Alibaba tests the limits of non-bank banking
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Alibaba isn‚Äôt a bank. But for customers it‚Äôs getting hard to tell the difference. Users of China‚Äôs dominant e-commerce website can now deposit funds, make investments, take out loans and even give out gifts of virtual cash. In taking on China‚Äôs lenders, Alibaba and its online rivals may be taking on bank-like risk.
Banks typically offer savings, loans and transactions. Alibaba‚Äôs foray into finance has seen it target all three. While the amounts remain small compared with China‚Äôs towering mainstream lenders, the growth rates have been rapid. No wonder: state-owned banks have for years benefited from a tightly-regulated oligopoly.
Alibaba has long handled payments through Alipay, its version of PayPal. Now it allows users to invest surplus cash through a service called Yu E Bao. The funds, which are invested in low-risk securities like government bonds and interbank loans, offer a return of about 6 percent, double what savers get on one-year bank deposits. It‚Äôs a money market fund, not a bank deposit. But for customers there is little substantive difference.
Alibaba is now getting into longer-term investments. A fixed-term product to be launched through Yu E Bao on Feb. 14 will give customers an expected 7 percent yield, by investing in property and equities among other things.
The company also offers loans to small and medium-sized companies who sell on its Taobao marketplace. By February it had made 170 billion yuan of loans. While Alibaba doesn‚Äôt have a bank‚Äôs lending expertise it does have masses of data on borrowers‚Äô transaction habits.
The clever part is that Alibaba isn‚Äôt doing the financial heavy lifting. Yu E Bao and the new fixed-term product are structured and operated by third parties. The e-commerce group acts as a conduit. Alibaba isn‚Äôt technically on the hook for users‚Äô cash, nor does it pick investments, according to a person familiar with the situation.
Strictly speaking, this means Alibaba isn’t taking the liquidity risk that banks face if depositors decide to withdraw their money en masse. That is why it doesn‚Äôt need a bank deposit-taking licence, and avoids onerous regulation from the central bank.
But Alibaba is straying into a grey area. China‚Äôs immature financial industry still hasn’t been through decisive tests of who takes responsibility when investments go wrong. For Alibaba, this risk may be heightened. Its users are young and financially unsavvy ‚Äď Yu E Bao savers have an average age of around 28 ‚Äď and trust for Alibaba‚Äôs brands runs high, thanks partly to founder Jack Ma‚Äôs self-styling as a champion of the little guy.
Even if Alibaba has no explicit responsibility to pay back investors, it may decide to do so to protect its reputation. The situation with Yu E Bao is further complicated by the fact Alibaba owns 51 percent of Tianhong, the fund management company that structures the products.
For now, Alibaba and its online rivals are more of an annoyance for banks than a real threat. But while Alibaba is decidedly not a bank, the biggest risk is that customers treat it like one. If that happens, it‚Äôs a fair bet regulators will too.