Chinese e-commerce firm Alibaba Group has been gearing up to expand in the finance market since the beginning of this year, with a rollout of policies by Alifinance, its financial business unit.

Alibaba announced a move last week to widen its lending services for small and medium-sized enterprises. And Alipay, the online payment department under Alifinance, pledged Wednesday to offer lending services known as "pay by credits" to its online buyers, so they can buy products on the group's two e-commerce platforms, taobao.com and tmall.com.

Alipay will launch an initial trial version of the pay by credits service for buyers in Hunan and Zhejiang provinces in mid-April, offering credit ranging from 1 yuan to 5,000 yuan ($804), Hu Xiaoming, president of Alifinance, said at a press conference Wednesday.

The credit, which is interest-free for 38 days, will be approved based on the buyers' credit record with taobao.com and tmall.com, said the firm. The record is based on buyers' transactions on the websites.

It will allow Alipay users to go shopping on Alibaba's online platforms via their mobile devices in a manner similar to using bank-issued credit cards, Hu said.

Alipay will charge its online merchants a 1 percent service fee for the credit payments, with a discounted rate of 0.8 percent also available.

The service will initially be available only to users of wireless products, such as laptops, tablets and mobile phones, Hu said.

Need to expand

Alipay is currently heavily reliant on the relatively slim fees from third-party payment services charged to merchants, Wang Weidong, an analyst with online market research company iResearch, told the Global Times.

So Alibaba's entry into the credit business could help Alipay to expand its revenue sources, given the country's growing online retail market and consumers' increasing preference for credit-based spending, Wang said.

Coupled with its well-established credit-evaluating system, Alipay's latest move could be a way to tap the domestic credit card market, which has long been dominated by the country's major commercial lenders, Wang noted.

However, some experts have expressed their skepticism about Alipay's prospects with its new push, saying that the company's somewhat obscure position in the finance market may inhibit demand and put it at a disadvantage compared to traditional banks.

Credit confidence

Alipay's pledge to offer credit to its users might stimulate buyers' online consumption, as China is seeing growing demand in the online retail market, Wang said.

The potential spending power could be illustrated by the surge in sales during last year's "Singles' Day" on November 11, when online buyers set a new one-day spending record of 936 million yuan as e-commerce platforms rolled out big discounts.

Meanwhile, paying by credit is increasingly common among Chinese consumers, Wang said.

The total credit that Chinese banks extended to credit card holders reached 3.49 trillion yuan by the end of last year, up 34 percent year-on-year, according to figures released on February 19 by the People's Bank of China (PBC).

According to figures from taobao.com, 1.3 million merchants will sign agreements to use the new service to attract online buyers, while 80 million Taobao buyers are expected to sign up for credit payments.

Alipay might consider tracking the whole process of online transactions between merchants and consumers in order to evaluate them before issuing credit, in a bid to reduce bad debts, Zhang Meng, a senior researcher of third-party payment with Analysys International, told the Global Times. Such an evaluation system is something that commercial banks lack, Zhang noted.

Bank-issued credit card debts that are at least six months overdue - the point at which they are recognized as bad debts - rose in China by 32.89 percent year-on-year at the end of last year to 14.66 billion yuan, according to figures from the PBC.

Having the advantage of such a credit evaluation system will make it easier for Alipay to manage the credit relations between banks and consumers, said Hu Xiaoming of Alifinance.

Big obstacles

However, the difficulty of gaining approval may be an obstacle for Alibaba's ambitions in the finance market.

According to banking regulations effective from 1986, only those who are granted a banking license by the country's central bank are allowed to run banking services, including lending and depositing.

Alibaba has made efforts to enter banking operations over the last year, but without success, as the country is unwilling to allow private firms into the banking sector, Lu Zhengwei, chief economist at Industrial Bank, one of China's commercial lenders, told the Global Times Thursday.

Without the banking regulator's approval, Alibaba will only be able to run credit payment services on its own e-commerce platforms, rather than in the real-world retail market as other banks do, and which remains a much larger business, Lu said.

Online consumption by value accounted for 6.3 percent of total consumption in China by the end of last year, according to figures released by China E-Commerce Research Center on January 29. The figure was 4.4 percent in 2011.

Meanwhile, due to its failure to gain official approval for banking operations, Alipay is prohibited from accepting deposits, which has greatly limited its lending abilities, Lu said.

Coupled with the country's credit squeeze, Alipay has few financing channels available, apart from the cooperation with commercial banks for its credit payment service, Wang noted.

What's more, unlike offline transactions, online businesses are still poorly regulated and may become a target for illegal activities, which would leave Alipay vulnerable to financial losses, Zhang said.

There is a danger of buyers and sellers colluding with each other to take advantage of the credit offered by faking online transactions, Zhang said. "As such, Alibaba could face mounting losses if this bug cannot be removed."

The safety issue may also stop online consumers from wanting to use Alipay's virtual credit system.

Sun Yiqing, a Shanghai-based mother with a 1-year-old baby, spends a lot of time on tabao.com. Currently, she spends over 1,000 yuan each month in buying baby products on the website.

However, she said that she would be cautious about a virtual credit payment service, and is not sure whether she would use it in the long run. "After all, banks are considered much safer," she said.