#372 2013 · Yu'e Bao (Alipay / Tianhong Fund) · Fintech / asset managementrisk-transfer
Money-market funds take two days to pay out — Alipay just paid users instantly out of its own pocket and let the real settlement catch up later.
the problem
the underlying financial infrastructure has a settlement delay that's fundamentally incompatible with how customers expect to use the product
background
Chinese money-market funds, like money-market funds generally, settled redemptions on a T+2 delay — an investor requesting their money back would typically wait two business days before the cash actually arrived, a timeline dictated by the fund industry's clearing infrastructure. This delay made a money-market fund fundamentally unusable as a substitute for a spendable cash balance, since customers expect money in an account they can spend to be available instantly, not after a multi-day settlement cycle.
Alipay, launching Yu'e Bao in 2013 to let users earn a better return on idle balances than traditional bank savings while still treating that balance like spendable cash, faced this settlement mismatch directly: the underlying Tianhong money-market fund still operated on the industry-standard T+2 redemption cycle, but users needed to spend or withdraw their Yu'e Bao balance immediately, the same way they would a bank account.
the move
Rather than wait for the fund industry's clearing cycle to catch up with user expectations, Alipay and Tianhong built a prefunded settlement layer: when a user requested a withdrawal or spent from their Yu'e Bao balance, Alipay paid out from its own pool of funds immediately, while the actual redemption of underlying fund shares was processed and reconciled with Tianhong on the standard delayed schedule, netted at the end of each day against all the day's other transactions rather than settled individually in real time.
the payoff
Yu'e Bao grew into the world's largest money-market fund, reaching over 1.13 trillion yuan (roughly $168 billion) in net assets by the end of 2018 and hundreds of millions of user accounts, built entirely on this felt-instant, actually-delayed settlement structure that let ordinary users treat a money-market fund balance exactly like spendable cash without ever experiencing the underlying T+2 delay.
what came after
Yu'e Bao's prefunded settlement model became the reference design across Chinese fintech for making delayed-settlement financial products feel instant to end users, and Chinese regulators later moved to cap and formalize this exact 'T+0 redemption advance funding' practice industry-wide in 2018 once its systemic scale became clear — the underlying principle, a platform absorbing settlement risk on its own balance sheet to give users an instant experience the infrastructure alone can't provide, now underlies instant-transfer and buy-now-pay-later products globally.
references
- [1]Alipay Yu'e Bao is Largest Money Market Fund in ChinaAlizila, 2018alizila.com
- [2]货币基金赎回新规：T+0赎回额度上限1万 限制垫资来源天天基金网 (East Money), 2018fund.eastmoney.com