Internet Finance:Innovator or Spoiler?

The world has entered into an era of “mass economy.” Based on their unmatched capacity to draw massive numbers of users through social networking， search engines， and cloud computing， internet companies have now set foot into realms previously dominated by traditional financial institutions such as banks， funds， and securities firms. These newcomers have conceived ambitious plans to seize as much of the market as they can， but are they “innovators” or “spoilers” for the financial industry？

Explosion of Internet Finance

“I transferred all my money to an Alipay Yu’ebao account，” smiles Li Jing， a young office worker with a Beijing company. “With my cell phone， I can monitor the balance in my Yu’ebao account as it grows with each passing day.”

Yu’ebao， or Leftover Treasure， is an online financial product co-launched by Alipay， China’s largest third-party payment platform and a subsidiary of the e-commerce giant Alibaba Group， along with Tianhong Fund. Yu’ebao allows Alipay users to transfer any funds into Tianhong Fund， which can be cashed out anytime. So far， its annual return rate has remained steady at nearly 5 percent， about 14 times more than Chinese banks’ current deposit interest rate. Especially popular among young web-savvy users with meager savings， Yu’ebao netted 1 million registered users in only five days after its launch on June 13， 2013.

Statistics released by Alipay and Tianhong Fund show that by December 31， 2013， Yu’ebao accounts exceeded 43 million， with its asset scale reaching 185.3 billion yuan. Thanks to cooperation with Yu’ebao， Tianhong Zenglibao has become China’s largest fund. It has brought profits of 1.79 billion yuan to Yu’ebao users.

“Essentially， Yu’ebao is a currency fund，” explains Zhou Xiaoming， vice general manager of Tianhong Fund. “However， it achieved innovation through incorporating the currency fund with China’s leading e-commerce platform， creating something totally new.”

As a result of the increasing openness of China’s financial sector， internet finance witnessed explosive growth last year. In addition to Alibaba， many other internet giants including Tencent， Baidu， Sina， Jingdong， and Suning have all conceived plans to explore the financial market.

Benefiting from its tremendous user base， Tencent， China’s leading online service provider， has become one of the most welcome partners for banks， funds， securities firms， and insurance companies. Moreover， Tencent has begun launching its own products for payment， insurance， small loans， and even private banking. China’s biggest search engine， Baidu， has also launched personal financial services such as Baidu Wallet， Baidu Financial Center， and Baidu Wealth Management.

Financial market shares that internet companies have seized don’t yet compare to those controlled by traditional financial institutions. However， no one denies that the internet has urged banks to change their philosophy. “In the future， finance will either go completely online or get transformed by the internet，” declared Jack Ma， chairman of Alibaba Group. “The financial industry needs external ‘spoilers’ because only outsiders can inject innovation.”

Disputed P2P Lending

On January 9， 2014， Renrendai.com， one of China’s biggest online peer-topeer （P2P） lending platforms， announced that it just received risk investment totaling US$130 million， the largest single financing ever earned by an online financial company.

P2P lending originated in the U.K. In March 2005， the world’s first online P2P lending platform， Zopa， was launched. It created an online marketplace for people to bypass banks and get better rates. Through the platform， borrowers and lenders can negotiate interest rates independently， and Zopa assumes responsibility for risk assessment. The business mode was introduced to China in July 2007， when the country’s first commercial P2P lending platform， Ppdai.com， was founded. Due to modest needs to enter， P2P lending has mushroomed in China. To date， hundreds of companies have started providing the service.

Chinese P2P lending primarily targets small business owners， the working class， and even students who typically need loans of less than 10，000 yuan. Such customers are often ignored by banks， thus creating a wide open market.

“From the first day of its establishment， our firm has aimed to help those who cannot get loans from traditional financial institutions，” noted Li Xinhe， a co-founder of Renrendai.com.

However， in the opinion of Zhang Meng， an analyst with Chinese internet market information consulting company Analysys International， the development of P2P lending in China will face challenges， of which the most pressing is a lack of an integrated credit system. Currently， P2P lending platforms cannot access the Chinese central bank’s credit system， and must accumulate information about personal credit independently. The China Banking Regulatory Commission warned investors of the risks of P2P lending， declaring that the service remains in supervisory “vacuum.”

“The future of the internet finance won’t be all smooth sailing，” stresses Chinese economist Ma Guangyuan. “In fact， risks related to P2P lending have already emerged. But， as something new and innovative， internet finance deserves some encouragement and tolerance from regulatory authorities.”

In the future， internet-based financial firms will likely play a role as intermediaries in the financial industry. Just as Alibaba subsidiary Aliloan already has， they accumulate huge client resources through years of e-commerce practice， and such information is highly valuable to traditional financial institutions. It remains uncertain whether internet firms will challenge the dominant position of traditional financial institutions in the industry， but the big data they control will certainly upend the landscape of market competition.