I avoided writing about Alibaba’s controversial new Yu E Bao financial product last week, not so much because it wasn’t newsworthy but because I was personally tired of writing about China’s leading e-commerce company that has been in the headlines nonstop for much of the last month. But after all the hype has settled, I want to weigh in with my view on this new product because I think most writers have missed the main point about Yu E Bao and why it’s likely to run into big problems.
Before I start with my own analysis, let’s take a look at this innovative new product that was in the news for much of last week after its launch with all of Alibaba’s usual fanfare. The idea behind the product is quite simple: users of Alibaba’s AliPay e-payments service often leave excess cash in their accounts for future purchases, even though that money earns little or no return. So rather than let the money sit there idle, Alibaba says, why not put it to work by investing in stocks, money market funds or other financial products?
That’s the main logic behind Yu E Bao, which is a partnership between AliPay and Tian Hong Asset Management Co, which has expertise in brokering the sale of financial products. The new Yu E Bao product will let AliPay account holders use the idle cash in their accounts to buy money market funds or other financial products, thus allowing them to get some return on the idle money in their accounts.
Alibaba boasted the new product signed up 1 million users in its first week, as AliPay users were quickly attracted to the service. (English article) Yu E Bao also drew less positive attention from rival financial services firms and the securities regulator, which said that Alibaba may have lacked the proper licenses to move into this product. (Chinese article) Others came out and congratulated Alibaba on the move, saying it should add some interesting new competition and innovation to China’s stodgy financial services market that is dominated by conservative state-run firms.
I personally agree with this latter group in thinking that this kind of competition is exactly what the market needs to become more competitive and responsive to consumer needs. So, why do I think this innovative new product is set for problems? The answer isn’t due to regulations, as I do think that Alibaba is quite a savvy, well-connected company that will quickly sort out any regulatory problems involved.
Instead, the problem is simply that Yu E Bao can be a very risky product. While consumers may initially flock to Yu E Bao thinking they can make some quick money from their excess funds, many may quickly be shocked to discover that those returns aren’t always positive. While some products like money market funds are relatively conservative, other can be far more volatile, especially in China’s currently weak economic situation.
In that kind of climate, I can easily imagine many Yu E Bao users purchasing risky financial products thinking they are relatively safe because they are in an Alibaba-backed product. Of course many could be shocked to later discover their funds are actually shrinking when the products they bet on don’t perform well.
When that happens, look for a chorus of complaints against Yu E Bao, which will cause big headaches and negative publicity for Alibaba and will probably force the regulator to take some kind of action. For that reason, I expect Yu E Bao to face its first serious challenge in the next few months, which may force Alibaba to either seriously re-think the product or at the very least take major steps to warn investors about the risks about investing through Yu E Bao.