In China, where normal one-year bank deposits offer slightly higher than 3 percent of returns, Yu'ebao and other Internet funds, with as high as 7 percent of returns, became extremely popular early this year.

Internet finance is in, but is banking out?

Yu'E Bao deposits exceed 250b yuan

Kenny Lam, a McKinsey & Company partner, estimates that the country's Internet banking has attracted between 500 billion yuan ($80 billion) and 900 billion yuan in deposits. It's equal to about 1-3 percent of China's total bank deposits, according to a CNN report.

But now the level of returns has slipped to below 5 percent. Meanwhile, the returns rate of some similar products offered by traditional banks has exceeded 5 percent.

Why?

The online fund products, such as Yu'ebao, which are run by China's online heavyweights, such as Alibaba, Tencent and Baidu, were mainly launched around the middle of last year. They are primarily invested in the money market.

Back then, the money market was suffering from a sudden capital crunch, which forced the interest rates of money to jump sharply. The online fund products had benefited from that surge in money market rates and were able to offer high returns rates for investors, most of whom were small investors who were highly sensitive to changes in the rate of investment returns.

The traditional banks, meanwhile, are responding slowly to the rise of online funds. They are yet to launch their own online fund products to compete with the Internet companies.

That is why in just eight months, Yu'ebao, the most popular online fund run by Alibaba, has attracted more than 60 million investors and 400 billion yuan.

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