Banks fight back against online investment products
With web giants such as Alibaba entering their turf, mainland lenders offer similar products
The mainland's bricks-and-mortar banks are launching a counterattack against the assault on their business from Alibaba and other internet heavyweights, in an attempt to staunch the outflow of bank deposits into high-yielding online investment products.
In less than eight months, Alibaba's money market fund Yu E Bao has attracted 400 billion yuan (HK$508 billion) in assets under management, more than the customer deposits held by the five smallest listed Chinese banks.
Similar online products from Baidu and Tencent contributed to a fall of 1 trillion yuan in traditional bank deposits last month.
"Yu E Bao and similar products are posing a very strong competitive challenge to banks," said Zennon Kapron, the head of Kapronasia, a finance and technology consultancy based in Hong Kong.
"Although the amount of money that they have attracted is still small as a portion of banks' overall deposit base, it is very significant in terms of the speed at which they have grown."
Now traditional lenders, initially caught flat-footed, are striking back.
Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Ping An Bank have all launched new products in recent weeks that match the attractive features of Yu E Bao.
Banks are also lobbying regulators to introduce curbs on the growth of online funds offered by non-banks. Ultimately, however, competition for deposits will drive up banks' funding costs.
The development of new deposit-like money market products designed to compete with online rivals will further accelerate the trend towards higher funding costs.
"It's going to negatively affect bank margins. Costs will go up," said May Yan, a bank analyst at Barclays Capital in Hong Kong.
Mainland savers have flocked in recent years to wealth management products (WMPs) that banks market as a higher-yielding alternative to traditional savings deposits, which remain subject to a cap of 3.3 per cent for one-year savings.
Alibaba supercharged the switch away from traditional deposits in June last year when it launched Yu E Bao in partnership with Tianhong Asset Management, in which it owns a 51 per cent stake. The product is yielding 6.2 per cent.
Beyond the attractive yield, several innovations allowed Yu E Bao and other online money market funds to draw cash away from bank deposits and offline wealth management products.
Unlike most bank WMPs, the Yu E Bao fund allows investors to redeem shares for cash at any time, rather than locking up their funds for months at a time. Yu E Bao also requires no minimum threshold to buy in.
Its seamless integration with Alibaba's widely used third-party payments platform, Alipay, also makes buying the product convenient.
Now banks are getting in on the act with their own cash-on-demand money market products. ICBC, the world's largest bank by assets, launched a money-market WMP called Tiantian Yi. So far, only account holders based in Zhejiang province are allowed to buy it, but the pilot is likely to ramp up quickly.
The bank hopes to gain an edge over Alibaba by allowing customers to transfer up to 30 million yuan into its product.
ICBC has also fought back by limiting its depositors' monthly transfers to Alipay to 50,000 yuan per month.
Bank of Communications, the mainland's fifth-largest bank, has launched an offering known as Quick Benefit Channel, while Ping An Bank has a product called Ping An Profit.