I took this picture while waiting for the subway at Xujiahui, one of the busiest metro stations in Shanghai. The ad copy translates to "Alipay Wallet. The Wallet that Makes Money for You." My initial reaction was, "Wow. What is this sorcery?" But then, I realized that growing money like this was nothing new; banks have always done this. The big difference was that the company behind this ad was no bank. It was Alibaba - one of the biggest and boldest internet companies in the world.

Uncovering the Magic of Alipay's Money-Making Wallet

I looked around. The entire metro station was covered with the same Alipay ad, only in different formats. Alibaba seems dead serious about this finance thing. Physical advertising for online products can still strike some observers as odd, but this type of advertising is now popping up everywhere in China. On the week leading to the 11/11 e-commerce shopping event, Tmall, Jingdong, and 51Buy practically plastered the entire city with e-commerce promotion ads. It seemed to have worked well, since Taobao/Tmall alone registered a record-shattering RMB 35 billion (5.75 billion USD) of sales in one day.

Alibaba is clearly hoping to replicate that success in the arguably even bigger field of financial services. For the company, doing outdoor advertising at this scale is just another step in the road towards dominance in yet another market. I already heard about Yu'ebao, the fund service where anyone with an Alipay account can invest, but tying that together with the Alipay app and marketing it as a mobile wallet that makes money for the user struck me as a genius marketing move.

Works like Magic

How exactly does a wallet make money for the user? Well, Alipay has made it dead simple to use. An Alipay user can just sign in, transfer as little as 1 RMB ($ 0.16) from the Alipay account to Yu’ebao, then simply wait for it to bear interest. This can be done either on a PC browser or Alipay’s Wallet app. At any point in time, one can choose to take out the money or add more. No strings attached. The interest one gets is based on the annual rate during the deposit date, adjusted for the number of days one keeps the money in the fund.

Simple as it may be, this concept could have easily joined the ranks of the countless online finance failures had it not been connected with Alibaba. The company was smart enough to realize that they were sitting on a giant golden egg with Alipay. Since the payment service uses an escrow model to ward off online fraud, users are obliged to transfer money from their banks to Alipay, essentially making it a deposit account, albeit one that a shopper can access instantly to buy goods online. Possibly in fear of missing out on good e-commerce deals, shoppers tend to keep money on standby in Alipay. Multiply that by a few hundred million and that’s a substantial amount of money just lying around.

Alipay clearly saw an opportunity not just to utilize the dormant money, but also to entice users to deposit more, so they partnered with Tianhong Asset Management to create a money market fund where the Yu’ebao money will be placed. With all the money moving in and out of the service, this is no simple undertaking, but Alipay seems hell-bent to keep all the complexity under the hood. In effect, all the user has to do is put money in and he or she will simply get a little more money out. Any amount, any time. It does work like magic.

A Virtuous Cycle

As of November 14 this year, Yu’ebao has already surpassed RMB 100 billion (USD 16.32 billion) in holdings. This is a staggering leap from zero on its June launch date and RMB 55.6 billion (USD 9 billion) just last September. The ads I saw on the metro will only accelerate this growth.

In the past months, it had seemed that Alipay was this Trojan horse that quickly led to the widespread adoption of Yuebao. But with the pace of growth and the aggressive advertising angle, it increasingly seems that the scenario has reversed. Yu'ebao is the real Trojan horse.

Yu'ebao’s low barrier to entry will only attract more users to Alipay. The high perceived value of earning instant money will compel those users to put in more money as well. In the ads, Alipay is advertising that their rate of +-5% is 14 times more than the regular savings rate in China. More money in Alipay means more potential shopping done on Alibaba’s e-commerce platforms and other partner services. More shopping leads to even more money parked in Alipay. And the virtuous cycle goes on. Is there anything that can get in its way?

By Scott Si