Influence of Yu’ebao on the Chinese Banking Industry
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Due to factors of system and policy, traditional banks are at the core of finance services. However, with the deepening of reform in all fields, a group of Internet companies represented by Alibaba gradually entered into the financial industry through the Internet. They hastened the adjustment and innovation of financial policies and systems, and significantly impacted traditional financial services. The aggregation effect and the butterfly effect were triggered by the successful launch of Yu’ebao. After that, Internet financial products, such as “Huoqibao”, “Xianjinbao”, “Wacai APP” and “Sina Weibank”, were launched one after another to compete with traditional banking services. Therefore, the rise of Yu’ebao weakened the position of the banking industry in the financial market.
In terms of yield, in 2014, the annualized yield of Yu’ebao was 4.8%, the interest rate of demand deposit was 0.35%, and that of one-year term deposit was 2.9%. Earnings of Yu’ebao outdistanced the interest rate of demand deposit, and also exceeded that of one-year term deposit. Inevitably, bank deposits were reduced to a certain extent.
Interest spreads of deposit and loan have always been critical to banks’ profitability. The almost-zero interest rate of demand deposit helps banks to gain huge profits.
With a yield much better than demand deposits, and even better than term deposits, Yu’ebao has attracted substantial funds. Deposits have been reduced, and the cost of debt has been increased for commercial banks. Although money market funds and Yu’ebao funds finally go into the bank system in forms of bankers’ deposit, wholesale deposit, or the agreement deposit, etc, the cost of debt has been increased due to the change in the structure of fund sources.
According to data released by Alibaba, Yu’ebao has raised RMB 578.9 billion Yuan (87.6 billion euro), and according to data in the Annual Report of the People’s Bank of China, at the end of 2013, the total amount of residents’ individual savings was 45 trillion Yuan (6.8 trillion euro), including demand deposits of 16 trillion Yuan (2.4 trillion euro). The data comparison indicates that Yu’ebao has only posed a limited threat on demand deposits, but the threat tends to grow.
Compared to financial products offered by commercial banks, Yu’ebao generates higher earnings with liquidity comparable to demand deposits. Funds can be redeemed at any time to make payments or transfers. There is no limit to the minimum subscription as customers can even spend only one Yuan (15 cents euro) to start making profits, which are calculated with the daily compound interest method. Therefore, users are able to make their “pocket money” profitable. In terms of characteristics and the investment structure, Yu’ebao is most similar to commercial banks’ one-day financial products, which require a minimum subscription of 50,000 Yuan (7,654.6 euro), while Yu’ebao only requires one Yuan (15 cents of euro). These non-principal-guaranteed floating-income financial products have more strict subscription and redemption requirements compared to Internet funds; moreover, they do not adopt the daily compound interest method. Therefore, customers turn to Yu’ebao, and the sales of super-short-term financial products are affected.
In terms of liquidity, funds in Yu’ebao generate high earnings, and meanwhile they can be redeemed for shopping or transfer at any time. The liquidity is much better than traditional financial products. In conclusion, with its advantages, Yu’ebao will definitely attract a number of customers from commercial banks, and therefore impact bank financial products, especially short-term ones.
A threat will be posed to the consignment sales of funds in commercial banks. In the traditional financial industry, banks lead the fund market as they enjoy a large customer base. As a result, banks have suppressed the bargaining power of fund companies in terms of consignment sales commission for a long time. Massive profits of fund companies have been exploited by banks. Banks distribute funds with offline advantages such as a wide reach and a huge customer base. For open-ended funds, about 60% are sold by banks, and almost 40% are sold by fund companies directly. Very few of them are sold on third-party e-commerce platforms. However, when the fund industry enters into an age of Internet, fund companies are able to reach common investors without the help from banks. For instance, thanks to Yu’ebao, TH Fund is exposed to a great number of customers, and customers can enjoy a fund without term limit but with additional payment functions. The fund market enters into a convenient and fast era of Internet. In future, Alipay will collaborate with other asset management enterprises to launch more financial products. Moreover, other third-party payment companies follow the example of Yu’ebao one by one. As a result, consignment sales of funds in commercial banks will be influenced, and even be marginalized.
