Third-party payment firms enter the fray

"The challenge they pose to the traditional banking model is beneficial, as fiercer competition will promote the development of the banking industry, with better products and services," Zhou said.

But the development has put pressure on the existing regulation system, as policymakers haven't fully adapted to the changes.

"Regulators are also highly concerned of the financial risks the new developments might trigger," Zhou said.

He said that not only the lenders, but also regulators need to step up to the challenges and speed up their adjustment to the new environment by upgrading regulatory rules.

He Qiang said the boundary between e-commerce companies and banks is increasingly blurring, and there's a trend whereby those companies get more involved in financial services by establishing banks themselves or holding more shares in existing commercial lenders.

"It would be natural for the lending firms under the flagship of e-commerce companies to turn into a commercial bank, if they keep a sound profit record. The current legislation allows that possibility. It's only a matter of time," He said.

However, Alibaba's Hu said the company will not become a bank, dismissing rumors that it will apply for a bank license.

Meanwhile, financial institutions, such as banks and securities companies, are also exploring Internet technology and developing electronic banking businesses, and even e-commerce platforms as a response to the growing competition, said Ma Weihua, president of China Merchants Bank Co Ltd.

For instance, CMB launched a shopping website for its credit card users in October 2004.

The bank has also set up an e-commerce company in Shanghai to provide travel services such as flight and hotel bookings.

The next step will be to sell luxury goods online, as the lender tries to differentiate itself from regular online malls, said Ding Wei, a vice-president at CMB.

"Banks have advantages in selling expensive and luxury goods online compared to other e-commerce companies, due to their better reputation and credibility. It's very important for lenders and e-commerce platforms to find out what they are good at," Ding said.

Ding added that the premier goal of banks when they set up shopping platforms is to stabilize relations with clients, instead of just seeking profits like e-commerce platforms.

In 2011, the transaction volume of the bank's online mall exceeded 700 million yuan. The lender expects sales to reach 10 billion yuan in the next three years.

Another major lender, China Construction Bank Co Ltd, started its e-commerce business, e.ccb.com, in June 2012, becoming the first Chinese bank to offer e-commerce services.