THE war of words between China’s top bankers and entrepreneur Jack Ma, executive chairman of e-commerce giant Alibaba Group, continues to swirl around the issue of Internet finance.

The Internet finance sector includes companies that provide lending, wealth management, payments and money transfers over the Internet.

China’s Big Four banks — Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China — have long dominated the nation’s finance sector. Alibaba, one of the top three Internet companies on the mainland, wants to encroach on their turf.

“If Steve Jobs were still alive, many people might hate him” as innovative ideas that challenge the status quo will always be vilified, Ma said.

The People’s Bank of China halted Alipay’s virtual credit card business while it was still in the pipeline, stating that Alibaba didn’t advise the central bank of the new business and didn’t provide a plan of risk controls. Offline payments effected by scanning Quick Response Code were also stopped due to security concerns.

Banks circle the wagons

Zhang Jianguo, president of China Construction Bank, said Internet finance raises overall financial costs, which would be harmful for the economy. He called for fairer competition between the banks and Internet companies, implying that regulations on market entry, business licenses and operation oversight for upstart challengers weren’t tough enough.

“It’s impossible to achieve a win-win situation here,” Hu Zheyi, vice president of the bank, said last month.

Li Zhenjiang, vice president of AgBank, said Internet finance doesn’t change the financial risks of traditional financing, but the risks are amplified by the greater number of people involved with the Internet.

Yi Huiman, president of ICBC, said his bank would continue its “win-win partnership” with third-party payment companies like Alipay, which is controlled by Alibaba. It was damning with faint praise. China’s largest bank was the first among of the Big Four to cut existing interfaces that allowed its bankcard users to pay via Alipay in the bank’s system. The number of interfaces was trimmed from five to one.

The bank said the move won’t affect users if Alipay “cooperates.” Media reports had said some ICBC customers were not able to register their cards for Alipay’s Express Payment service, which allows users make online payments with registered bankcards in steps more streamlined than the bank’s own Internet banking system.

About a month ago, the Big Four banks lowered the cap on payments per transaction as well as total payments per day that users can make via Alipay.

ICBC and China Construction Bank cut the payment limit per transaction from 50,000 yuan (US$8,107) to 5,000 yuan, while AgBank and Bank of China pared their limits to 10,000 yuan from 50,000 yuan.

ICBC’s chief risk control officer has accused Alipay of operating “illegally” for three years. The bank, he said, could be liable for potential customer losses.

Ma responded that if the statement were true, ICBC would have been sailing close to the wind.

Vampire vitriol

Not only bankers seem bent on vilifying Ma. National media also assailed Alipay for the “challenges” it has imposed on the country’s financial stability.

Niu Wenxin, a finance commentator with China Central Television, said Chinese banks were hit in their Achilles heel by something he described as a “blood-draining vampire” and a “financial parasite.”

Niu was attacking Ma’s wealth management product — called Yu’ebao, meaning “leftover treasure” — which is designed for rookie Chinese investors. It has become one of the biggest money-market mutual funds in the world in the past nine months, currently managing assets valued at more than 500 billion yuan for over 81 million investors.

“Yu’ebao doesn’t create any value,” Niu wrote in his blog. “It profits from raising the financing costs for the whole society.”

He said regulators should ban money-market funds like Yu’ebao before they destabilize the entire financial system.

Niu made no mention of the fact many much bigger money-market funds operate in more developed markets without doing any apparent damage. Fidelity and JPMorgan both run funds that have more than US$110 billion in assets, bigger than Yu’ebao.

The consumers’ voice

Resentment is a form of flattery, Ma told his staff to cheer them up, as Alipay struggles against the industry goliaths.

The rapid expansion of Yu’ebao since its launch last June is proof of its popularity among small, rookie investors. Although the fund’s annual return dropped from a peak of near 7 percent, when a severe liquidity crunch hit the money markets, to about 5.3 percent recently, the returns are still far ahead of the petty 0.35 percent interest that depositors get from banks.

Yu’ebao is the first product that allows people with small sums of money to invest. Wealth management products sold by the banks and offering higher returns typically require minimum investments ranging from 50,000 yuan to 1 million yuan.

White-collar worker Zhang Dan, who said she likes to save 20 percent of her monthly income, complained that her paycheck arrives too late in the afternoon. She wishes she could transfer the money to her Alipay account before 3pm each payday to earn an extra day’s interest. Deposits to Yu’ebao after 3pm are deemed payments made the following day.

She uses her Alipay account to pay utility bills and credit card debt, and to settle online shopping site checkouts. She began putting money in Yu’ebao when it was launched and is hooked on the product because Alipay refreshes her returns every day, which allows her to see her wealth growing bit by bit on the screen.

Security issues

All Big Four banks have taken pains to point out the inherent risks of Alipay, which they said prompted them to turn their backs on the service.

The director of a Shanghai-based securities brokerage firm said the level of security required by the regulator is different for financial institutions and third-party payment companies. He didn’t want to be identified, saying he is a friend of Ma’s. For financial companies, the security of customer funds tops their concerns because any damage to their reputations would be disastrous, he explained.

Chang Qing, head of MasterCard China, said during an interview last month that the safest part of the payment-processing chain lies with financial institutions supervised by regulators.

“They have to spend a big amount of resources for the maximum protection of consumers, and they have to process transactions in line with industry standards,” he said. “That applies to every market in the world.”

He added, “The least secure parts of the chain are at the two ends. One is the consumer, who might lose a wallet or inadvertently leak a pin number. The other is the merchant, who invests very little in security.”

Target Corp., the second-largest discount retailer in the US after Walmart, suffered a security breach last year that resulted in the theft of 40 million pieces of credit card information.

Ctrip.com, China’s biggest tourism website, also exposed users to a security breach by recording customers’ credit card CCV numbers, a three-digit verification number on the back of the cards, on its system. The loophole led to credit card fraud, which was widely reported by local media.

The leaks and misuse of customer information is forcing service providers to alter the way they handle transactions.

Last month, MasterCard, Visa and American Express announced a global standard for digital payments via mobile devices and personal computers. The new technology, co-developed by the companies and called “tokenization,” masks customer information throughout the processing chain to enhance payment security.

Similar technology is not in place in China, nor is a widely accepted industry standard.

Alipay has a rating system to show users how safe their accounts are as part of a promotion to convince them to use security-enhancement tools it provides.

Users can pay 0.6 yuan per month for a text message service that sends a dynamic verification code to a registered mobile number for each payment. The code embedded in the message is required to finalize the payment.