The latest figures from online saving funds financial statements have shown that the BAT (Baidu, Alibaba, Tencent) online money funds continued expanding. The 2014Q1 data reveals that Tianghong Zenglibao, relying on the huge client base of Yuebao, lead the market and is the first online saving funds that exceeds RMB100 Billion.

An interesting graphic from IDC and WSJ looks at the declining growth rate in smartphone sales in China. China's smartphone market is maturing.

Published in China Banking Research

Money funds in China have been around for a long time with the first launched just over a decade ago in 2003. For the most part, these funds existed in relative harmony with the banking industry and occupied a small niche in the investment market. However, the emergence of Yuebao in 2013 started to change that. Money funds have now grown significantly in prominence and present an increasing threat to traditional banking services.

Published in China Banking Research

The Basics

If you haven’t been following Chinese online finance innovation industry, here’s a quick brief: leveraging mainly underlying high-yield interbank deposits as assets, China’s main internet giants including Tencent, Alibaba and Baidu have launched online finance products where users can quickly and easily move money out of their banks accounts onto these platforms. Tencent uses their nearly ubiquitous Wechat app as the main user interface which Alibaba uses their Alipay platform to distribute the products; the underlying funds are managed by an external asset manager.

The typical returns of Chinese online finance innovations are between 5-8% and greatly eclipse traditional bank deposits, which yield less than 1%. With this kind of return, it’s not surprising that consumers are moving assets over to the platforms at an astonishing rate with some funds accumulating over 400 billion RMB (~US$66B) in AUM in less than a year making the asset managers some of the largest in China.

At the same time, taxi booking apps are growing incredibly rapidly in in China’s eastern coastal cities – some with the support of the internet giants as well. Over US$40 million of investment has gone into the taxi booking apps over the past two years and it’s not uncommon to ride in a taxi where the driver will have 3-4 phones all running the apps on his/her dashboard.

Bring it together

A key part of the internet giants’ strategy has been to bring everything together in one platform. Tencent, already with a significant user base through it’s ‘whatsapp on steroids’ Wechat app allows you to invest in their online finance product called Licaitong and they have integrated a taxi booking app called Didi Taxi where you can ‘tip’ taxi drivers a pre-selected extra amount to come and pick you up.

Money for nothing and your taxi for free

So, all of the above is well and good. Where it gets interesting is the level of competition in the marketplace and what companies are doing to gain marketshare. A Chinese friend related her experience:

She initially called a taxi via Didi taxi. Didi is running a promotion where you can get 12 RMB (~US$2) back on your taxi ride when you use the app. Base fare in a taxi is 14 RMB (~US$2.33), so she paid 2 RMB (~US$0.33) for the taxi ride. But wait, there’s more…

The taxi driver then asked if she could pay using Alipay and she said yes. Why? Because Alipay is running a promotion where she could get 13 RMB (~US$2.15) back and the taxi driver then likely also received some reward. The taxi driver then gave her the 14 RMB in cash and she sent him 14 RMB via Alipay.

So let’s do the math:

 

Rider

Taxi Driver

Internet Giant

 

Change

Balance

Change

Balance

Change

Balance

Initial Ride

-14 RMB

-14 RMB

+14 RMB

+14 RMB

0

0

Bonus for using Didi

+12 RMB

-2 RMB

0 RMB

+14 RMB

-12 RMB

-12 RMB

Driver pays rider cash

+14 RMB

+12 RMB

-14 RMB

0 RMB

0 RMB

-12 RMB

Rider pays driver w Alipay

-14 RMB

-2 RMB

+14 RMB

+14 RMB

0 RMB

-12 RMB

Bonus for Using Alipay

+13 RMB

+11 RMB

??

??

-13 RMB

-25 RMB

Net

 

11 RMB

 

14+ RMB

 

-25 RMB

So basically, my friend was paid to ride the taxi. She can then take that 11 RMB and instantly put it on her online finance account where she’ll earn about 6% and the internet giants are out a combined 25 RMB.

Of course in the internet space, we’ve seen plenty of companies providing products or services for free or nearly for free, but the scope with which this is happening in China is amazing. And it’s happening more and more.

Take your lessons to go

Time is compressed here. Group buying developed over years in the US and took another couple to fade away. In China, it was started and finished in less than 3 years. Will taxi booking and online finance be similar?

Although both products are essentially in the middle of a ‘perfect storm’ of a huge potential user base, very tight liquidity (giving high overnight lending / fixed deposit rates) and tremendous mobile and internet penetration and momentum, the winds are shifting in terms of innovation and it has put fear into the financial industry.

