Online sales juggernaut Amazon has a toe in the Internet finance business, processing payments and offering loans to the site’s merchants. What about its Chinese counterpart, Alibaba? It does those things, too. It also facilitates peer-to-peer lending, sells mutual funds and insurance policies, and has formed a private bank to lend to consumers. Who’s leading the Internet revolution now?
From a modest start in processing online payments, Alibaba, online media and entertainment firm Tencent, and search giant Baidu have all branched out into a vast array of financial services and products. And as online finance is becoming a more important part of their business models, they are presenting increasingly stiff competition for the country’s traditional financial institutions.
Credit Suisse estimates that online finance adds 8 percent to Alibaba’s fair value— and a full 14 percent to Tencent’s — with both percentages expected to increase. The bank’s analysts expect that over the next three years, the three Internet giants will increase their share of the online payment market from 78 percent to 84 percent, their share of the financing market from 8 percent to 16 percent, and their share of the country’s wealth management product sales from 5 percent to 6 percent. (The 1 percentage point jump in wealth management alone would nearly triple assets under management from 791 billion renminbi, or $122 billion, to 2.2 trillion renminbi, or $339 billion.)
China’s online payment sector, in particular, eclipses its U.S. counterpart. Alibaba’s Alipay has 300 million registered users compared to PayPal’s 165 million. In 2014, 9 percent of online shoppers used Alipay, compared to 6 percent of U.S. shoppers who used PayPal. That percentage is expected to rise to 14 percent this year.
Whereas PayPal focuses primarily on online shopping transactions, Chinese customers also use Alipay to hail (and pay for) cars and taxis, place food delivery orders, buy movie tickets, or add time to pre-paid mobile phones. Alipay has been able to spread its wings so wide because credit cards are still relatively rare in China, leaving many people eager for non-cash payment options at a time when mobile Internet use is expanding quickly.
Credit Suisse also believes intense competition in China will make businesses more efficient and improve service. PayPal is by far the leading online payment option in the U.S., whereas Alipay competes fiercely with Tencent’s Tenpay and its WeChat messaging service, which allows people to send funds via text message. Apple Pay also recently entered China.
The jousting doesn’t end there. All three Internet giants own all or part of an online bank. WeBank, in which Tencent has a 30 percent stake, has loaned a group of 660,000 users on its instant messaging and text messaging platforms between 500 ($77) and 200,000 ($31,000) renminbi each, for a total of 7.5 billion renminbi ($1.16 billion). In June 2015, Alibaba and its subsidiary Ant Financial launched MyBank, which lends individuals up to 5 million renminbi ($800,000) and small businesses up to 1 million renminbi ($154,000). Baidu launched an online bank in November 2015 as a joint venture with the traditional China CITIC Bank.
Wealth management is also a competitive, fast-growing business, thanks to a younger, smartphone-savvy generation that wants convenient, mobile services and access to higher returns than those offered by bank deposits. Credit Suisse expects online assets under management to grow 30 percent a year to reach 38.5 trillion renminbi ($6 trillion) by 2018. The Internet companies’ wealth management businesses should grow faster than that, at 40 percent a year.
Alibaba launched the first online money market fund, Yu’E Bao, in June 2013. It’s since become the largest money market fund in China, with 579 billion renminbi ($89.4 billion) under management. Tencent and Baidu have also launched money market funds and offer access to index funds and wealth management products as well as short-term investments that bundle a variety of debt and equity securities.
Alibaba was the first mover in Internet finance, when it launched Alipay in 2004, and it remains the strongest in the space. Credit Suisse believes the company will continue to dominate the fast-growing online payment business (59 percent market share), maintain strong consumer loan growth, and nearly triple its distribution of wealth management products by 2018. Tencent is expected to take 25 percent of the online payment market, and Credit Suisse expects WeBank’s lending to increase from 7.5 billion renminbi ($1.2 billion) to 43.7 billion ($6.7 billion) by mid-2018. Baidu, a latecomer, is playing catch-up, and won’t compete on the same scale as its rivals for some time. Still, the company continues to invest in and prioritize online finance – after all, that’s where the money is.