Alibaba’s Yuebao is now the nation’s largest money market fund with assets hitting 1.43 trillion yuan (US$210.18 billion) as of the end of June, up sharply from the end of last year.
Launched in June 2013, Yuebao allows users to deposit, withdraw or transfer money online free of charge. Also, users get a much higher return than interests on bank deposits.
When it first came out, Yuebao offered an annualized return of over 6 percent, compared with less than 0.5 percent interest rate for domestic savings accounts. The gap is smaller at the moment, but we are still talking about a difference of almost 4 percentage points.
Yuebao attracted more than 100 billion yuan of deposits from over 29 million customers in less than six months after its launch.
Yuebao’s success is bad news for traditional banks.
Traditional banks generate most of its income from interest rate spread between what they pay to depositors and what they charge borrowers. Yuebao has disrupted that business model.
By collecting deposits from a large number of individuals, Yuebao accumulates huge sums of money, and is able to negotiate for a far better interest rate with big banks. It then passes on most of those benefits to users.
In short, Yuebao took away from the banks quite a bit of the cheap funding that they can otherwise profit from.
After realizing Yuebao’s disruptive power, Chinese banking regulators have kept a close watch on its operations and tightened the rules over the years.
For example, the maximum amount of funds individuals can put into their Yuebao account has been slashed to 250,000 yuan from initial ceiling of 1 million yuan.
And individuals are now allowed to transfer money between Yuebao and their bank accounts for only up to three times daily.
Though such restrictions have slowed down Yuebao’s growth a bit, it still managed to expand its net asset by 79 percent in the first half of 2017 from the end of December. Its user number has also increased to more than 300 million.
Up to now, Yuebao only focuses on individuals, and it can only deposit the funds with banks to earn a return rather than lend out to customers like banks do.
That is why the negative impact on the banking industry is still not significant.
However, Alibaba’s Ant Financial and Tencent have already set up their own banks, MYbank and WeBank respectively.
New players and their new products would pose increasing challenges to their banking counterparts.
This article appeared in the Hong Kong Economic Journal on July 6
Translation by Julie Zhu
[Chinese version 中文版]
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