Money in the Cyber Bank

When Wang Bowen， 24， graduated with a master’s degree at Tsinghua University in Beijing in July， she had more on her mind than her fresh diploma.

Already having secured a spot as a reporter at the state-run Xinhua News Agency， Wang wasn’t anxious about landing a job. She was， however， anxious about her savings， locked up in deposit accounts capped by a government-mandated return rate of around 3 percent. With the cost of living in Beijing skyrocketing and inflation denting low-yielding accounts， Wang was looking for a financial alternative.

Enter Yu’ebao， launched in mid-June. It’s Alibaba’s wildly popular online-finance platform that works through Alipay， Alibaba’s third-party-payment arm， to deposit idle Alipay funds into a comparatively high-yielding money market fund.

Given Yu’ebao’s current annual interest rate of 4.5 percent， its lack of a minimum deposit requirement， and the ability to transfer and withdraw funds easily without paying a commission， Wang says it was a no-brainer to invest in what has become China’s biggest online investment service.

“Using Alipay to deposit money into Yu’ebao is very easy， and the redemption of Yu’ebao is fast” Wang said. “I can enjoy the liquidity of the money and a higher rate of return at the same time.”

She was not alone. In just one week， the online platform that works through Alibaba’s online finance arm Alipay （a Chinese version of Paypal） and partners with Tianjin-based Tianhong Asset Management Co. Ltd.， had attracted 1 million users. A month after it was unveiled， in mid-July， it had 4 million users and more than 10 bAoOiWIvuSxw3mXZVyFczyQcRRQyjncuA4/sutQ3jOdM=illion yuan （$1.6 billion） in deposits.

Yu’ebao’s popularity has skyrocketed in large part， because of consumer confidence in its parent company， Alibaba， and its link to the company’s online payment platform， Alipay， which claims close to 600 million active worldwide users （800 million registered accounts according to the company’s website）.

Big player

Hangzhou-based Alibaba， which runs Taobao， Tmall， and a host of other e-commerce sites， accounted for 70 percent of package deliveries in China last year， with sales reaching $163 billion， or 2 percent of China’s GDP， according to statements released by Yahoo. The American tech giant currently owns a 24-percent stake in Alibaba.

“Chinese trust Alibaba as an established brand with the finances to sustain products like this. If all did go pear shaped， they’d be confident that their money would be returned，” said Mark Tanner， Managing Director at Shanghai-based China Skinny， an online market-research firm.

In preparations for a possible public listing in the months to come， some financial analysts have estimated Alibaba’s worth at more than$100 billion， rivaling Facebook’s $104 billion val- uation last year before its $16 billion IPO—the largest ever for a tech company， and the third largest of all time.

Analysts are able to justify the sky-high valuation because of the explosive growth in China’s online retail sector. McKinsey’s estimates the Chinese online retail economy， with Alibaba’s operations as a core engine， will reach $420 billion to $650 billion by 2020， eclipsing the United States to become the world’s largest market. China is currently the second largest market in the world， with online retail sales reaching $210 billion in 2012， and an annual growth rate of 120 percent since 2003.

In announcing Alibaba’s intention for Yu’ebao and Alibaba’s foray into financial services to Chinese media， the company’s founder and chairman， Jack Ma， said， “China’s financial industry， especially the banking in- dustry， only serves 20 percent of clients， and I see there are 80 percent of the clients （who） are not covered. Financial services should be about serving the layman， rather than playing inside your own circles and making money for yourself.”

Risk factor

Despite its enthusiastic embrace by investors， Yu’ebao does face uncertainties. Foremost among them is regulatory limbo. It hasn’t yet been cleared by the China Securities Regulatory Commission， the industry watchdog， although company spokespeople said the requisite paperwork has been submitted， and Yu’ebao risks fines or even forced closure if it doesn’t pass that process soon. But observers believe that Alibaba， and in turn Alipay， have enough clout and reputation to gain government approval.

Also， because deposits are transferred to the oversight of Tian Hong， which invests them in various funds and bonds， there is a certain degree of investment risk. Although handsome returns are loudly broadcast， the fine print warns of potential losses.

“The underlying investments are meant to be relatively risk-free bonds and bank deposits， so the risk to the consumer is somewhat less，” said Zennon Kapron， founder of KapronAsia， a financial industry consultancy. “Considering the recent high-profile failures of several bank wealth management products， we think the general public users are aware of these risks， however small they may be.”

To date， Yu’ebao has only been used in China and is unlikely to expand internationally due to currency and financial regulations.

Excellent timing

Until now， there were few clear-cut， ostensibly low-risk， investment vehicles besides the bank-offered wealth management products that commonly have a minimum deposit requirement of at least 50，000 yuan（$8，000）， can carry stiff penalties for early withdrawal， and are under scrutiny for their rapid proliferation and uncertain sustainability. Alipay’s Yu’ebao， with an attractive yield， immediate liquidity and no limit on deposits， seemed irresistible. All a user has to do is click a button to transfer idle cash sitting in their Alipay account into the fund， and click another button to transfer it back.

“Reaching 100 million （Yu’ebao） users is conceivable，” Li Xiaohui， a researcher at China Security News， said， citing Alipay’s 500-million-plus user base. “It’s an easy process that seems hard to refuse. The money is just idle in your account， so why not invest it into something with a little return， then switch it back when you need it？” Li said， adding that users must not overlook the risk associated with entrusting a fund-management company to invest their deposits.

While Yu’ebao continues to tempt Alipay users into transferring at least a portion of their balances into the fund， it won’t be long before other major players enter the online finance arena， Kapron said.

“There will certainly be imitators. As an example， Tencent has a very large customer base and also has a payment product， so it could quickly move into the space，”Kapron said， clarifying that he doesn’t expect Yu’ebao or its imitators to impact the popularity of banks’ wealth management products， because most Yu’ebao deposits come from idle Alipay funds， rather than“large amounts of money in the short term.”

Currently， it’s not possible to withdraw Yu’ebao funds without first transferring them back to an Alipay account， and then depositing the amount into a tied-in bank account. That extra step has not deterred Wang Bowen， who plans to continue using the platform ahead of any other investments.“Yu’ebao meets the needs of the people，” Wang said. “Although it is more risky than deposits， considering the rate of return and the liquidity， the risk is acceptable.”