts, and its failure to submit an agreement between Alipay and the fund's supervisory bank.

"The supervisory bank is China CITIC Bank, which is also the money market fund's custodian bank," Zhou Xiaoming, Tianhong's vice general manager, told the Global Times.

"We submitted the supplementary documents as per the regulator's requests last week. We haven't received any further request for submitting more documents," said Zhu.

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