Why do Internet users support Yu'ebao?

The clash between emerging Internet finance companies and traditional banks has resulted in a regulatory intervention that tilts toward the latter.

Regulators have stopped QR code payments and virtual credit card business carried out by China's major Internet finance giants Alibaba and Tencent, citing security concerns.

But seen from reactions of ordinary users, the regulatory move has been largely interpreted as a shield guarding the commercial interest of traditional banks.

Why has the regulatory move been "misunderstood"?

Indeed, security of users' money should always top the agenda of regulators. But the timing of the intervention is dubious as it happens when the Internet finance is becoming increasingly attractive for users who would otherwise have to pile their money in their bank accounts with very low rates of return.

According to a China Daily website report, the third-party platform transactions exploded to hit 17.9 trillion yuan ($3 trillion) in 2013, up 43.2 percent from a year earlier.

If the above figures are not indicative of the sector's impact on the banking sector, let's have a look at Yu'ebao, a fund management platform under Alibaba. It has doubled its scale to reach 500 billion yuan in the past two months since it provides much higher interest rates than what banks can offer for individual savers.

The banks have felt the pinch, no doubt, although online security is a real cause for concern.

The real issue behind the bicker between the two sides is why the banking sector offers across-the-board low interest rates for their customers — the banking sector is yet to be open enough to encourage competition that is badly needed to improve their operational efficiency.

For example, the rigidly regulated interest rates — both those for demand deposits or those for fixed-term ones — are widely thought to be lower than the real inflation levels. Meanwhile, banks are allowed to lend the money to businesses at much higher lending rates, thus resulting in handsome profits for the sector.

If banks can pocket in impressive profits without having to go through fierce competition, why should they opt to raise the savings rates?

Unlike in the developed economies, where investors have various options to put their money, Chinese investors do not have many choices besides bank savings and the highly risky stock market. Moreover, the online finance is quite convenient as users can withdraw their money from their accounts easily. Therefore, it is natural for them to choose online finance to invest their money.

The core issue here is liberalization of the banking sectors. While urging Internet finance players to enhance security measures, regulators need to accelerate their steps to liberalize the banks to make them more conscious of the interest of their individual clients. Pointing fingers at the alleged security loopholes of Internet companies could distract people from grasping the real problems to be solved.

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