The growing feud between banks and China’s biggest Internet firms has taken a major new turn, with word that leading lender ICBC (HKEx: 1398) may be preparing to formally sever ties with Alibaba’s Alipay electronic payments platform. The move would be clearly aimed at Alibaba’s wildly popular Yu’ebao service, which lets users put excess funds from their Alipay accounts into a product that functions much like a traditional bank savings account but offers much higher interest rates. Of course the next big question is whether other big banks will follow ICBC’s lead, and I suspect the answer is that many will indeed do so.
Alibaba launched Yu’ebao last summer as an investment product, allowing Alipay users to invest idle funds from their accounts into money markets. Such investments typically yield much higher interest rates than traditional bank savings accounts, whose rates are tightly regulated by the central government.
As a result of that difference, many consumers and businesses started using Yu’ebao like a traditional bank savings account, propelling the service to China’s largest fund in just a matter of months. Other Internet giants including Tencent (HKEx: 700) and Baidu (Nasdaq: BIDU) launched their own similar products in an attempt to grab part of the business. As a result, banks have suddenly seen a huge outflow from their traditional savings accounts, as consumers rush to transfer money into these newer, higher yielding online accounts.
China’s big 4 banks reacted by severely limiting the amount of funds that their customers could transfer each day to Yu’ebao, recently lowering the figure to 5,000 yuan from a previous 50,000 yuan. The central bank has also moved to slow the fund migration by taking moves that would force Yu’ebao to lower its interest rates.
But this latest move by ICBC would be the most draconian so far, and would ban its customers from transferring money from their accounts to Alipay and Yu’ebao. (Chinese article) A related report said ICBC wasn’t cutting off Alipay completely, but rather was channeling all fund transfers to Alipay through its Hangzhou branch due to technical issues. (Chinese article) Sourcing and details in the reports are quite vague, but it does appear that some major changes are coming to limit the flow of funds from ICBC accounts to Yu’ebao. Alibaba had no comment on the matter and referred all questions back to ICBC.
Such a move certainly wouldn’t surprise me, and even seems like a logical way to try and stem the huge outflow of funds from the bank’s savings accounts into these higher yield products. Accordingly, I would fully expect the other banks to follow suit and ban or severely limit the transfer of funds from their accounts to Alipay and other similar services.
Next we’ll have to watch to see how Alibaba and the other Internet companies respond, and also whether the central bank gets involved. Personally speaking, I don’t see anything wrong with what ICBC is doing in this situation. It’s simply adjusting policies to protect its business, and now must face the results of its actions. Of course it’s likely to see big objections from its customers, many of whom may ultimately close their accounts in protest. But that’s how free markets work — if someone doesn’t like the actions of one company, they can always choose another.
Of course everything I’m saying is theoretical, and a ban by all the banks on fund transfers to Alipay and other similar services is likely to create big chaos in the market. The last thing the central bank wants to see is that kind of chaos, which could see consumers lining up at ICBC branches to close their accounts and manually move their funds to other accounts. Accordingly, if the latest reports are really true I would expect to see the regulator quickly step in and mediate the situation.
Bottom line: Other banks are likely to follow ICBC’s lead in taking steps to severely limit the movement of savings account funds to Yu’ebao and similar services, forcing the central bank to intervene and mediate a settlement.