In many ways, the development of the Internet in China was the same two-step process as it has been elsewhere: wait for American winner to emerge, launch Chinese version of same. First came the Chinese Amazon, Alibaba. That was followed by a Sino-Google called Baidu. When it comes to online financial services, however, the Chinese are following a different trajectory. Traditional financial market players such as banks and brokerage houses have not yet captured China’s rapidly expanding middle class, and the country’s Internet giants are angling to beat them to the punch.
At this point, of course, e-commerce in the U.S. or Western Europe is pretty much synonymous with commerce itself. Most Americans purchase goods online using a credit card, a debit card, or the likes of PayPal. But as recently as five years ago, Chinese consumers had no easy way to purchase goods over the Internet. That’s changing in ways that are unique to the world’s largest e-commerce market, as a team of China-based Credit Suisse analysts write in a recent report called, “Internet Finance: A Force For Creative Destruction?”
In 2004, only about 1 percent of Chinese citizens had credit cards, and while that number grew quickly, by 2008 it was still less than 10 percent of the population. While Americans used to be wary of giving their credit card numbers out online, most would-be online shoppers in China didn’t even have credit card numbers. Chinese Internet giant Alibaba capitalized on that disconnect with the 2004 launch of its online payment arm, AliPay.
AliPay has been a smashing success, amassing 150 million users by February 2009 and 300 million today. But it wasn’t just a PayPal clone, simply transferring money immediately from buyers to sellers. Why? Because Chinese consumers were, and still are, somewhat wary about being fleeced by local businesses and individuals. To allay that fear, Alipay developed an escrow model that holds the payment in a dedicated account until the customer confirms that the purchased goods have been delivered and were as advertised. That simple wrinkle set what was a dormant Internet payment market on fire, and the total value of online transactions swelled from nearly nothing in 2008 to around RMB 4 trillion ($660 billion) in 2012, according to Credit Suisse.
At that point, a number of competitors quickly sprang up, including Tenpay (a subsidiary of the Internet giant Tencent) and BaiPay (launched by Baidu, the company behind the premier Chinese-language search engine). A few old-line financial institutions, such as China UnionPay – which is a payment system very similar to Visa – also got in on the action, but the majority of the market has gone to the Internet players. Alipay controls just under half of the online payment market, Tenpay around 20 percent, and China UnionPay just over 10 percent. (China UnionPay is still the dominant system for processing offline transactions, but has a much smaller piece of the online payments market.) All three focus on regular consumers looking to shop or pay bills online, while smaller competitors have sought out niche markets. China PnR, for example, targets travel agents by fronting them money to purchase tickets. (It gets reimbursed when the traveler pays.)
Despite the rapid growth of e-commerce, many Chinese consumers still don’t fully trust credit or payment services, and Credit Suisse estimates that between 30 and 40 percent of all online transactions are still handled via cash on delivery. But that proportion is declining, as more Chinese embrace the convenience of using online services to settle their utility bills, top up pay-as-you go cell phone accounts, and even pay off their credit cards. The analysts predict that total online payment transactions could quadruple from 2012 levels to RMB 16 trillion ($2.64 trillion) by 2016.
The real prize, however, could be what comes after the online payment market matures. Millions of newly minted middle-class Chinese are keen to access financial services ranging from simple bank accounts and loans to more complex financial products such as insurance or brokerage accounts. And once again, Chinese Internet companies are positioning themselves to compete with traditional banks, brokers, and insurance companies in the space. It’s as if Amazon started offering checking accounts.
Alibaba has already dived in. Its subsidiary, Alipay, finally received a third-party payment license from the Chinese government in May 2011 after 11 years of waiting. Over the past three years, Alibaba has also acquired interests in three small loan companies and launched an online market place for insurance products. The company’s boldest move came with the June 2013 launch of a money market fund called Yu’E Bao, which literally translates to “leftover treasure.” As of Jan. 15, the fund had around RMB 250 billion ($41 billion) in assets under management, and some 49 million accounts.
Remarkably, it seems as if e-commerce companies might be the driving force behind wholesale changes in Chinese finance itself. Chinese money market funds had RMB 575 billion ($95 billion) under management in November 2013 and Credit Suisse estimates that figure could grow as high as RMB 5.4 trillion ($891 billion), or 10 percent of GDP, by 2020. That would represent faster growth as a proportion of GDP than money markets experienced after arriving on the scene in the United States in the late 1970s. Other financial products, including equity funds, could enjoy the same kind of rapid growth, Credit Suisse’s analysts say. The big question is who’s going to provide them: old-school financial firms or the increasingly diversified Internet giants.
It can be tough to separate people from their trusted financial services providers, which is why many traditional brokers and banks have managed to hang on to so many customers in the U.S. But the game changes when the customers get convenient service 24 hours a day, seven days a week, from online financial product providers – with the added bonus of earning a return multiple times higher than that from conventional institutions. That being the case in China, newer players are in a position to truly compete. Need a bank? Without the need to invest in branches, online players’ costs are likely to be lower. Wondering which brand to entrust with your money? Baidu has an enormous marketing platform, thanks to its impressive traffic (around 6 billion search queries a day) and 460,000 existing advertisers, and gets its name in front of as many Chinese as any bank ever will. And talk about establishing a relationship with them when they’re young: Alibaba says that the average Yu’E Bao account holder is 26 years old. That young clientele is attracted by the relatively low risk of the service, easy access to funds, and the fact that accounts are linked—clients can use their Yu’E Bao funds to purchase goods and services online.
Last year, Alibaba co-founder Jack Ma made what seemed to be a prediction: “If the banks don’t change, we’ll change the banks.” But he had the tense all wrong. It’s already happening.
Above: A woman uses her mobile phone in front of an advertisement of the online payment platform Alipay of Alibaba Group. Photo courtesy of Imagechina via AP Images.