Yu’ebao has achieved success because it is able to make full use of advantages of the Internet finance, including easy product innovation, low transactional cost, convenient process, and associated marketing channel, etc. It challenges traditional banks, which monopolize the deposit market due to their advantages including rich managerial experience, a strong resource system, a huge customer base, national credit support, and fund security guarantee. At present, in response to the impact of Yu’ebao, banks have to put more emphasis on the online market, and combine traditional edges with Internet financial advantages to innovate the financial product portfolio and the mode of fund consignment sales. In terms of financial products, for products like “Jinxinfu - Fengdeng” launched by Rural Credit Cooperatives, featuring low earnings, non-fixed term, and high minimum transfer amount, they can be improved by increasing yields, lowering minimum subscription, combining purchase by appointment with purchase at any time, and implementing multi-channel operation, etc. in order to enhance customer satisfaction and retain customers.
Internet financial products such as Yu’ebao have yields more than ten times higher than interest rates of demand deposits, so their emergence has impacted bank financial products. Banks should pay attention to this trend, and keep innovating. The main edges of Internet financial products are their convenience and high yields. Therefore, bank financial products should be reformed accordingly, and meanwhile excel in other respects. Only through constant innovation and differentiation, can banks survive in the trend of Internet finance. In order to reduce the adverse impact of Yu’ebao, commercial banks should launch competitive products as soon as possible. For example, new products should enable customers to buy T+0 money funds with their demand deposit account balance through online banking, and payment functions of T+0 money funds should be enhanced. Commercial banks have advantages in their customer base, capitals, channels, and particularly corporate deposits which Yu’ebao does not have. Moreover, the T+0 mode is quite mature in the market. Therefore, commercial banks are more than qualified to launch competitive products.
Banks should develop innovative financial products, and diversify the product portfolio to meet market demands. In particular, banks should make full use of highly liquid funds. Moreover, they should establish a concept of serving all the people, actively enlarge the customer base, and treat customers without discrimination. Financial products are the basis for banks to enter the Internet financial market. The gap between their product service operational process and Internet financial market demands still exists, so they should try to boost product quality in order to meet market requirements.
In some sense, the success of Yu’ebao is the success of Internet finance. In the fast-changing information age, it is a trend to enhance the in-depth integration of information technology and bank management, and future financial products will be featured with quick service based on the Internet.
Information technology has played a key role in the launch of Yu’ebao. There are two manifestations: firstly, the T+0 fund redemption mode has been realized. Fund companies utilized big data to accurately forecast fund liquidity in order to minimize liquidity risks. As a result, the traditional modes of T+2, T+3 evolved into T+0, and real-time payment became a reality. Secondly, the business flow is simplified. TH Fund and Alipay have made great efforts to enable the function of “opening an account with one click”. Now Alipay users can open their fund accounts only by clicking the “transfer in” button and confirming their information.
Before then, banks including CGB, BOCOM, PAB and ICBC cooperated with fund companies to launch similar products. Yields of such products are almost the same as Internet financial products. And their emergence is perceived as a passive "revolution" brought about by Yu’ebao and the like.
Due to the retarded development of the social credit system and web-based asset ownership verification for financing bodies, intrinsic requirements of Internet finance have not been fully met at the present stage, as financial products similar to Yu’ebao are still audited through offline manual process. This situation will be changed fundamentally with the development of Internet technologies. Existing products should be put online to make full use of both the online and offline channels, which is an important measure in this initial stage. In addition, existing products should be optimized to offer better customer experience and meet requirements of Internet financial products.
The greatest lesson of Yu’ebao to commercial banks is that banks should understand customers’ financial service requirements, facilitate the market researches, innovate products from the perspective of clients, optimize service process, and enhance service quality in order to constantly improve customer satisfaction. Commercial banks should be customer-centred in the process of business development.
Banks should also make it easier for customers to buy financial products as convenient as making deposits by taking off unnecessary restrictions.
Customers should be able to make free subscription, transfer-in, and transfer-out as traditional demand deposits, and meanwhile earn profits.
Adhering to the concept of creating values for customers, banks should improve the management and utilization of funds collected by financial products.
The focus should be shifted from traditional deposits to financial products in order to retain existing customers as well as wining back lost customers.
Traditional financial products are sold in 10 thousand Yuan (1,512.9 euro), and minimum subscriptions can be 50,000 Yuan (7,564.6 euro), 100,000 Yuan (15,129 euro), 200,000 Yuan (30,258.4 euro), or even 500,000 Yuan (75,646 euro). Some retail investors are not able to afford such financial products. However, Yu’ebao broke the restriction by making the minimum subscription as low as 1 Yuan (15 cents euro). But it should also be noticed that the maximum subscription of Yu’ebao is 1 million Yuan (151,292 euro), which cannot satisfy high-end customers. Therefore, banks should develop differentiated financial products to practice differentiated marketing. Satisfy different levels customers by perfection market segmentation.
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