Nine Months, Four Rounds of Caps and Crackdowns: Alipay's Banking Dream Is Over

2013.6 - 2018.1: Alipay's banking business began with Yu'ebao, and it ended with Yu'ebao too.

Deposits are the foundation of every bank's business.

Alipay, which has taken on more and more bank-like business, has now lost its own "deposits."

On February 1, if you had set your Alipay balance to move into Yu'ebao automatically, you should have received a text message like this one.

"Because Yu'ebao's rules have changed, the automatic balance-transfer service will be suspended before March 15; you can still transfer funds by hand. Tap here for details," followed by a link.

At the end of January 2018, Alipay announced that to keep Yu'ebao from growing too fast, automatic transfers would be suspended before March 15, and that putting money into Yu'ebao would turn into a daily scramble starting at 9 a.m. Each day came with a total purchase quota, and sales stopped once it ran out.

The days when you could turn your Alipay balance into a wealth-management product automatically, with no limit, had already ended the year before.

When Yu'ebao first launched in 2013, it had a purchase cap of 1 million yuan. In 2015, wanting more money in the door, Yu'ebao dropped the cap on transfers in.

By June 2017, Yu'ebao had taken in more than 1.4 trillion yuan, more than the deposits held by China Merchants Bank. That was also when the caps came back.

In May 2017, Yu'ebao set the ceiling on how much one person could hold at 250,000 yuan.

In August 2017, it cut that ceiling to 100,000 yuan.

On December 8, 2017, Yu'ebao ruled that a user could buy no more than 20,000 yuan in a single day.

Finally, in January 2018, Yu'ebao stopped capping what each person could buy and started capping the total it would take.

The latest figures aren't out yet, but by the third quarter of 2017 Yu'ebao's growth had already stalled:

That's not because users have lost interest in managing money online. Over the same stretch, China's online wealth-management market hit a new high. The data show it grew from 215.297 billion yuan in 2013 to 3.15 trillion yuan in 2017.

Yu'ebao went live in June 2013. Over the four years that followed, this market — built almost entirely by Yu'ebao — grew fifteenfold.

Commercial banks make most of their profit on the gap between what they pay depositors and what they charge borrowers. Yu'ebao siphoning off trillions of yuan in small, scattered deposits meant banks had to pay more to get money. Now they can finally breathe out.

But Ant Group, Alipay's parent company, has lost more than the money Yu'ebao brought in directly.

Yu'ebao made online money management ordinary, and that was the foundation of Alipay's banking business

"There's no longer any reason to keep your money in a bank" was a comment quoted by the Financial Times when it reported on Yu'ebao's launch.

On June 13, 2013, Alipay launched Yu'ebao. Within 10 days, the product had 1 million users. At the time, the Chinese money-market fund company with the most customers had only 2.5 million.

Alipay started as a feature Alibaba built to make transactions on Taobao safe, using a third-party escrow model. In 2004, Alibaba set up a separate Alipay company to handle free transactions and transfers for users and merchants.

By June 2012, Alipay's registered users passed 700 million. More and more people were used to parking spare cash in Alipay so they could shop on Taobao without thinking about it.

That trust and that user base handed Yu'ebao its first wave of customers.

What made it grow further was that the product was simply better.

Yu'ebao's annualized yield then ran between 4% and 6.9%, a figure that beat commercial banks' 3% rate on one-year fixed deposits and even their 4.25% rate on three-year deposits.

Put 10,000 yuan in a one-year fixed deposit and you earned 300 yuan. Put it in Yu'ebao and you could earn roughly 400 to 600 yuan a year.

It paid more than a bank's three-year deposit, put no limits on paying in or taking out, and could be spent directly on purchases and credit-card bills. Yu'ebao was a money-market fund, but using it felt no different from a checking account. Alipay users started moving their money in.

By the end of 2013, six months after launch, Yu'ebao had 40 million users. "Alipay Wallet, the wallet that makes you money" was the ad line you saw all over the Beijing and Shanghai subways that year.

Underneath, Yu'ebao is a money-market fund: the Zenglibao fund that Tianhong Fund built for Alipay.

