Matthew Brooker is an editor with Bloomberg Gadfly. He previously was an Opening Line columnist, an editor and a bureau chief for Bloomberg News. Before joining Bloomberg, he worked for the South China Morning Post. He is a CFA charterholder.

It is a truth universally acknowledged that a Chinese Internet company in possession of several hundred million loyal users must be in want of a bank.

When China's banking regulator approved the establishment of five privately owned lenders under a trial program in March last year, Baidu was the odd one out. Alibaba and Tencent were both on the list; Baidu was not. Now the third of China's Internet titans is catching up, through a venture with Citic Bank.

The delay may end up working to Baidu's advantage. Despite Alibaba's MYbank and Tencent's WeBank being online-only operations, they're still subject to rules that stipulate customers must open accounts at a real-world branch. In Baidu's case, its planned Baixin Bank will be able to sign up users through state-controlled Citic Bank's network, encompassing more than 1,200 outlets in 125 cities as of the end of June.

The deal promises other benefits. Unlike Alibaba and Tencent, Baidu won't be starting from scratch. The venture, which is subject to regulatory approvals, will be able to draw on Citic Bank's infrastructure, experience and suite of financial products. A mid-sized lender is a logical choice of partner. The nation's five biggest banks eschew working with Internet companies, seeing them rightly as a threat to their traditional business model and deposit base. Citic Bank, meanwhile, has shown signs of innovation in online finance. Its personal mobile banking transactions jumped 10-fold in value to 336 billion yuan ($53 billion) in the first half. Plans by Citic Bank to introduce virtual credit cards with Alibaba and Tencent were blocked by the central bank earlier this year. Now it's in bed with their competitor.

The appeal for Citic Bank is clear. Baidu's mobile search users topped 643 million in September -- providing a wealth of information that (privacy concerns aside) can potentially be mined and sifted to provide assessments of creditworthiness and risk, enabling the design of better-priced insurance products and marketing of tailored financial services to targeted groups.

Financial innovation is exploding in China, the Internet landscape is changing and the boundaries between cyber and traditional commerce are blurring. Baidu, which has long dominated Internet search in the country, has been undergoing a transformation, pouring money into the new holy grail of online-to-offline services in a quest for more diversified revenue streams. That's had a concomitant impact on margins, to the alarm of shareholders:

Trending Down
Baidu's ebitda margin, %
Bloomberg Intelligence

After tripling between early 2013 and late last year, Baidu shares lost almost half their value between November 2014 and September. They've since rebounded, helped by a share swap between its travel site Qunar and rival, which may help to end destructive price competition in that business. Baidu's stock remains down 14 percent this year. That's still better than Alibaba (whose online financial arm isn't part of the publicly traded company), which has dropped 25 percent. Tencent's up 36 percent, though mostly because of the performance of games and videos. The online banking unit looks to have been having a rocky ride, with President Cao Tong resigning in September.

China's Big Three
1-year share price performance, %

Investor concern over Baidu's margin erosion is partly attributable to the money it's been plowing into group buying services -- understandable given Groupon's decline from prominence in the U.S. (its shares are down two-thirds this year). Internet banking is a far more lucrative proposition, intense competition notwithstanding, and the venture's initial investment of 2 billion yuan should be reassuring to shareholders: A relatively trivial amount for a company with a market value of $68 billion.

Baidu is coming from a long way back, though it has been making fast progress. Its digital-payment platform, Baidu Wallet, reached 45 million activated accounts as of the end of September. The company's transaction-services division recorded gross merchandise value of 60.2 billion yuan in the third quarter, more than double a year earlier.

Alibaba's Alipay remains the big gorilla in e-commerce transactions. While there are no official data, the company is estimated to have the vast majority of e-commerce transactions, according to Bloomberg Intelligence analyst Michelle Ma. Baidu Chief Executive Officer Robin Li says transaction services are ``losing a lot of money right now,'' but insists they will become more important to the company as time goes on. The promise may justify the wait.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Matthew Brooker in Hong Kong at

To contact the editor responsible for this story:
Katrina Nicholas at