Tops in E-Commerce, Alibaba Is Now Taking On China’s Banks
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When Jack Ma started a new retail site to rival eBay’s dominance in China, he called it “a fight between an ant and an elephant.” Mr. Ma, the chairman of the Alibaba Group, even briefly considered making the site’s mascot the ant.
He soon prevailed, with eBay eventually closing its Chinese operations. Years later, Alibaba’s online retail venture, Taobao, is China’s largest shopping site — a position that helped Mr. Ma pull off a record-setting initial public offering on Thursday.
Now, Mr. Ma is going up against another giant by shaking up China’s state-dominated finance industry.
His business, the newly named Zhejiang Ant Small and Micro Financial Services Group, processes payments, sells insurance and runs one of the world’s largest money market funds. In doing so, the company is going head-to-head with some of the world’s most profitable banks, operating in highly regulated markets and standing against competitors largely owned by the Chinese government.
It is a precarious position. Although Beijing has pledged more financial liberalization, Mr. Ma risks government displeasure if his company moves in ways that run counter to powerful state firms or regulators.
“Jack Ma has clearly disrupted the banking sector in China, and if he didn’t have the right political clout to do that, he would have been crushed already,” said Paul Gillis, a professor at the Guanghua School of Management at Peking University. “How far he can go with it” remains to be seen, Mr. Gillis added.
The payoff could be huge. Zhejiang Ant, a stand-alone company that is controlled by Mr. Ma and shares profits with Alibaba, could be worth an estimated $25 billion.
It is also making significant inroads. Through Alipay in China, the company already processes nearly four times the amount of payments that eBay’s PayPal unit does globally. It is also winning deposits away from state banks by paying higher interest rates on investments in Yu’e Bao, a money market fund that has grown to be one of the world’s largest in just over a year. It is branching into online transfers, making loans to small businesses, developing other investment products and laying plans to open one of China’s first private banks.
“Alipay has become the default payment platform for the majority of users for nearly every online or mobile e-commerce transaction, and an increasing number of offline transactions as well — I even use Alipay to pay my rent and utilities,” said Zennon Kapron, the managing director of Kapronasia, a financial industry consulting firm based in Shanghai. “Banks are already facing challenges in maintaining profitability and credit quality, and they definitely recognize Alipay and Yu’e Bao as a threat.”
At the core of this budding financial services empire is Alipay. In the 12 months that ended in June, the business processed $778 billion worth of payments in China, only 30 percent of that related to Alibaba’s online shopping websites. By comparison, eBay’s PayPal unit — which does not have a license in China but handles transactions in more than 100 currencies across 203 markets globally — processed $203 billion in payments during the same period.
Ashley Wang, a 22-year-old television editor in Beijing, started using Alipay six years ago to shop on Taobao, the Alibaba site where independent vendors sell goods like clothing, household items and consumer electronics. Today, Ms. Wang uses Alipay for much more: paying her electricity, water and gas bills, buying airplane and train tickets and transferring funds quickly to and from the bank accounts of her friends or relatives or their Alipay accounts.
Because she travels a lot and doesn’t always carry her laptop, she often uses Alipay Wallet, a popular mobile payment app. The wallet app sends frequent updates to Ms. Wang’s smartphone, as well as monthly summaries of her spending through Alipay.
“This is very annoying,” Ms. Wang said. “Because you go back and you realize how much money you’ve spent on unnecessary purchases, on things you don’t need.”
Ms. Wang said the money in her Alipay account was automatically transferred to Yu’e Bao, which translates as “leftover treasure,” where it earns interest at a rate of just over 4 percent annually until she’s ready to spend it. That compares with the 3.3 percent rate — capped by the government — that traditional banks can pay on a one-year fixed deposit and 0.35 percent for demand deposits, which can be withdrawn anytime.
“I don’t mind letting the money stay there, although rates are decreasing,” Ms. Wang said, referring to the returns on her Yu’e Bao account. “That’s good enough for me. I haven’t done any other investment at traditional banks.”
While successful, the money market fund has also proven controversial. Critics have referred to online products like Yu’e Bao as “vampires sucking blood out of banks.”
Some of the country’s biggest banks are fighting back, moving to place limits on how much their customers can transfer into third-party online payment accounts. Mr. Ma responded with a sharply worded post on Alibaba’s social messaging service, Laiwang, calling out the banks by name and accusing them of failing to keep pace with China’s market-oriented financial liberalization.
“The market doesn’t believe in crying and isn’t scared of competition, it’s afraid of unfairness,” he wrote in a post on his personal account that was later deleted but continues to circulate online. “The decision of who wins and who loses in the market shouldn’t be up to monopoly and authority, but up to customers.”
The banks have cause for concern. After rising each year since records began in 2007, low-interest household demand deposits in China’s banking system have declined slightly in recent months.
As with Alibaba in the past, Zhejiang Ant’s strategy appears to be one of winning customers first and worrying about increasing profit later. Alibaba’s filings do not list its share of earnings from the financial unit. But its investments are starting to show signs of paying off.
In May, Zhejiang Ant bought control of Tian Hong Asset Management, the company that manages the Yu’e Bao money market fund. By the end of June, Tian Hong’s assets under management had grown to 574 billion renminbi ($93 billion). Tian Hong charges fees of less than 1 percent on the assets that it manages, and those fees amounted to 1.5 billion renminbi ($243.8 million) in the first six months of this year.
The company’s portfolio is diverse. Zhejiang Ant is selling insurance products online, as well as making small loans to the businesses that set up virtual storefronts on Alibaba’s retail websites. The company is also waiting to receive approval for one of China’s first private banking licenses, part of a pilot programannounced this year. It is even experimenting in onlinecrowdfunding for film production.
But competition is growing. In addition to the risks of resistance from state companies or regulators, Zhejiang Ant’s toughest challenges could come from rival Chinese Internet behemoths like Tencent Holdings or Baidu.
Tencent, a giant in the online game and social messaging world in China, has introduced fast-growing financial offerings to compete directly against both Alipay and Yu’e Bao. While Alibaba can market financial offerings to users of its retail websites, Tencent can leverage its ownership of Weixin, also known as WeChat, a wildly popular social messaging app.
Indeed, Tencent “has been enormously successful in creating cross-product sales opportunities” with Weixin, said Mr. Kapron, the financial consultant.
He added that Zhejiang Ant’s lack of a formal banking license could also limit its future expansion, and the variety of products and services it is allowed to offer, “especially if the regulators start to become more active in regulating this space.”
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