Yuebao is a hot topic in China, and has even gotten international attention. But what is it? Yuebao is a value-added service that customers of Alipay (China’s version of PayPal) can use to earn interest and to make payments and transfers. An individual can start a Yuebao account with as little as RMB 1 (US$0.17).

The Alibaba Group launched Yuebao in June 2013. By mid-February 2014, 61 million people had invested money in Yuebao, and total fund skyrocketed to RMB 400 billion (US$65 billion) – making it the largest fund in China.

People are drawn to Yuebao because of its:

  • High yield. The average annualized return is around 6% — much higher than similar funds and banks’ financial products.
  • Good liquidity. Yuebao offers great flexibility; investors can deposit and withdrawfunds anytime. Other financial institutions require lock-in periods and much higher initial investments.
  • Ease of use. Yuebao offers a much easier way to invest. People can see the value of their assets anytime, anywhere on their smartphones.

Other companies in China are following Alibaba’s lead. Baidu (the largest search engine) and Tencent (the largest IM and game provider) have both launched their own versions of Yuebao.

Internet financing offers consumers more choice and flexibility to money management, and the results are plain to see: In January 2014, the total savings in China’s banking system reached RMB 940 billion (US$154 billion).

What inspiration can traditional banks take from Yuebao?

  • Put users at the core of every business model. Internet companies deeply understand how important users are and recognize that they will win or lose according to how successfully they obtain users. They are also good at capturing consumer needs and creating products to satisfy those needs. Yuebao offers ordinary people flexible, visible, high-yield financing — something traditional banks don’t. Banks have a pressing need to learn how to capture customer needs and provide a better experience.
  • Use innovation to create opportunity. Yuebao hatched the idea of small-balance financing. What consumers find most attractive is that keeping a balance in their Alipay account gives them a much higher yield on their savings than a bank while maintaining liquidity — and it’s easy to use.This clear, simple innovation is the key to Yuebao’s rise.
  • Adapt to rapid changes with Internet thinking. People adopt new Internet services very quickly these days. Yuebao attracted 43 million users within six months, growing the fund to RMB 180 billion (US$29.5 billion). And WeChat’s “Lucky Money,” another hot mobile app that launched on January 26, went viral almost overnight. Rapid market change is the hallmark of the age of the customer; to respond quickly, traditional banks must undergo a mind shift to Internet thinking.

Yuebao’s initial attractiveness may wane once the market matchesits interest rate, but the huge customer base will not disappear; Internet companies will find new ways to provide them with financial services. The traditional methods that banks have used will face tough challenges, and banks must shift their thinking to meet these challenges. I’m beginning to research the opportunities for and challenges to traditional financial institutions caused by emerging Internet finance on eCommerce platforms. Please stay tuned.