“The whole nation gathers to deposit money, becoming rich and handsome in an instant,” says a message on the webpage of Baidu’s new wealth management product, “Baifa.”
Launched today in partnership with a Chinese funds management company, this product is the latest move in the financial services space by a growing number of Chinese internet companies. Earlier this week, Tencent Holdings announced an unknown amount of investment in a wealth management firm Howbuy, while SouFun, operator of a real estate online search portal, rolled out a financial services platform offering easy access to mortgages and loans. Way ahead in the race, China’s e-commerce powerhouse Alibaba Group joined hands with an asset management company in June to launch Yu’ebao, which allows for the investment of the remaining balance on users’ Alipay accounts in a monetary fund.
The relatively high returns on these financial products have attracted herds of consumers and stocks of their savings. As of mid-November, 30 million users has deposited $1.65 billion on their Yu’ebao accounts, which has averaged a yield over ten times traditional banks’ call rate but still allows instant withdrawal. Baidu’s Baifa, locking deposits for a month, advertises for an 8% return, more than three times the three-month deposit rate at Chinese banks. When the same return rate was trumpeted for its first wealth management product in October, Baidu saw an inflow of $165 million in a short four hours.
Such enthusiasm has prompted chatter that internet companies are biting into traditional banks’ business and may even kick them aside. Online finance is already on its way to overhaul the operational, profit and service model of commercial banks, and the days that they can simply profit from interest rate differentials between wholesale and retail are long gone, says Niu Ximing, Chairman of China’s Bank of Communications in a recent interview with Sina.
Though most internet companies are currently acting as distributing channels for loans or financial products, they may one day become providers themselves, especially in light of prospective policies allowing companies in the private sector to operate banks. E-commerce companies have emerged as the most promising private bank contestants given their existing customer base and expertise at big data analysis. Jack Ma, Chairman of Alibaba, has bluntly remarked that “the current financial industry’s understanding of the internet, is far less than the internet’s understanding of finance.”
Yet safety concerns may well render that prospect a mirage. “The issue of security is going to exist both physically and online…the difference is that online attack is more scalable,” says Cheng Cheng, a research analyst at Pacific Crest Securities. “If you hack into a database and get account information, that could affect thousands and millions of customers.” Several users of Alibaba’s Yu’ebao have had their accounts attacked and deposits stolen, in one case as much as nearly $30,000 (though Alibaba’s insurer Ping’an compensated for the loss in full in this case).
For most ordinary Chinese, traditional banks will remain their first choice simply due to a sense of security derived from banks’ association with the government. They “still believe that the government is the parent and somehow gives guarantee,” notes Tian Hou, an analyst at asset management firm T.H. Capital.
Nor is it necessarily the internet giants’ intention to become masters of banking, taking legal hurdles, high risks and the companies’ core competencies into account. Baidu’s venture, for example, is geared towards capturing the advertising potential of the financial market, while also benefiting monetization of Baidu’s other products with users’ deposits in its accounts. “It’s more like their way of saying, mobile usage is increasing, online usage is increasing, so we want to be the gateway, have more power over the channel and extract value,” says Cheng.
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