By gathering up Alipay users' idle cash, Yu'ebao grew big enough to deposit money with banks that wanted funding at negotiated rates well above the norm, and to put some of it into lower-risk short-term instruments such as short-term treasury bonds and bank acceptance bills.

Banks tried to look unbothered.

In February 2014, Yang Kaisheng, then president of ICBC, said in an interview that Yu'ebao would not disrupt banks, let alone threaten them.

Less than a month later, ICBC and Agricultural Bank of China both announced they were lowering the limit on transfers from savings cards into Yu'ebao, having had no limit before. ICBC went from unlimited to 5,000 yuan per transaction and 50,000 yuan a month.

In 2014, several banks also launched their own Yu'ebao-style money products, including Ping An Bank's Ping An Ying and ICBC's Tiantian Yi, which sold the same two promises: a high rate and fast withdrawal.

ICBC said in its 2013 annual report that after Yu'ebao launched, the growth rate of commercial banks' savings deposits fell for the first time; from then on, monthly deposit growth ran more than 120 billion yuan below the year before on average, adding up to a 686 billion yuan shortfall over the year.

In 2017, Yu'ebao passed 300 million users. By the third quarter of last year, it held 1.56 trillion yuan, an average of 3,885 yuan per person.

"Yu'ebao was never a strategic product for Alipay, not from the start. It was never meant to disrupt anyone or beat anyone." That is how Peng Lei, CEO of Alipay's parent Ant Group, described Yu'ebao in 2014.

Yet while calling Yu'ebao non-strategic, Ant Group had already spent 1.18 billion yuan at the end of 2013 to buy 51% of Tianhong Fund and take control of it.

And the money coming in was only the start.

Starting with Yu'ebao, Alipay built the frame of a bank

Take in a lot of money from a lot of people at a low rate, lend it out at a higher one, and keep the difference. That is how banks make money.

Deposits, wealth management, loans and credit cards make up a bank's core business. A manager who has worked at Postal Savings Bank of China since the 1990s told us: "Once money is deposited into a bank account, it mostly goes into lending — that's about 50% to 60% of the business. Another 20% to 25% of deposits has to sit with the central bank as reserves. Of what's left, some is lent to other banks at higher rates to cover their short-term needs, for as little as a day or as long as a year. And some is used to buy treasury bonds or to invest in stocks and securities."

The first step in banking is raising money by taking deposits. If Alipay wanted to be more than a payment tool, it needed money too. As Yu'ebao grew, Alipay got both capital and customers, and that opened a lot of doors.

A year after Yu'ebao launched, Alipay renamed itself Ant Group and, within a few months, closed seven acquisitions of financial companies and began assembling a financial business.

Ant Group then named five business lines — payments, wealth management, financing, comprehensive finance, and financial infrastructure — which amounted to the same list a commercial bank runs.

In 2014, as more money piled into Yu'ebao, a prominent reminder appeared inside it: you could also buy products that paid more.

In its wealth-management section, Alipay pushed short-term principal-protected products sold as "low risk, steady returns, high limits" to get you to put in more, alongside its own 30-day to one-year Yu'ebao products, which let you invest more money for longer — closer to a bank taking fixed-term deposits.

Alipay was also selling funds, gold and other financial products. All of them carried a service fee.

Banks, meanwhile, were still cold-calling customers to sell wealth-management products. Every branch handed its account managers a quota, and the way to hit the quota was to phone customers all day. Dozens of calls a day annoyed the customers, converted only a few of them, and cost a lot in labor.

In January 2015, Ant Group announced Zhima Credit Management Co., which would score individual users on their Alipay spending, Yu'ebao holdings and similar behavior.

Zhima Credit's scores were built to rival the credit-reporting system the central bank had established. They also became the credit foundation for Ant Group's later consumer products, Jiebei and Huabei. Leaning on Zhima Credit, Alipay went on to launch a string of deposit-free services, from the few hundred yuan on a shared bike to the few thousand yuan on an apartment.

In April 2015, Ant Jiebei, an online small-loan product, went live. It aimed at the small businesses and individual borrowers that banks' lending arms were largely ignoring at the time.

