Both the user base and the market value attract major Chinese banks including the Industrial and Commercial Bank of China, China Construction Bank, China Merchants Bank and Pudong Development Bank. The partnership with Alipay brings the Chinese banks profits in a way that as the most recognised online payment tool, Alipay is tied to both credit cards and debit cards issued by the banking partners, which maintains the client bases of the banks and absorbs a great number of potential card users and small merchants that the banks can hardly reach. As of July 2009, Alipay's user base reached more than 200 million; 4 million transactions were processed per day, of which 80% were associated with online banking.
Such a good start seems to pave the way for further development of the partnership, yet the movements have been impeded by a loophole that exists in Alipay's online payment system. Alipay performs as a middle agent that processes online payments between traders, and there are not any fees involved. The feature is exploited by a number of Alipay users to avoid cash-out handling fees and interest. Violators act as both buyers and sellers, transactions are technically processed; however, no delivery is actually done. In this way, a certain amount of credit can be transferred from credit cards to debit cards that cash withdrawals are available. Both credit card cash-out handling fees and interest are easily circumvented. This is a real headache that inflicts Alipay's banking partners. Mr. Hong Chen, the Marketing Director of the Credit Card Center, China Minsheng Bank, said that with regard to the credit card sector, as of 2008, an estimated loss resulting from the partnership with Alipay amounted to around ￥7 to 8 million. This made the credit card sector of the bank difficult to work any further with Alipay. The Credit Card Center of China Minsheng Bank recently put an end to the two-year long partnership. To alleviate the problem banks like China Citic Bank and China Merchants Bank have decided to put limits on the transactions processed via Alipay, which is that maximum value per transaction is set between￥499.99 to 500. But there is no easy solution to the problem. China Citic Bank once took a radical approach that the credit card users of the bank were charged a handling fee of ￥5 for every transaction processed through Aliplay. But shortly afterwards the bank called a halt to the fees policy as clients' complaints piled up. On the other side, Alipay expresses that collecting handling fees, at the present stage, is not possible because of risks of losing existing and potential users. Alipay's large user base is closely connected with Taobao, China's largest online trading platform that is also part of the Alibaba Group. To Alipay and Taobao, a considerable number of customers will flow away if a fees policy applies. Alipay is still provided free of charge. As a result of this, several major Chinese banks scrapped the partnership with Alipay in respect of credit card related services.
But the partnership continues to grow in other aspects. The banks still tie their debit card services to the online payment processor. Alipay holds advantages that fit the Chinese market. Chinese users can now use Alipay to pay utility bills, the Internet bills, telephone bills and the like. What makes Alipay stand out is that the company can reach the widest possible array of people, especially credit card holders and small merchants. The importance of working with Alipay, for various banks, has increased, as nowadays the banking focus has shifted away from conventional banking to online banking; expansion of client bases is necessary. In January 2008, China Construction Bank teamed up with Alipay to launch bank loan services targeted particularly at online vendors operating on Taobao. The loan procedure can be processed over the Internet so as to suit the needs of Taobao vendors, ranging from filing applications to fulfilling loan payments. Loan approvals, to a great extent, are based on credit ratings that the vendors have accumulated through every deal done on Taobao.
Given the large user base and Taobao's strong business growth, Alipay still takes the lion's share of the whole market. The success of the China grown online payment
processor attracts new partners; Visa, Asia Pay and Paymate are amongst the renowned ones that has received the public's attention. However, Alipay's flawed online payment system is still a major hurdle before any business partnerships that would thrive.
Derek Han is fluent in Mandarin, English and Cantonese. His writing focuses on analysing the Chinese market.