Internet Finance: A Brave New World in China

Internet Finance: A Brave New World

11-05 15:45 Caijing

Competition and cooperation between dotcom companies and financial institutions will help upgrade the financial industry and ultimately benefit individual investors.

By staff reporters You Xi, Liu Wenjun, and Zhao Jingting
Internet companies, given their massive user bases, have achieved great success upon expanding into the financial sector, especially in the areas of online payment and fund sales.
A case in point is Baifa. A wealth management product co-offered by search giant Baidu and domestic fund company ChinaAMC, Baifa raked in over 1 billion yuan in sales revenue in just a few hours when it debuted Oct. 28. Baifa easily broke the record set by competing product Yu’ebao in late June. Yu’ebao, a currency fund launched by e-commerce giant Alibaba Group, raised 50 million yuan on its debut day, which sent a shockwave across the industry. The Internet industry is all about meeting customer needs. It is only natural that Internet companies would foray into the financial market after they satisfied the need for online purchase of tangible products.
Possible business models for the domestic Internet finance sector are becoming increasingly clear, and include third-party payment, micro financing, wealth management and insurance products, virtual currency, and online banking. Both Yu’ebao and Baifa fall into the third category, wealth management and insurance products.
Baifa became a hit partly because it chose the right access point: fund sales. Fund sales is the best launching pad for Internet companies hoping to enter the financial market, said an executive at the e-banking department of a major state-owned bank. Dotcom companies, with their massive user bases, fit well with fund companies, all of which are eager to expand their sales channels; and fund products, which are easy to standardize, are suitable for online sales, said the executive.
Only the fittest survive in natural selection. Two different strategic options emerge as traditional financial institutions also try to reposition themselves. Some of them choose to cooperate with Internet companies by offering financial products and services designed for sale online; others want to build their own online business ecosystems where both the information and the capital flows form closed loops.
Caijing learned that Internet companies, which lack financial-services talent, relevant expertise, and other resources, actually welcome the collaboration if financial institutions can offer valuable assistance at the back-end. In fact, domestic Internet companies see applying for a banking license on their own as their last resort, and will not go there unless they cannot work with traditional financial institutions to meet customer needs.
Financial institutions need to change their mindset and their current practice of selling products top-down, which is a legacy of the web 1.0 era. The offering of products and services has evolved into a bottom-up process in the era of SNSs and Web 2.0, which gives top priority to clients. All sectors are experiencing a deconstruction and shift of power as the old B2C model is replaced by a C2B pattern.
Competition and cooperation between dotcom companies and financial institutions boils down to which side can better satisfy customer needs. In fact, it is individual investors who have benefited the most from the current boom of online wealth management products.
A policy research expert at Alibaba said that wealth management products offered by Internet companies have largely driven down the threshold for investing in currency funds and hence given ordinary Chinese citizens an alternative to current accounts.