In the first three quarters of 2017, Ant Micro Loan's lending volume reached 300 billion yuan and its net profit 4.494 billion yuan. Both were roughly doubling every year.

In the same month Jiebei launched, Alipay also released Ant Huabei — in effect, a credit card with no card.

Huabei makes money the way credit cards do. Banks profit on credit cards mainly through installments: they issue the card, grant a limit, and encourage spending. When you can't pay it all back, they earn on installment repayment and installment purchases, which usually carry annualized interest above 15%.

Getting a bank credit card meant submitting payroll records and waiting for a card to be made and mailed. Huabei took seconds to switch on, granted anywhere from a few hundred to tens of thousands of yuan, and gave up to 41 interest-free days. For a while it was even Taobao's default payment method. Every Singles' Day, Huabei raised users' limits automatically to nudge them into spending more.

As of the end of June 2017, Huabei's net profit was 1.02 billion yuan. Users born in the 1990s made up 47.25% of its customers.

Alipay had become almost the same thing as a bank account: you put money in, kept some of it liquid in Alipay and moved the rest into Yu'ebao to hold its value, then paid for meals, utility bills, shopping and transfers. If you wanted something expensive, you could borrow from Jiebei or pay in installments with Huabei.

All of this is the same business as a bank's deposits, loans and credit cards. Nearly everything a bank offers an individual customer, Alipay now offered. The difference was that Alipay needed no branches across the country and no one standing at a counter to open an account.

It wasn't the intention, but Alipay really did push financial reform

Yu'ebao also gave a hard shove to money-market funds and to the freeing up of interest rates in Chinese finance.

From 1993, when the central bank first raised the idea of market-set interest rates, to 2004, when it removed the floor on deposit rates and the ceiling on loan rates, that single step took a full decade.

And the reform didn't change much: banks had no reason to pay more on money you could withdraw at any time.

In 2012, the ceiling on deposit rates was lifted to 1.1 times the benchmark. Even so, few banks actually raised their rates the full 10%. Deposit rates barely differed from bank to bank, ordinary people had few places to invest, and although banks sold wealth-management products, most required tens of thousands of yuan to get in. Other than putting money in the bank, there was nothing better to do with it.

Yu'ebao made money-market funds — a product that had existed for years — familiar to people who had never paid attention to investing or understood it. You could say Yu'ebao opened an era in which everyone managed money, and in that era traditional commercial banks took the hardest hit.

Six months after Yu'ebao appeared, after Chinese New Year in February 2014, household demand deposits at banks fell 670.6 billion yuan from a year earlier, while money-market funds led by Yu'ebao grew by nearly 1 trillion yuan year on year.

In just two years, the ceiling on bank deposit rates was adjusted again and again. At its busiest, between November 2014 and August 2015, the ceiling moved up roughly every three months, from 1.1 times the benchmark to 1.5 times — even the cap on deposits of more than a year was opened up.

The run of financial products Alipay built around Yu'ebao also pushed the banking industry onto the internet far faster.

In 2008, Jack Ma said: "If the banks don't change, we'll change the banks."

The banks did change. In recent years they have dropped a range of fees, including annual card fees and charges for withdrawing cash out of town. Commercial banks have also spent more on mobile apps, mobile payments and handling business online.

Chen Kunde, chief information officer at China Merchants Bank, once said that CMB modeled its overhaul on fintech companies. As the most digital commercial bank in China, CMB's retail strategy is mobile first: move every business that can go online onto the web and onto the phone.

Thirteen years after it was born, Alipay had changed the whole banking industry. Together with WeChat Pay, it made mobile payments real. Banks now have to live with the fact that without a good app, they cannot win young customers.

And Yu'ebao, riding the speed and convenience the internet brought to paying for things offline, forced banks to give up their slow approach to interest-rate reform, move rates faster, and improve the products they sold.

Beyond the caps, a string of more specific rules ended Alipay's banking dream

In February 2017, the central bank published its report on monetary policy for the fourth quarter of 2016. The words "risk" and "bubble" appeared over and over, and the report said that preventing and controlling financial risk had moved up the priority list.

