Alipay was initially introduce to solve the problem of vendor/purchaser providing fraudulent goods/purchases on taobao (equivalent to ebay without the bidding). When a buyer make a purchase on taobao, he/she pays first from your bank or alipay cash holding account, but money is not directly transfered to the seller, rather it's holding at alipay's escrow account.
The seller will send you the goods, if you are satisfied, you release the payment by confirming the shipment, if you are not satisfied, you request a refund or exchange, in cases that the seller refuses to respond, you can get alipay involved to resolve the dispute. Sellers acting on their own interests, typically don't want to get to the last part, because they will not get their money (held at alipay escrow) and also bad reputation when the buyer leave a nasty comment. Escrow account also provide protection for the seller, if a buyer made a purchase using credit card, and later on dispute the charges with credit card company, credit card company typically provide the refund (because credit card company has insurance to cover it), and charge back to the seller. So seller is out of the goods and without the money. By having escrow account in between, a buyer can't get his/her money back without going through the refund/exchange process which weed out some bad purchasers. Shipment info is used to track auto payment in case the buyers are lazy, e.g. if buyer don't confirm shipment after he/she received it, payment will be released 10 days after shipment arrived. All these changes provide a trusted platform for sellers and buyers to work with, and that's why taobao is growing so fast.
Now why other added features are added on alipay, as a business alipay is an independent payment system not just for taobao, and its business strategy has been to expand to being the center of all money transactions. Itself is more like a bank now, it expand its payment system link to other vendors besides taobao. It also added a money market fund feature last year, so your excess deposits can earn a higher interest rate than bank's savings rate. So how do alipay make money, simply on the interest of money held at escrow account, the 10-15 day interest on money held at escrow account is paid to non other than alipay, the buyer or seller don't get to receive anything. Alipay already has a unit to expand to lending to small vendors, because it can mine vast amount of transaction data to figure out who can be a good borrower. I see in the future, they will be able to lend out money held at escrow account and earn even higher interest rate. Now that's a win win for alipay and its customers.
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