4 ways China’s web giants will beat state-owned banks in consumer finance

In recent months, China’s web giants – namely Baidu (NASDAQ:BIDU), Alibaba, and Tencent (HKG:0700) – have been applying for financial services licenses to be issued by the government. That will allow the web companies to offer the same services existing banks do: savings portfolios, loans, insurance, and payment methods.

It all started with the re-appointment of China’s central banker Zhou Xiaochuan, which seems to have piqued the interest of these companies. The governor of the Bank of China came back into office in March, advocating for a consumer-oriented economy where people have more spending power and loans for private firms are more easily available. Former Alibaba CEO Jack Ma echoed Zhou’s sentiments, saying in an interview with the People’s Daily in June, “China’s financial industry, especially the banking industry, only serves 20 percent of clients, and I see there are 80 percent of the clients not covered.” Using big data, brand-name credibility, and agility that can outpace the sluggish state-owned enterprises, the country’s internet behemoths think they can best China’s “big four” state-run banks that have run the country’s finances for decades, along with the country’s many smaller commercial banks.

The companies obviously have a lot to gain in terms of commissions and interest, but average Chinese people in general also stand to profit from the trend because the barriers to entry are lower than traditional banks.

Some of their efforts have already started taking hold, and the public reception has been strong. Here’s our list of four ways these tech companies are revolutionizing China’s consumer finance industry.

1. Savings and investment

Alibaba currently runs the largest money market fund in China, Yuebao, with RMB 55.7 billion ($9.2 billion) in assets under management and 13 million customers. Baidu Finance, launched less than two weeks ago, hit the maximum allowed RMB 1 billion ($164.3 million) cap in less than five hours after it opened on October 28. The warm welcome towards online financial services reflects not just enthusiasm (or at least curiosity) towards online financial products, but also the ease which which they can be acquired. Alibaba allows investment through its popular Paypal-like Alipay platform, and neither Baidu nor Alibaba require a minimum investment. Yuebao promises a five percent annual interest rate and Baidu eight percent. That’s far higher than the average annual yield from most banks in China, about 3.25 percent for a one-year time deposit. These portfolios are solely invested in bonds and bank deposits, so it’s highly unlikely deposits will lose value.

In addition to these investment services, Alibaba-owned marketplace Taobao also sells online funds from banks, usually in the form of currency bundles. This service, which just began earlier this month, received a lukewarm reception from consumers, though.

Acting as a broker for investment in stocks requires a different type of license in China, so this type of service would still require regulatory approval, should companies choose to pursue it.

2. Loans

Microfinance in China is a huge potential market that only recently started getting the attention it deserves. Transparency over the internet improves the efficiency of matching the supply and demand for loans, so private firms can out-maneuver big banks. State-owned banks tend to channel the majority of their loans to state-owned enterprises, leaving small- and medium-sized enterprises (SMEs) underfunded.

SMEs, meanwhile, are precisely the type of entities with which e-commerce vendors like Alibaba have long-standing relationships. After years of managing financial transactions between Taobao vendors and buyers, Alibaba can leverage its massive backlog data to determine how responsibly a particular SME manages its finances.

The web giants will also be competing with smaller lenders in this space. Beijing, for instance, is trying to lure internet-based P2P lending services to Zhongguancun – dubbed China’s Silicon Valley – with perks like lower rent and cash rewards.

A high demand for SME lending, in addition to things like small loans for cars, vacations, mortgages, etc, makes this a promising market. Alibaba already offers loans to small businesses using Alipay. Tencent and Alibaba have both taken steps toward obtaining online banking licenses in a race to become China’s first internet bank, as has electronics and appliance retailer Suning.

3. Insurance

4. E-wallets