China has now become the biggest and fastest-growing online payment market in the world. In the past decades, with the development of communication technology, the e-commerce with the online payment methods present in the 21st century. Mainly, there are two types of payment methods: through the first one, customers use their credit card or online bank to transfer money, which is essentially linked to banking services; different from the first method, independent third-party online payment platforms provide additional cashless payment options. In such arrangements, customers open dedicated accounts in their online payment providers’ systems, which they can generally top up by means of credit transfers or card payments, and use subsequently for their transactions in the providers’ self-contained proprietary systems, which are independent of banking infrastructures. In most developed countries, because of the early development of credit system, the first payment method is widely used. Despite the steady growth in the number of people using mobile payment solutions in Western states, even the most developed payments systems have so far failed to convince a wide range of consumers to use the latest technologies. By contrast, in China, a significant group of consumers has skipped over arguably traditional payment methods such as credit transfers or card payments and switched from cash usage directly to mobile third party payment solutions. This has also caused the role of banks to become less central, and that of other payment service providers more prominent, which may also significantly influence the situation of the banking sector going forward.
In the online payment market, China’s two most prominent service providers are Alipay and Wechat Wallet. Alipay was established in December 2004, which is one of China’s mainstream third-party payment platforms. Initially, AliPay primarily supported the execution of e-commerce solutions on Alibaba and Taobao platforms by acting as a third party between merchants and buyers, providing an escrow service to remove the obstacles resulting from the lack of trust between the parties. According to the data which is published by Alibaba, the transaction value of Alipay in 2016 is about 5.6 trillion. More than 4.5 hundreds of millions of people consume products through Alipay. Transactions made by mobile App increases from 65% to 71%. Unlike Alipay, the rise of WeChat is originally intended to meets people’s needs of interaction and communication in an increasingly fragmented society and constitutes an indispensable part of people’s daily lives. In 2014, Tencent Company has been successfully leveraging users to Wechat Wallet. In 2016, the transaction value of Wechat Wallet reaches 3.6 trillion.
Having those Apps, you can shop in supermarkets, take metros, call a taxi, call for food delivery and so on. From 2011, both companies opening the ‘pubic service’ sector, where you can pay for utility and penalty. Nowadays, in most big Chinese cities, the only thing you need to bring with yourself when you going out is your mobile phone with the App of Wechat or Alipay. These two payment methods are becoming a necessity of Chinese people’s daily life. Given the popularity of the use of online mobile phone payment, it is not difficult to imagine how big the amount of money these two payment platforms can generate and if the power can be properly used in financial and banking sector, how big the influence will be. Unfortunately, as online purchases essentially concerned low-value transactions and involved a relatively high level of risk, commercial banks avoided this segment. By the time the banking sectors was finally recognized its importance, commercial banks had lost the vast majority of the market.
Although payment services account for only a relatively small part of their revenues, banks may not only lose customers but also key data, such as those suitable for scoring based on actual customer behavior. Furthermore, bank liquidity may dry up to a large extent in the long run.
Although online payment has been operating in China for more than 10 years, most people regard the June 2013 launch of Yu’E Bao, an online sales platform for money market funds established by Alibaba’s Ant Financial Services, as the point from which the recent explosive development of Internet finance in China began. From 2013, internet technologies and internet ways of thinking profoundly changed the pattern of traditional financial business. Internet companies raced to get involved in the financial sector, financial innovation protagonists are no longer limited to banks, insurance companies, securities companies and fund companies. The convenience and high-return products offered by internet finance brought forward an unprecedented challenge to the banking industry. And it is really hard for the bank to fight against the online third party because of their stereotype of service and business. So far, the online third-party platforms just make up almost 90 % of the market, and the expected market share is increasing each year.
Let’s still take Yu’E Bao as an example. Yu’E Bao is the largest MMF in China and one of the largest in the world with around US$120 billion in total assets at end September 2016. It has more than 250 million retail investors; more investors than China’s equity markets. Investors include individuals and corporations, most of which are reportedly looking for investments of less than three months. Investors buy units in Yu’E Bao by transferring funds from a linked deposit account to their Alipay account through the Alipay app; investors can draw on multiple bank cards or receive payments from other individuals’ Alipay accounts to purchase units in Yu’E Bao. But, banks limit the amount their customers can transfer to Yu’E Bao per day per card and can vary this amount. Yu’E Bao operates 24 hours a day and allows online shopping purchases from MMF dividends, offering clients an efficient cash management facility. Little information on the underlying investments is available to investors. And the fund’s broad asset allocation is available on the website and is updated on a quarterly basis. Investors can withdraw funds from Yu’E Bao at any time and there are no limits on the amount that can be withdrawn; however, since October 2016 Yu’E Bao has imposed transfer fees on users transferring more than CNY20 000 to a third party. There are also potential delays for larger withdrawals: for example, there is a two-hour delay for withdrawals of up to CNY50 000 and up to a 48-hour delay for larger withdrawals.
According to the Peking University Internet Finance Development Index (IFDI), since January 2014, Internet financial activities have been growing at around 100 percent a year. Taking the peer-to-peer platforms as an example, the total number of platforms increased from 200 in 2012 to 4,029 in April 2016. How could the banking industry face the challenges in the Internet finance era, and how to make good use of these opportunities to transform and develop the banks has become an important issue.
So what is the reaction of commercial banks when they had lost the vast majority of the online payment market? They tried to block the growth of third party platforms using their monopoly power. They united as one to resist permeating of Alipay and Wechat payment. At the same time, they tried to draw more investors back by launching a similar new product. The growth prospect of Alipay and Wechat wallet indeed slowed down. Another reason causing the decreased growth rate is the defect of the online payment platform itself. The number of problem P2P platforms also skyrocketed, from 16 in 2012 to 1,598 in 2016. In other words, 40 percent of the P2P platforms ever established turned out to be problem platforms. It is therefore not surprising to observe that public sentiment toward Internet finance has moved from a fever pitch to fear in the past three years. The online platform company also realized that it is never ever possible to beat the banking sector.
To search for continuous innovation and development, AliPay teamed up with one of China’s four largest banks CCB to set up an innovative payment system in March 2017. This is an ice-breaking action of both markets. As mentioned above, enjoying its previous monopoly, the CCB aided by the state was relatively late to realize the degree of threat third-party providers posed to the banking sector, and by the time it launched its new products such as real-time payments or card transfers, it had suffered a major market loss in retail payments. Meanwhile, Alipay suffered from low growth rate. A corporation between these two parties seems to lead to a win-win situation. It releases a signal that commercial banking sectors are now willing to compromise with third-party payment companies. Three months later, ICBC announced its corporation with Jin Dong, which is another online platform. A few days later, ABC declared its alliance with Baidu. From now on, an era has started and we are looking forwards how far it can go.