20 August 2019

The power of internet finance

They made their name in e-tailing and games but now Alibaba Group Holding Ltd. and Tencent Holdings Ltd. (00700.HK) are using their online heft to disrupt the world of investing. Through their money market funds, both companies are giving depositors access to yields way surpassing interest available for savings and offering them the flexibility usually associated with demand deposits. They’re incredibly popular, competitive, low-cost products in a sector that holds a lot of promise for expansion, the Hong Kong Economic Journal’s investor diary column writes.

Alibaba’s Yu’E Bao fund has accumulated almost 500 billion yuan (US$81.3 billion) in the 300 or so days since its launch, with 30 percent of that total added in the first two months of this year.

Compared with savings deposit rates of 0.35 percent, the 6 percent Yu’E Bao offers represents an interest gap of 25 billion yuan on 500 billion yuan, the column says, citing Guo Guangchang , chairman of private conglomerate Fosun International Ltd. (00656.HK).

By luring away deposits, funds are not only draining lenders but also the banks’ power to allocate deposit funds, rusting their fundamentals over the long run. Traditional lenders, such as Industrial and Commercial Bank of China Ltd. (01398.HK) and China Minsheng Banking Corp. Ltd. (01988.HK) have been considering similar products just to stay in the game.

The growth of money market funds and related online financial accounts will largely depend on how well lenders can defend their territory and whether the authorities will tighten their grip over such platforms. They are likely to lower their promised returns or restrict clients from withdrawing money if the authorities set a higher minimum reserve requirement for those funds, the column says.

Whether these funds will venture into high-risk investments and jeopardize asset quality is another unknown.

Still, the cost advantage of the internet banking model offers lot of room for exploitation, as suggested by the success of Bank of Internet Holding Inc. (BOFI.US).

The San Diego-based online bank serves 40,000 retail customers across the United States with only one office and fewer than 100 staff.

Although it is involved in traditional banking, Bank of Internet’s savings from a much smaller payroll and the absence of a branch network enables it to offer clients better rates, which drives its competitiveness.

Compare that with HSBC Holdings Plc. (00005.HK), which despite shedding 40,000 staff in the past three years and the closure or disposal of over 60 non-core operations, still had to spend 59.6 cents to achieve each dollar’s revenue, above its target cost efficiency ratio of 55 percent. Bank of Internet’s ratio was 40 percent.

As long as these kinds of banks can maintain their asset and loan quality to build up their reputation, they stand a good chance to attract more funds.

The online lender’s share price has more than doubled in less than 10 months to US$101.35 as of Friday, or gained about 20 times in value since early 2009.

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Freelance journalist

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