An online banking application in China has collected more than $66 billion from 81 million customers in less than nine months. The app, Yu’E Bao, which launched last June, gives customers a seven-day annualized return with a high yield of 6 percent, compared to the just 3 percent offered for a one-year deposit at state-controlled banks. With no minimum deposit or mandatory time frame, it also lets customers access their money simply by tapping their phones. It’s understandable then why Yu’E Bao has attracted more than 20 million users in the past 20 days. But with an increase this significant, Yu’E Bao is ruffling a few feathers in the traditional finance community.
The editor-in-chief of CCTV’s Stock and Information Channel, Wenxin Niu, said Yu’E Bao is a vampire sinking its teeth into Chinese banks’ veins. He also called it a parasite living in China’s finance system. Niu and others worry that Yu’E Bao will negatively affect liquidity in the money market and cause interest rates to spike, thus increasing both the cost of production and prices in the larger economy. Niu argues that Yu’E Bao should be regulated and, even better, banned. Are Yu’E Bao’s critics totally overreacting, or do they have a point?
The short answer is that it’s a little hard to tell right now. While Yu’E Bao is growing rapidly, its current share of the market is still infinitesimal. UBS, a Swiss financial service company, estimates that, because of Yu’E Bao’s disruption in the market, Chinese banks’ net interest margin may see a reduction of roughly 0.1 percent. If 10 percent of total bank deposits in China flow into online products like Yu’E Bao and others, UBS predicted that Chinese banks could lose some income from fees, but it’s unclear whether that would shake the big banks, according to a Chicago Tribune story.
Other Yu’E Bao critics worry that the app simply isn’t as safe or stable as state-backed banks. As an online-only service, Yu’E Bao customers’ money and financial information could be the target of attacks from hackers and data thieves.
But it’s important to remember that Yu’E Bao is neither a fly-by-night tech start-up nor unprecedented. The app is owned by a company called Alipay, which is itself an affiliate of Alibaba Group Holding Ltd, the largest e-commerce company in China. Alibaba, in turn, operates two platforms online, T Mall and Taobao Mall, where customers pay via online banking services or Alipay (China’s PayPal). Cash drawn by Yu’E Bao goes into a money-market fund, Tian Hong Asset Management Co., in which Alibaba owns a majority stake. Customers can move around money between their online banking accounts, Alipay, and Yu’E Bao and spend their earned interests in T Mall and Taobao Mall via Yu’E Bao.
In 1999, Ebay Inc.’s PayPal offered customers a similar product, but the money-market fund behind the product closed in 2011 after interest rates fell under 0.05 percent due to the financial collapse. Back in the day, it also offered a five percent return.
The way that Yu’E Bao makes money is similar to how banks do: they collect cash from customers and invest the money into something else. The main difference is that Yu’E Bao has a higher yield, is very convenient to use, and offers customers flexibility in accessing and moving around their money. It also collects for the most part much smaller sums of money—deposits that many banks simply wouldn’t bother with. By picking up small deposits of cash here and there, Yu’E Bao has not only dramatically grown its customer base, it’s also lured customers from traditional banks.
While traditional banks and folks like CCTV commentator Niu may be squawking, apps like Yu’E Bao may be good news for many. Chinese President Xi Jinping has worked to advance a free-market agenda and is in favor of liberalizing interest rates. By forcing traditional banks to compete with online products, customers may get a better deal no matter where they invest.
