Led by Alipay, a new breed of financial institutions are now flexing their muscle

It's not an easy task to compete with banks, whose sheer size may be too big for latecomers to handle. But there are exceptions.

Third-party payment companies, after a decade of fast growth, are providing not only payment services but also services traditionally provided by banks, such as loans.

Among these companies, Alibaba Group Holding Ltd, China's largest e-commerce company, has gone further than others. Alibaba plans to set up Alibaba Small and Micro Financial Services Group to consolidate its online payment and micro loan businesses, and provide financial services for consumers and small and micro enterprises - those with an annual turnover of less than 30 million yuan ($4.8 million, 3.7 million euros).

The company says its two main business arms will be e-commerce and financial services based on its huge e-commerce data. The latter is thought to be a challenge to banks and may change the financial industry due to the use of Internet technology and the huge amount of data that records users' history and habits.

"For the past 13 years, Alibaba hasn't thought of challenging anyone, but creating something new instead," Alibaba's Chairman Jack Ma said at an industry forum in late March, asked whether his company aims to challenge banks.

"Banks are getting a bit nervous. But I think that getting nervous is good, and it would be strange if they aren't."

"If banks weren't nervous, China's small and micro businesses would be nervous," Ma added, hinting that banks fail to provide enough services to help small and micro enterprises raise funds.

Major third-party payment companies in China first appeared around 2004, and they have quickly risen to prominence as the country's e-commerce market grew dramatically over the last decade.

Last year, the total transaction volume processed by third-party payment companies reached 3.8 trillion yuan, an increase of 76 percent on the previous year, says the domestic research company Analysts International.

By contrast, last year, the total transaction volume of bank cards in China was 346.2 trillion yuan, says the People's Bank of China.

While the biggest player in the sector, Alipay, which is owned by Alibaba, originally acted only as an escrow between sellers and buyers, third-party payment companies are now offering a wide range of services, such as payment and settlement services, and micro loans.

Alibaba plans to launch a credit payment service for its mobile users, giving them a certain credit limit based on their Alipay records.

Although banks provide the funds, the service is similar to a cyber credit card, a further move by third-party payment players to expand in the financial industry.

"I don't think the service will have an impact on the banks' credit card business," says Hu Xiaoming, Alibaba's vice-president. "In fact, it's complementary as more users' credit histories can be dug out and accumulated for banks' reference."

Around 220,000 small and micro enterprises had received loans from Alibaba as of March, at an average interest rate of about 18.9 percent a year, which is "not low" for small and micro companies, Hu says.

More industry players, including e-commerce companies, have started providing micro loan services to ease funding problems.

Beijing Jingdong Century Trading Co Ltd, which operates China's second-largest shopping website, and smaller rival Suning Commerce Group Co Ltd both partnered with banks to provide micro loans to their suppliers and distributors, which usually face a shortage of funds due to long payment periods.

With the services, Jingdong and Suning's suppliers and distributors can get funding more easily based on their credit and account receivables records.

This way of lending by using e-commerce data differs from the traditional way, in which small companies have to provide collateral to banks and sometimes have difficulties meeting the banks' requirements. In addition, banks usually prefer larger companies with lower risks.

He Qiang, a professor at the Central University of Finance and Economics, says the expansion of third-party payment and e-commerce companies into payment services may pose a challenge for banks.

"Payments are where banking services start, as customers deposit their money in the banks primarily for the purpose of processing payments, which generates lending and remittance business. And now the online payment companies are taking the same track."

Zhou Xiaochuan, the central bank governor, said on March 13 that authorities support the financial innovation of the e-commerce players.

"The challenge they pose to the traditional banking model is beneficial, as fiercer competition will promote the development of the banking industry, with better products and services," Zhou said.

But the development has put pressure on the existing regulation system, as policymakers have not fully adapted to the changes.

"Regulators are also highly concerned about the financial risks the new developments might trigger," Zhou said.

He Qiang says the boundary between e-commerce companies and banks is increasingly blurring, and there is a trend whereby those companies get more involved in financial services by establishing banks themselves or holding more shares in existing commercial lenders.

However, Alibaba's Hu says the company will not become a bank, dismissing rumors that it will apply for a bank license.

Meanwhile, financial institutions, such as banks and securities companies, are also exploring Internet technology and developing electronic banking businesses, and even e-commerce platforms as a response to the growing competition, said Ma Weihua, president of China Merchants Bank Co Ltd.

For instance, CMB launched a shopping website for its credit card users in October 2004.

The bank has also set up an e-commerce company in Shanghai to provide travel services such as flight and hotel bookings.

The next step will be to sell luxury goods online, as the lender tries to differentiate itself from regular online malls, says Ding Wei, a vice-president at CMB.

Another major lender, China Construction Bank Co Ltd, started its e-commerce business, e.ccb.com, in June last year, becoming the first Chinese bank to offer e-commerce services.

Other banks such as China Minsheng Banking Corp and China Citic Bank plan to launch similar e-commerce platforms this year.

Credibility is the banks' biggest advantage when developing e-commerce businesses. In addition, they have strong capital strength to support them, He says.

He says existing bank operations such as settlement, clearing and credit services, as well as their IT infrastructure and outlets, will set a sound foundation for the lenders' exploration of e-commerce.

Contact the writers at chenlimin@chinadaily.com.cn and wangxiaotian@chinadaily.com.cn

(China Daily 05/10/2013 page18)