Case study: Small things can grow to powerful titans

bondsmart has an international perspective and works across many markets. We often come across an interesting story that fits with our mission and has had an interesting impact not known widely.

Yu’e Bao (pronounced “Yoo Uh Bow”) arrived in 2013 and has turned cash management into a serious business. The business is connected to AliPay, the huge payment gateway in China. When you understand the name in English the business case becomes obvious. Yu’e Bao means “leftover treasures” because it was originally promoted as a way to invest money left in the AliPay wallet into a fund to earn interest. It became the world’s largest money market fund in 2017. Its humble beginnings are what led us to consider looking back to its start to reflect how its immense growth led to policy changes and altered the net interest margin game for conventional banks in China all by adding a new product into a financial app.

Spare cash was the aim at the beginning. It offered an interest rate that was better than a deposit account and easy switching led Chinese consumers to begin to use it like a checking account. Proposition = micro transactions into a pooled vehicle to earn better returns on your spare money. China has a massive saving ratio so the top down demand for such a product was easy to see. Cash deposits are a vanilla asset with no bells or whistles but the friction to move it from one account to another and shop around for the best rates of returns make it difficult for any entrant to achieve any success. Though designing a superior investment product then creating ease to access it are at the centre of its tremendous growth. The high-interest rates that it offered were possible due to money market diversification rules in China that allowed more higher-yielding assets. China’s regulators and policymakers needed to change these rules to reduce systematic risk to the deposit market given the growth of the money market fund.

The competition reply has been to develop Fixed Maturity plans offered by wealth groups to compete, often mixing some leverage to increase returns. These are different to a money market fund, then a money market fund is different from a savings account. One in three households use Yu’e Bao data suggests and most of the investors are individuals. Compare this to the largest money market fund in the USA and its mostly institutions that are invested. Yu’e Bao drive into the consumer market has been successful because of the link to the payment gateway so suggesting consumer growth means linking into infrastructure that is connected to a consumer group you cannot replicate independently or directly. This encourages fintechs to work with financial institutions that have a large client base themselves and space in their product shelf for a new service/product that reduces the parcel size and is an easy access point, hallmarks we feel of bondsmart.