Date
17 October 2017
E-commerce and internet firms such as Alibaba are seeking a slice of the growing financial services business in China. Photo: Bloomberg
E-commerce and internet firms such as Alibaba are seeking a slice of the growing financial services business in China. Photo: Bloomberg

Internet finance the next big thing

When e-shopping was the preserve of only a handful of trendy, curiosity-driven youngsters more than a decade ago, many traditional buyers and sellers found fault in this creative way of trading, with some commentators declaring that it will be a short-lived fad. But things have changed so quickly since then that the skeptics have no choice but to accept the new reality.

The power of the internet is more than evident as the Chinese quickly became the world’s largest Web community.

Now when the internet starts to tread onto the turf of traditional financial industry, no one would ignore its potential. Internet finance, for sure, will be the next big thing.

Alibaba’s launch of Yu’E Bao in June, a service allowing users to invest money stored online into a money market fund, marked the landscape-changing marriage between an e-commerce company and a fund management firm. Yu’E Bao and its partner Tian Hong Asset Management have become the largest money market fund in China within three months since its June launch.

Since then, this internet+finance mode was copied by many, with two other Web giants Tencent and Baidu joining the bandwagon, taking advantage of their brand services such as Wechat.

Baidu, for example, launched on Oct. 28 a platform to sell fund products that promised annualized yield of 8 percent, a handsome return rate for small-amount investment.

Feeling the pinch, traditional fund managers and bankers are eager to forge alliances with internet companies.

As many as 14 fund companies launched shops at Alibaba’s Taobao.com, China’s leading online shopping platform and the first internet company licensed to sell fund products.

Web giants’ ambition does not stop with fund products. Alibaba and Tencent teamed up with Ping An Insurance to launch Zhong An Online Property Insurance Co, the first online insurance company in China.

Clearly, internet firms’ foray into the financial sector is an irresistible trend that will definitely change the landscape of the sector.

The internet companies’ advantages lie in at least three aspects.

The first is their large client base. A major headache for fund and insurance companies is to find enough investors, but this is not an issue for internet companies. Theoretically, every one of China’s 600 million Web users is their potential investor.

Hundreds of millions of registered users of Alibaba’s Taobao and Tencent’s QQ naturally are potential investors of any financial product they launch.

With the economy of scale, internet company-backed products usually do not require an entry threshold on the investment amount, unlike products from traditional fund managers. This helped them win even more clients.

The second advantage of internet companies is their sound credit systems. With third-party payment and e-commerce services, internet companies have collected complete information on those who use their services. In this respect, internet companies do much better than banks and government departments. This also explains why Alibaba’s small-loan services witnessed a bad loan ratio of just 0.78 percent, a performance far better than any Chinese bank.

While traditional fund firms and banks have to painstakingly assess clients’ qualifications, internet companies can happily and easily select creditworthy investors from their databases.

The last advantage of internet companies lies in cost. Unlike traditional firms, they don’t need to set up brick-and-mortar offices or hire many sales agents to promote products. What they need are a few more servers and technicians to maintain them. This is why internet company-backed financial products charge less management fees and offer higher returns.

So far, internet companies basically teamed up with traditional financial service providers instead of acting on their own. In this marriage, internet firms provide sales channels and client database, while financial firms design and provide products and services.

But this situation many change, with Alibaba applying to become a major shareholder of its partner Tian Hong Asset Management. If the deal is approved by regulators, it will mark the first internet company to indirectly enter the upper stream of the fund management market.

Top Chinese policymakers, including Premier Li Keqiang, have said recently that internet finance is a great innovation, and urged authorities to support internet companies.

As the Chinese government is looking to break the state monopoly in the financial sector, it is highly likely that privately-owned internet giants will be given financial licenses. If that happens, the e-commerce boom that China is experiencing will be repeated in the financial industry.

Zhang Xinmo, a commentator based in Beijing, has been a journalist for more than 10 years in China and Hong Kong. He writes mostly on China’s economic issues.

– Contact the writer at [email protected]

RC

 

The writer is an economic commentator. He writes mostly on business issues in Greater China.

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