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The Future of Banking Is in China



Tech companies use internet payment systems as a wedge into an array of money-management services

The 33-year-old market researcher in Shanghai usually keeps yuan equivalent to a few hundred dollars deposited online to cover her daily spending—and more ahead of big sales. It takes her only a few taps on the screen to buy investment funds, split restaurant bills with friends and send cash to family members. She recently dipped into the account for a $7.50 box of tea at a Shanghai convenience store.

“I use it about every day,” Ms. Wu said. “Click here, and they just scan the code. You don’t even need to take out your wallet.”

None of this directly involves a bank. In a living example of what U.S.-based fintech companies can only aspire to, China’s giant technology companies are using their internet payment systems as a wedge into an array of money-management services, prying deposits and fee-generating business away from the country’s banks.

A recent Citigroup report says financial-technology companies in China already have a similar number of clients as the country’s major banks. Ant Financial Services Group is among the pacesetters, positioning its Alipay phone app—one of the systems used by Ms. Wu and 450 million others each month, the company says—as a bazaar for consumer financial services the way its affiliate Alibaba Group Holding Ltd. grew to dominate online shopping.

The Alipay app for now is mainly a high-tech credit card that makes it easy to use a mobile phone to exchange money. At checkout, users call up a QR code that the clerk scans to complete the payment, sort of like Apple Pay, except it works nearly everywhere. Money can also be sent directly to other people.

In China, mobile payment has become a part of people’s everyday lives. The WSJ’s Menglin Huang spends a day without cash in the southern city of Shenzhen and finds out how you can pay for things digitally. Photo: Diana Jou/The Wall Street Journal
Mobile Payment: Going Cashless in China

Increasingly, Alipay is peddling financial products alongside services such as taxi booking and noodle deliveries. Press the tile marked Yu’E Bao to park spare cash in an interest-bearing account or Ant Fortune to buy higher-yielding investments. A credit function aims to make it easier to weigh risks. The group’s MyBank, its new online-only bank, said this year it had issued 870,000 loans at an average amount around $6,100.

Another digital rival is Tencent Holdings Ltd., which is building financial services on the back of its popular WeChat messaging system. During Lunar New Year, its over 760 million users exchanged 32 billion “red packets,” a twist on a holiday tradition to gift small amounts of cash.

Last year, Tencent joined Ant in launching online-only banks that accept minideposits and microloans, extending their leadership in the country’s $235 billion internet payments business.

At Tencent’s WeBank, the one-minute process to set up an account requires little more than a mobile-phone number, the applicant’s national identification number and the user’s photo taken with the phone’s front-facing camera.

The government has supported the digital-finance trend to spur consumer spending and arrest a slump in economic growth that has sunk to quarter-century lows. But the industry at times has moved faster than regulators can keep up with: Blowups in peer-to-peer and other online investment firms have repeatedly left depositors with nothing.

Ms. Wu is wading in cautiously. She said she is comfortable keeping hundreds of dollars deposited online but cites “the safety issue” for bigger amounts, which she prefers to keep in a bank, where deposits are government-guaranteed. Ant Financial and Tencent say they have invested in technology that makes payments secure, such as QR codes that can change every 60 seconds, making them unique for each transaction.

China is adopting such services much more quickly than the U.S. Despite a widespread push by Apple, Samsung and Android to promote their mobile-payment technologies, paying with a mobile phone is still considered a novelty. A survey released in March by the Federal Reserve found only about a quarter of U.S. smartphone users had used their device to make a payment in the previous 12 months.

In the U.S., a wide divergence of technologies used by brick-and-mortar merchants is one hurdle. Retail behemoth Wal-Mart Stores Inc., for example, doesn’t accept Apple Pay.

Roughly half of U.S. smartphone owners use their phones to conduct banking activities like checking account balances, transferring money between accounts or receiving alerts, the Fed survey showed.

In China, bankers say they are losing deposits to wealth-management companies that advertise high returns by text message. Online payment services are absorbing fees that could be generated by wire transfers and credit cards, which never caught on in China. Peer-to-peer networks are issuing mortgages and underwriting weddings. Bankers say the fintech companies remain in the ramp-up stage and predict the firms will eventually face more regulation and begin to act more like banks in setting fees and interest payments.

The fintech industry is blurring business lines when it comes to deposits. While the government guarantees bank deposits, banks and fintech companies often serve as platforms for higher-yielding investments that carry no such assurances.

“You have to have a bank,” said Li Ying, a 34-year-old in Shanghai. But after ticking off the various ways she uses mobile finance, including transferring money and parking deposits, she said, “we are going to use banks less and less often.”

First appeared at WSJ

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