Regulators cheer on online finance with watchful eye

China's regulators are supporting the development of new forms of online finance - within certain limits - as traditional banks watch the encroachment of revenue-hungry Internet companies onto their turf.

The central bank will support the burgeoning Internet finance sector, but it will prevent the fledgling industry from moving into areas such as illegal fund-raising, said Liu Shiyu, vice-governor of the People's Bank of China.

"Based on the premises of honesty and trust, all financial activities and services that are beneficial to inclusive growth should be respected and encouraged," Liu told the Internet Finance Summit on Tuesday.

Spearheaded by e-commerce group Alibaba Group Holdings Ltd, leading Internet companies aim to shake up the financial industry with new services.

The third-party payment segment appears to be the earliest such challenge. It's also closest to established online services offered by traditional banks.

Third-party payments surged 24 percent in the second quarter to 247.9 trillion yuan ($40.5 billion), PBOC figures show.

China Securities Co Ltd has suggested that third-party payment tools were used to conduct more than 80 percent of online transactions last year.

While Alipay, the payment system offered by Alibaba, has dominated the arena since its launch in 2004, the situation is set to change. Companies like Tencent Holdings Ltd are coming up with solutions that offer safety and ease in transactions.

Tencent has enabled online transactions for select merchants by linking payment services to its popular WeChat smartphone application, which has more than 300 million users globally. Many other companies are following suit with their own payment systems.

The central bank regulates the market through a licensing process that began in May 2011. As of July, 250 institutions had been granted licenses.

As competition increases, Alibaba is mulling changes. The launch of Yuebao, a service allowing users to invest money stored online into a money market fund, was a critical step in the company's expansion of its financial territory. Yuebao offers a deposit product, like a bank, but with higher returns.

The product has run into some headwinds, as the China Securities Regulatory Commission said in June that Alipay hadn't submitted all the required information.

But the CSRC also offered words of encouragement for such services, saying they offer "more investment options".

Internet companies are also eyeing small-loan businesses to aid cash-starved micro and small enterprises.

For instance, JD.com, China's leading home appliance online vendor, launched a financial service platform to help suppliers get loans from participating banks.

Likewise, Suning Commerce Group Co Ltd, China's largest e-commerce outlet, said it would set up a microcredit company to support suppliers on its online retail platform.

A more mature case is that of Alibaba, where all individual businesses that open online stores on Taobao or Tmall, the customer-oriented marketplaces, are eligible to become beneficiaries, said Ge Ruichao, public relations head of Alibaba's small-loan business unit.

These small and medium-sized enterprises, with annual sales of 30 million yuan or less, can borrow up to 1 million yuan, Ge said.

According to Ge, the problem lies in the asymmetrical information between commercial banks and small-cap firms.

"Since many companies fail to reach the threshold for obtaining direct loans from banks, they have already turned to these intermediaries. But as the majority are non-registered agencies, we do want to lend a helping hand via a legal framework," he said.

Alibaba's role involves investigating a wide range of companies, identifying their needs and then assisting them in applying for the best financing option.

Ge has found that 70 percent of SMEs usually need to borrow 300,000 yuan or less, for three months at most.

Alibaba found itself best-positioned to cater to such clients thanks to the data it collects from merchants.

"We are able to monitor the credit history and business performance through their track record on our platform, so that we may secure funds for the best possible candidates," he said.

Alibaba lends at a rate of 0.05 percent on a daily basis, which translates into an annual rate of 18 to 20 percent.

An "early warning" system for potential defaults operates by monitoring monthly sales for a change of 30 percent or more, Ge noted.

"We might freeze some of the capital until the merchant can explain the situation. We judge if they are able to make repayments on time," he said.

All these moves have unnerved many banking insiders. Hong Qi, head of China Minsheng Bank Corp, which is known for lending to SMEs, has identified Alibaba as its biggest competitor.

Alibaba's finance operations use "big data" based on clients' transaction activities, Hong told the National Business Daily.

"It analyzes clients' behavior and characteristics and offers responsive financial services. This is a completely new trend that may overturn traditional business models entirely," he said.

Chen Lili in Shanghai contributed to this story.