Both banks and securities firms are feeling the pinch from internet finance. Banks are facing eroding deposits in the face of gradually liberalizing interest rates, while brokers and asset managers are seeing their customers move to relatively high-return products that carry very few fees.

Although the same ‘perfect storm’ may not be happening in the west, paying attention to how things are developing in China is important as more Walmarts and Tescos move into the banking space. Not that banks were ever really known for innovation, but here in China, it's clear that the innovation is certainly not - which is putting them in an increasingly tight position.

Published in China Banking Research

Yu’ebao had already made Tianhong Asset Management the largest one in the public fund industry in China in early 2014. However, the scale of Yu’ebao has continued to grow with the latest figures showing the AUM of Yu’ebao reaching RMB400bn on Feb 14, 2014, a leap of 60% compared to only one month ago. The speed of capital inflow is still accelerating in 2014. We may witness Yu'ebao becoming the largest money market fund in the world soon. 

The fast expansion of Yu'ebao crosses 400B under managementYue bao AUM data of Chinese money market funds, especially the ones leveraging Internet Finance, reflects the large wealth management demand potential of Chinese market and new innovative finance forms that will appear in the Chinese market in 2014.  

Not satisfied with just taking deposits from banks, online finance platforms are facing more competition from each other.

Published in China Banking Research

On November 27, 2013, the Ali-cloud division of Alibaba group announced the launch of Ali Financial Cloud services.

Background

Ali financial cloud services has been developed to provide secure and stable IT resources and internet operation services for financial institutions including banks, funds, insurance companies and securities companies. The service is based on cloud computing, with the cooperation from many well-known financial product solution providers and Alipay’s standard connection portal and a completely sandboxed environment.

At current stage, China's approximately 2,000 small and medium banks are the focus of Ali Financial Cloud as these banks typically do not have enough capital and technology experience to develop their own robust IT structure, so outsourcing is thought to be a low cost and efficient way for these banks to process large amount of data and information.  

The claimed benefits Ali Financial Cloud include:

  1. Enable Small and medium banks to have their own online banking system and mobile banking systems and expand e-commerce and online banking services in the rural areas.  
  2. Provide stable and strong business processing capabilities for small and medium banks during high demand periods
  3. Enable small and medium banks with smaller technology footprints to develop innovative products and solutions that would typically only be available to larger banks
  4. Reduce IT support requirements

One example provided by Ali cloud website shows the processing capabilities of Ali cloud. About 300 million transactions of Yu’ebao could be cleared within 140 minutes, or about 35,000 transactions per second. Some financial firms are already using the Ali fianancial cloud including asset management companies, rural banks, regional banks and insurance companies.  

Historical Context

Cloud computing in China's financial services industry, similar to other global markets, has been slow to take off. Players like IBM have in the past setup comprehensive cloud computing research centers to attempt to move the market, but none have been incredibly successful in gaining a foothold. 

2014 might be the year when we see this change. Cloud technology and security has become increasingly sophisticated and with an increasing profit squeeze due to liberalising interest rates, banks will be looking for ways to increase revenue, reduce cost, and more importantly, stay innovative.

2014 - Year of the Cloud

Certainly Cloud will be a key industry topic as we move into 2014 with major players besides Alibaba including IBM, 21Vianet and Tencent all vying for a part of the increasing cloud computing pie.

It will also be interesting to see the level of innovation that happens in the space. Alibaba has rapidly moved beyond just an IT / e-commerce company to provide a variety of products and services beyond just technology. Its Yu-ebao product is forcing banks to re-think their retail investment products and how they price and distribute them – it has completely changed the industry.

With China's cloud services in the financial indusry being a key topic of discussion in 2014, could we see Alibaba do the same thing it has with 3rd Party Payment Platforms?

yuebaoThe latest figures from Tianhong Asset Management show that the AUM (asset under management) of Yu’ebao deposits, the currency market fund which is co-launched by Alibaba and Tianhong on 13 June, 2013, has rocketed from June 13th to November 14th, 2013, from 0 to CNY100B. Now Yu’ebao is the largest fund in China leveraging it's enormous Taobao, T-mall and Alipay customer base.

The success story of Yu’ebao has not only encouraged the Chinese IT giants and online payment providers to enter the asset management market, but also is a worry to the traditional asset management firms. Currently, most public funds in China sell their products on their own websites or choose to cooperate with the online platforms to sell their products. Asset managers do recognise the benefit of selling funds online including low cost and convenience, but struggle as they simply just do not have the customer base of Alibaba/Alipay.

Date   13 June 30 June  9 Sept  14 Nov
AUM (CNYB)  6.6  55.65  100

Page 3 of 3