NEW YORK (MainStreet) — Like most 20-somethings who have never had a saving account, Fengqi Zhang, a 26-year-old marketing planner who lives in Beijing, was part of the "Moonlight Clan" (also known as "Yue Guang Zu" in Chinese)—a name that describes people living paycheck to paycheck. Yet in February, right after the Chinese New Year, Zhang decided to use her Yu'e Bao to help manage her personal savings.
Yu'e Bao, also translated as "left-over treasure," is a type of online currency fund that was created by China-based Tianhong Asset Management, Co. Ltd. and its sole partner, Alibaba Group Holding Ltd., the Chinese ecommerce giant that is soon expected to have its initial public offering at the Nasdaq. It is affiliated with Alibaba's third-party online payment solution Alipay.com that is similar to Paypal. Shoppers who use Alipay to make online payments set up a Yu'e Bao account, which allows them to track their money like in a regular bank account and simultaneously experience growth from the fund. Unlike a typical bank's paltry interest returns, Yu'e Bao can provide an annual yield upwards of 8% while allowing for PayPal-esque ease to spend money from the account.
That's the ticket for Millennials, Chinese and Americans alike, who don't necessarily have the capital to put in the stock market or investment alternatives. Still, they're frustrated that low interest rates are delivering measly returns on their savings. An online asset management situation like in Yu'e Bao is the no-frills answer to obtain secure and robust growth while catering to this demo's tech-savvy tendencies.
And though American digital payment systems and online investing platforms are numerous – from Betterment to Covestor – no single one can provide a purchasing tool, peer-to-peer money transfer and investment growth. That versatility is what sets Alipay apart, serving as a Swiss Army Knife that makes the mobile wallet a one-stop-shop for all of a person's financial needs with banking and investment tools as part of the package.
Due to the fact that there is no minimum amount required for an initial deposit with Yu'e Bao, Zhang only began with a 2,000 yuan (nearly $328) initial investment in hers. At the time, the average annual return was close to 8%, which would bring her a 160 yuan (nearly $26) profit over the course of the year, if the rate remained the same. The yield would be nearly twice as high as the interest generated by the same amount through a 3.3% one-year-term fixed bank deposit.
"For me, the way Yu'e Bao works is like a 'magic money maker,'" says Zhang, who started her first full-time job at an advertising agency two years ago. "Since I'm an entry level employee who barely had any extra cash to be deposited, it is a good way to help me make some spare money."
Shoppers can replenish their Yu'e Bao accounts to allow them to make further online payments, in a manner similar to depositing money in a bank account – except it grows at a faster rate.
Meanwhile, since the account is accessible by smartphone, users can easily find out how much return they have accumulated every day simply by swiping their thumbs on the screen.
"Seeing the numbers of your account increase in every single day is a really cheerful thing," says Zhang, who later placed another 20,000 yuan (nearly $3,278) into her Yu'e Bao just one week after tasting the sweetness of her initial investment.
Billboards of Yu'e Bao that have been set up at the subway stations in major Chinese cities like Beijing and Shanghai have illustrated an inevitable "left-over treasure"-hunt all around the country. Tech-savvy Millennials like Zhang, in particular, join the hunting game with the highest enthusiasm.
Zhang told MainStreet that apart from enjoying the additional yield delivered by Yu'e Bao, Alipay, China's answer to Paypal, has blended into her daily life. She often uses Didi-Dache, a taxi hailing app like Hailo and Uber. She can pay for the rides with the money she has saved in her Yu'e Bao through Alipay. There was one time she went to have dinner with her friend at a restaurant but forgot to bring her wallet. Her friend bought the dinner and she ended up paying her back simply by pressing a button on her smartphone – making a transfer from her Yu'e Bao, without being charged transaction fees.
To cater to younger users' taste and create more customized service, early this year, Yu'e Bao has released a Millennial-user-focused plan that allows the generation of social media to be engaged through helping each other with financial knowledge and sharing their personal user experience, according to an article published by the China Securities Journal.
Currency funds, as a type of mutual fund, carries relatively lower risks compared to others. As a result of its flexible user experience, low barriers-to-entry, considerable margin and zero transaction fee, the platform that Alipay invented has attracted over 81 million Yu'e Bao users as of end of February, since it was launched last June. According to Chicago-based Morningstar, Inc., at the end of the first quarter this year, Tianhong had become the world's fourth-largest money-market fund manager with assets of 541.28 billion yuan (nearly $87 billion), in part by offering the "left-over treasure." Data from a Tianhong report shows that 92.3% of Yu'e Bao's funds are invested as bank deposits.
The magic money-maker, however, has produced negative voices that have driven a recent exodus from a lot of once active users. To resist the competition from the online currency fund and to protect banks' profits, China's central bank has demonstrated the importance of supervising the country's online financial services. Affected by that, the return of the treasure has been falling off.
"Everyone was talking about Yu'e Bao – I was even explaining the concept of it to my students in class," says Xi Chen, 28, who teaches finance at SIAS International University in Zhengzhou, Henan.
Yet recently, as the return curve started to seem sluggish, Chen, who now is in a financial situation where urgent money needed, withdrew her entire treasure out from the account.
Yu'e Bao, now offers a return of 4.7% to its users, still above the current maximum bank's one-year rate.
Despite facing the downturn, Vanessa Zeng, a Beijing-based Forrester Research analyst told MainStreet, "Internet-based personal financial services, such as online currency fund like Yu'e Bao...will definitely become a trend in the next few years."
Zeng is currently conducting a research report titled "Meeting The Challenges of Digital Disruption: Internet Financial Innovation Is Striking China's Banking Sector," which will be published at the end of June. In terms of the potential downside of Yu'e Bao, she also added that the online currency fund might be transformed into a more complex financial product as the technology gets involved more.
"If that happens, consumers might have to require more transparency and disclosure from their digital investment to avoid risks," she said.
Alipay has actually already solved in China what is a big impediment to digital wallet growth in the U.S.: the value proposition of the product, which Alipay delivers via robust yield. With little upside to using new transaction technology in the U.S., only 12% of American consumers have ever used mobile wallet applications like Google Wallet or MasterCard PayPass, according to a February study from ComScore. Were those platforms connected with an all-in-one proposition as seen with Yu'e Bao, that percentage stateside might skyrocket.
In that vein, Keith Ashe, founder of Spendology, LLC., who has clients including PayPal, Google Wallet, Square and Stripe, told MainStreet a similar interface would be a strategic success in the U.S.
"American consumers would love a product that simplified their life and made them money," he said. "We could see substantial growth in the percentage of digital wallet users if a U.S. company adopted AliPay's strategy."
Of course not everyone believes it would be possible to implement a similar structure in the U.S.
"It's less likely a single player in the US will emerge to replicate Alibaba and its Alipay model that has been driven first by commerce and then expanding into banking and other financial services," says Lisa Stanton, president of Americas at Monitise, a mobile money provider.
Yet Stanton agrees that mobile payment adoption succeeds when bringing together content that consumers want via merchants and a payment transaction framework that is low-friction, economical and trusted by all parties.
"U.S. players know they need to begin working this way in order to compete effectively and unlock new revenue opportunities," she said.
--Written by Amy Xie for MainStreet