Article / 26 June 2015 at 4:22 GMT

MYbank set to be a mighty disruptive influence

China Watcher / Shanghai
China
  • Alibaba has launched MYbank, an internet banking platform
  • The move its latest effort to expand into the financial industry
  • It will also help it compete with its largest rival, Tencent

By Neil Flynn

Alibaba has announced its new internet banking platform MYbank, through its financial arm Ant Financial. It allows individuals and SMEs to apply for loans of up to RMB 5 million, and helps boost the economy, which is targeting consumption to be the main driver of economic growth.

This is the latest stage of Alibaba’s expansion into the financial industry, to not only capitalise on the lack of competition from the stagnant state-owned banks, but to also compete with its largest rival Tencent, which has been actively developing its own financial business through its WeChat app and online shopping subsidiary JD.com.

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State-owned banks such as the Bank of China rarely lend to individuals, who are the target demographic for MYbank. Photo: iStock

Encouraging lending 

In a bid to increase lending to individuals, the Chinese government approved the launch of several new private banks, including Alibaba’s MYbank and Tencent’s WeBank. The problem in China is that the big four state-owned banks: Bank of China, Industrial & Commercial Bank of China, China Construction Bank, and Agricultural Bank of China, very rarely lend to individuals and SMEs. They typically only lend to large private firms or state enterprises, which are in least need of bank loans. 

This situation has seen the shadow banking industry grow, as wealthy investors capitalise on SME demand for loans. Typically, an SME requests a loan from an unregulated financial company, which in turn would find a group of investors who are willing to supply capital to the SME, with a very high interest rate. 

The industry is very widespread, and even started allowing China’s foreign nationals to invest in such products in 2013, but the problem is that if and when the SME defaults on the loan, there isn’t a standardised way of retrieving the money for investors.

China Bank Lending
Despite being China’s largest banks, the big four are reluctant to
lend to individuals and SMEs.
 Source: Capital Economics 

Likewise, the loan system for individuals is just as difficult, with the only viable option being spending on credit cards. But this is limited by each credit card company, and as with the West, it’s more and more difficult to amass large credit debt across different cards.

Tech giants disrupt the financial industry

Tencent and Alibaba have revolutionised China’s financial industry over the past few years. They have launched the WeChat Pay and Alipay mobile payment apps respectively, and these are the default methods of payment online. But as both firms expand their mobile ecosystems, offline payments are embracing this technology. 

Taxi journeys can be paid for through these mobile payment apps, as well as goods in convenience stores, and I fully expect that over the coming few years, more offline businesses will accept this payment format.

Both firms have launched their own wealth management fund distribution platforms, with Alibaba’s Yu’e Bao (余额宝) platform growing rapidly since its launch. Typically in China, you would go to a bank branch to invest in a wealth management product, but the quality of the fund and the quality of the service are poor. This has been the case for years, and hasn’t changed because banks have had no rivals in the industry. However, Yu’e Bao is much more simple and transparent, with everything being conducted through the user’s Alipay account.

Through its 40% stake in online retailer JD.com, Tencent allows users to make online purchases using interest-free credit, and Alibaba allows the same on its Taobao and Tmall shopping platforms. Through this feature, both firms are essentially acting as credit card operators for their users, where the money can only be spent on their platforms. 

Similarities can be made to the controversial micro-loan industry seen in the West, but the key difference is that all of these credit payments are being made through Alipay and WeChat Pay. This means that these firms have a strong dataset of each user’s purchase history and behaviour, so that a comprehensive credit score can be calculated, and the optimal amount of credit be offered to each user. 

Both platforms were tentatively launched at the end of last year, so Single’s Day 2015 on November 11 will be the first time that both firms see how their sales can increase through the use of consumer credit.

The launch of MYbank will further disrupt China’s financial industry. Individuals and SMEs will have very little need to use the shadow banking system, and will make bank lending much more transparent. All loan transactions are conducted through Alipay, and because this mobile platform has been in operation for over 10 years, almost every user has built a large dataset of purchase history and behaviour, meaning Alibaba can calculate the most comprehensive credit scores in China. 

In fact, so comprehensive are they that Alibaba is selling the data to China’s banks and financial firms. Alibaba has a 37.5% profit share from its financial subsidiary Ant Financial, which in turn owns 30% of MYbank. I expect that over the next 12 months, MYbank will grow rapidly in popularity as capital loans become much more attainable to the majority of China’s population, which will boost and diversify Alibaba’s revenues. 

– Edited by Gayle Bryant

Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

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