Last time, we talked about how the revamped Alipay Wallet app coupled with Alibaba's clout could create a virtuous cycle which might prove to be unstoppable to its competitors. This time, we explore the other side of the coin. Alibaba clearly has the scale to barge into the financial sector, but it is also this scale which could be its biggest disadvantage. So what are the possible roadblocks against Alibaba’s road to financial industry dominance?
BAIDU: THE FAST FOLLOWER
Baidu emerged as a surprise competitor to Alipay Yuebao when it launched Baifa last October. Within 5 hours, Baidu was able to sell 1 billion RMB (123 million EUR) worth of money market fund to over 120000 users. Its launch even outperformed Yuebao on its first day.
Baidu obviously doesn’t have Alibaba’s experience in managing money for consumers. So how did the fund become so successful? There are two possible reasons. One is market conditioning. Alipay first had to condition the market to an unfamiliar product when it launched Yuebao. When Baidu came into the scene, consumer expectations were already established. Since Baidu is also one of the internet giants commanding prime web real estate, it became a lot easier for them to position themselves.
The second and more important reason was that Baidu advertised an 8% APY (annual percentage yield). This is much higher than the 5-6% APY of Yuebao, making Baifa a far more lucrative investment on the surface. The reality is that the 8% APY promise is unrealistic and tantamount to false advertising. In all likelihood, this makes Baidu’s initial success with Baifa an anomaly, and unless it acts quickly to obtain other financial competencies, Baidu’s foray into the financial industry seems unsustainable at best.
TENCENT: THE DARK HORSE
Tencent is a dark horse. Unlike Baidu, it has Tenpay, a 3rd party payments system which it has already integrated into its hit product Wechat. It has significant experience in managing consumer funds, especially with virtual currencies dating back to QQ’s heyday. It also just invested in mutual funds platform Howbuy. Slowly but surely, Tencent has been planting the seeds. The ace up Tencent’s sleeve is Wechat’s user base of over half a billion. If the company decides to one day flip the ‘investment’ switch and launch an easy-to-use platform on Wechat, it could pose a significant challenge for Alibaba.
OTHER INTERNET PLAYERS: JOINING THE PARTY
Suning and Sina are two other players to watch out for. They are both in the process of launching banks and expanding to other financial products. Sina’s greatest asset is the Weibo user base, although it faces a similar problem as Baidu - little experience in handling payments and transactions. On the other hand, Suning is more like a mini-Alibaba. It also has a popular online shopping platform and its own payment system Yifubao. Its brick-and-mortar heritage could also prove to its trump card against Alibaba especially when it comes to possible higher-level banking activities which still require offline interactions.
Almost every major internet company in China seem to have financial ambitions one way or the other. Even smaller players like Soufun and Netease are crashing the party. The good news is that this competition makes it easier than ever for average Chinese consumers to diversify their investments.
CHINA’S BANKING INDUSTRY: TOO LITTLE, TOO LATE?
Banks have every reason to be scared of Alibaba. The e-commerce giant is already so far ahead of any bank in terms of visibility, mindshare, and user base. The incredible rise of Yuebao from 0 to biggest in 6 months is something that no bank can pull off. Through its e-commerce platforms, Alibaba has also acquired a massive trove of data from both sellers and customers. Sister company Aliyun, which specializes in big data analytics, coupled with the recent acquisition of mobile analytics firm Umeng, only reinforces this strength.
On the other hand, banks have been so used to being coddled by the state that they are only now alarmed with the new threat. Their only advantage over Alibaba now is not even natural, it’s regulatory. If ever Alibaba is awarded a banking license, can any bank even match it? At least for consumer banking, I highly doubt it. Banks are finally starting to act by partnering more closely with e-commerce players and even launching their own e-commerce platforms, but it looks like a case of too little, too late.
REGULATORS: THE BIG QUESTION MARK
This is the biggest potential threat to Alibaba’s growth. Alipay claims to have close to 800 million registered accounts. Let’s say this number was inflated and we round it down to 600 million. Yu’ebao currently has 30 million users, which means that the service has only covered 5% of all Alipay users. As of last week, the fund is already the biggest in China and the 51st in the world. How much bigger can it get?
No matter how big it becomes, it will still be at the mercy of China’s regulators. In fact, the bigger it gets, the easier it is to target. The more the state-owned banks will cry foul. What if tomorrow the government decided to cap the amount of fund holdings for Yuebao? As Alibaba wades into deeper financial waters, the more regulatory hurdles it has to go through. The good news is that Beijing is looking to spice up the competition and relax the barriers but for now, its financial expansion will ultimately be limited by a lack of a banking license.
ALIBABA'S LONG ROAD AHEAD
For Alibaba, it’s ‘yesterday payments, today investments, tomorrow the world.’ The company is arming itself very well. It recently bought a controlling (51%) stake in Tianhong Asset Management Group and invested in several other mutual fund platforms. Through its multiple services now embedded in consumers’ lives, Alibaba understands the consumer mindset better than any bank. This will be doubly potent when combined with financial data. Alibaba has all the ingredients to create a full-fledged financial service offering which could provide tailor-made solutions to consumers. Couple that with Aliloans, and you get a feeling that Alibaba is a bank disguised as an e-commerce company.
As Alibaba seeps further into consumers’ lives, it casts an even bigger shadow, one that goes beyond e-commerce and banking. It is quietly placing itself in the best position possible to shape the future of payments in China. As financial services benefit immensely from economies of scale, expanding to international markets is definitely within reach. China, through Alibaba and Alipay, could yet become the world’s innovation leader in this sector as it shapes the future of finance.