What the regulators did not say in public is that the growth of products like Yu'ebao was taking away the business banks had relied on to gather deposits cheaply.

One thing is plain: banks' deposits really have been growing more slowly in recent years.

Central bank data show that since Yu'ebao launched, banks' deposit growth rate has fallen steadily, from 14.3% in June 2013 to 9% in December 2017.

From January to November 2017, household savings grew by 3.82 trillion yuan in new deposits, against 4.54 trillion yuan in the same period two years earlier — 700 billion yuan less.

Yu'ebao didn't drain deposits out of banks so much as raise the price banks had to pay for them.

Tianhong Fund's 2017 half-year report showed that 82.95% of the money in Yu'ebao sat in bank deposits and settlement reserves. Users' money was still in the banks; only the name on the account had changed to Tianhong Fund. Because the sum was so large, the rate paid on it was far above an ordinary demand-deposit rate.

For banks that live on taking deposits and making loans, being unable to get money cheaply raises their costs, while lending rates are capped by the central bank and cannot be exceeded on their own. Profits are likely to shrink.

How much banks can lend is also limited by capital adequacy rules: current policy says the ratio of a commercial bank's capital to its risk-weighted assets must not fall below 8%. With deposits down sharply, banks can lend less, and earn less on what they lend.

Money-market funds led by Yu'ebao are not risk-free either.

The biggest danger is a run — everyone redeeming at once. Most of what Yu'ebao holds carries low risk: treasury bonds, bank certificates of deposit and a small share of financial bonds. But if a fund holding 1.5 trillion yuan faced mass withdrawals, the damage would be serious.

That is exactly what the new rules went after. In September 2017, the China Securities Regulatory Commission issued its provisions on liquidity risk management for investment funds, making clear that the money-market funds that matter most to the system would face especially strict requirements.

Under the rules, the money-market fund a fund company manages cannot exceed 200 times the balance in its risk-reserve account. Take Yu'ebao's 1.5 trillion yuan: at 200 times, it would need 7.15 billion yuan in risk reserves.

The central bank also began issuing policies to keep the financial system stable, one after another, in the second half of last year. Among them was a rule requiring companies like Alipay to raise their reserve ratio to 50% and place that money in central bank accounts. At the same time, regulators started going after the leverage in Ant Group's two other main businesses, Jiebei and Huabei.

In early 2018, the central bank summoned Ant Group staff to look into the financial risk created by the high leverage in Alipay's and Ant Group's financing.

No one knows exactly what passed between the central bank and Ant Group, but afterward every one of Ant Group's businesses began cutting back.

Early this year, Ant Group shut off Jiebei and Huabei for some users. A few days ago, word got out that Ant Micro Loan was applying for a consumer-finance license.

The limits on Yu'ebao, meanwhile, kept tightening. On October 25 last year, Tianhong Fund published Yu'ebao's third-quarter report. It showed growth of 8.9% over the previous quarter, down sharply from 25% in the second quarter and 41% in the first.

That wasn't enough. In the end Yu'ebao chose a daily purchase cap and switched off automatic transfers.

At the same time, to comply with the central bank's 2016 controls on the interbank deposit rates banks charge one another for short-term funding, Tianhong Fund, which allocates Yu'ebao's money, began cutting its interbank holdings sharply from 2016 on. Lending to banks was a low-risk, high-return product that money-market funds had used heavily.

Tianhong Fund's 2016 annual report showed 16% of Yu'ebao's money in interbank deposits; by 2017 that was 3%. In its place, the share in treasury bonds and lower-risk financial bonds rose. The most direct result was that Yu'ebao's returns fell, quarter after quarter.

In December 2017, Alipay started another round of scan-for-a-red-envelope promotions. In almost every shop, you could hear a clerk telling you, "Scan this Alipay code, there's a few yuan in it."

The money handed to users didn't come out of the merchants' pockets. It was Ant Group's, and the point was to fight WeChat Pay for offline payments. No business you have to buy market share in is an easy one, especially when the other side is Tencent.

Banking had gotten harder. Once again, the most important thing Alipay had was its place as the gateway to payment.

Cover image: Unsplash