Quotable (#9)

Is the Chinese Internet subsuming the country’s financial system?

Remarkably, it seems as if e-commerce companies might be the driving force behind wholesale changes in Chinese finance itself. Chinese money market funds had RMB 575 billion ($95 billion) under management in November 2013 and Credit Suisse estimates that figure could grow as high as RMB 5.4 trillion ($891 billion), or 10 percent of GDP, by 2020. That would represent faster growth as a proportion of GDP than money markets experienced after arriving on the scene in the United States in the late 1970s. Other financial products, including equity funds, could enjoy the same kind of rapid growth, Credit Suisse’s analysts say. The big question is who’s going to provide them: old-school financial firms or the increasingly diversified Internet giants.

It can be tough to separate people from their trusted financial services providers, which is why many traditional brokers and banks have managed to hang on to so many customers in the U.S. But the game changes when the customers get convenient service 24 hours a day, seven days a week, from online financial product providers – with the added bonus of earning a return multiple times higher than that from conventional institutions. That being the case in China, newer players are in a position to truly compete. Need a bank? Without the need to invest in branches, online players’ costs are likely to be lower. Wondering which brand to entrust with your money? Baidu has an enormous marketing platform, thanks to its impressive traffic (around 6 billion search queries a day) and 460,000 existing advertisers, and gets its name in front of as many Chinese as any bank ever will. And talk about establishing a relationship with them when they’re young: Alibaba says that the average Yu’E Bao account holder is 26 years old. That young clientele is attracted by the relatively low risk of the service, easy access to funds, and the fact that accounts are linked—clients can use their Yu’E Bao funds to purchase goods and services online.

Last year, Alibaba co-founder Jack Ma made what seemed to be a prediction: “If the banks don’t change, we’ll change the banks.” But he had the tense all wrong. It’s already happening.

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