Change or Die

By+zhou+Xiaoyan

there once was a time when online financial products offered by Internet companies were viewed as formidable enemies by Chinese banks. Now， its time for banks to lie back and breathe a sigh of relief.

The crown of Internet finance pioneers such as Alibaba is now slipping. Return on Internet financial products have been dropping for several consecutive months， triggering concerns over their investment value and raising the question of whether they will vanish from the market.

losing luster

The flagship online investment product offered by Chinas Internet companies—Yuebao（literally meaning “leftover treasure”）—was launched by Chinas e-commerce leader Alibaba Group and Tianhong Asset Management Co. Ltd. at the end of May 2013. The instrument allows users to convert spare cash into a money market fund holding.

yuebao instantly created a splash and became Chinas biggest online investment service. The reasons why users chose yuebao over traditional investment options included a much higher yield than the government-mandated deposit rate， the lack of a minimum deposit requirement and the ability to transfer and withdraw funds easily and quickly without paying commission.

According to Tianhong Asset Management Co. Ltd.， as of May 26， yuebao had over 100 million users with a total of investment of 574.2 billion yuan （$92 billion）， making it the largest money market fund in China and the fourth largest in the world.

The good times， however， didnt last long. In fact， the return rate of yuebao has been on a steady decline since January， when the annualized seven-day interest rate reached its highest level of 6.76 percent. On July 23， that rate was only 4.18 percent. Analysts predict it will decline to less than 4 percent in August. The benchmark one-year bank deposit rate is 3 percent.

“In the long term， the interest rate of yuebao will stabilize at around 3-4 percent，” said yi Huanhuan， deputy head of the research institute affiliated to Hongyuan Securities Co. Ltd.

New deposits in yuebao took a nosedive in the second quarter. It attracted nearly 33 billion yuan （$5.28 billion） new deposits during the period， less than 10 percent of the new deposits recorded in the first quarter.

The growth in user base has also slowed down. The number of yuebao users almost doubled from 43 million at the end of 2013 to 80 million at the end of March， but only increased to 100 million by the end of June.endprint

Wu Xiaoling， former vice central bank governor， said yuebao doesnt have much room in terms of future development. “yuebao has reached its peak.”

yuebao is not an isolated case. Online Internet companies-backed wealth management products such as Tencent Holdings Licaitong and Baidu Inc.s Baizhuan， have also witnessed a continued decline in return rates.

Banks strike back

Experts say the continuous drop in Internet financial products interest rates can be attributed to the decline in interbank lending rates since early April.

Back in June last year when the products were launched， the money market was suffering a serious capital crunch， forcing interest rates to jump sharply. Online fund products benefited from the surge in money market rates and were able to offer high return rates for investors.

But as the money market situation stabilizes and interest rates fall， the return rates for online funds such as yuebao have dipped accordingly.

In the long term， the return rate of yuebao will gradually stabilize—just like other ordinary money funds—and it will change in line with money market conditions. Its impossible for them to offer exceptionally high rate of returns for investors， analysts claim.

Although yuebao has been operational for only a year， it has changed the landscape of Chinas wealth management sector and greatly enhanced peoples awareness of money management.

In the wake of huge deposit losses， Chinese banks have launched products similar to yuebao to grab their share of the riches. Although they are latecomers， their returns are now higher than those offered by Internet companies.

For instance， the interest rate offered by Zhanggui Qianbao （which translates to “bosswallet”）， launched by Industrial Bank， and Huoqibao （meaning “due on demand baby”）， launched by Bank of China， are both above 5 percent.

Online money funds partially rely on agreement deposits with traditional banks to achieve higher return rates （the banks offer higher interest rates for corporate clients more than individual savers）.

“After gathering a large amount of money， Internet companies have to negotiate with banks on the agreement deposits to make profits. Part of the profits will be given to investors while part of them will go to Internet companies. Now， banks have their own online investment products to directly accumulate money. Intermediate links have been reduced， therefore bank-backed online investment products have higher return rates than those offered by Internet companies，” said Guo Fanli， Director of Research at the Shenzhen-based industry research company CIConsulting.endprint

“Market-based interest rate reform will be gradually carried out in China. Therefore， the online investment products offered by banks will overwhelmingly defeat those offered by Internet companies in the future，” Guo said.

“Going forward， investment platforms by Internet companies will not only focus on money market funds but also find other development opportunities. Other types of funds can be used to ensure steady returns，” Guo predicted.

Its also more convenient to use online investment products launched by banks because users have a higher daily redemption limit and can enjoy quicker redemption.

Banks offer instant redemption for their products while in the case of yuebao， redemption for less than 50，000 yuan （$8，000） will take less than two hours while redemption for more than 50，000 yuan （$8，000） will take two days. Some bank-backed investment products dont even need redemption and users can withdraw money directly from the fund through ATM machines.

diversification

A drop in return rate notwithstanding， yuebao did gather more than 100 million users that are in need to manage their spare cash. Holding such a precious client resource， how to effectively tap the resource has become an urgent task for yuebao.

Faced with a turnaround in their fortunes， it seems that the key to survival of online investment products by Internet companies lies in diversification.

A source from Alibaba Group told National Business Daily that future product innovation in yuebao will focus on two areas： catering to usersconsumption demands and offering more various and targeted wealth management services to its 100 million users.

yuebao has reached agreements with major telecom operators that allow users to purchase smart phones using their yuebao fund. The fund can also be used to shop online and pay electricity， tap water and phone bills.

An open investment platform called Zhaocaibao was established by yuebao in April so that financial institutions can sell their products via the platform.

“Zhaocaibao is totally different from yuebao. Financial institutions can sell their products to our over 100 million users. Zhaocaibao has a stable return rate and a fixed period for redemption. Its a complementary service to yuebao where all users can access more professional and more diversified wealth management services，” said Wen Tian， Director of Operations at the Wealth Management Division of Alibabas Small and Micro Financial Services Group.endprint