China’s leading online-payment platform provider Alipay is set to receive 5 billion yuan (US$731 million or 538 million euros) over the next three years from its parent, Hangzhou-based Alibaba Group.

The unit will use the investment to expand its business. Besides hiring more staff, upgrading technology and buying more facilities, Alipay will invest in mobile-payment development to “meet different demands from its users,” Peng Lei, Alipay CEO, said in a statement.

Alipay operates a payment service similar to PayPal that helps process payments when buying and selling on Alibaba’s business-to-business online marketplaces and other third-party client sites. Buyers make payments by linking their MasterCard or Visa credit cards to their Alipay account. Like PayPal, buyers do not expose their card details when shopping online.

Alipay services support online shopping, hotel reservations and online gaming. It also has payment platforms for mobile phones, including Apple Inc.’s iPhone. By the end of March, Alipay had more than 300 million registered users.

Zhang Jing, an analyst at Beijing-based research firm, tells PaymentsSource the investment funds will help heat up the already strong competition in the industry. “With Alipay’s big move, it will no doubt improve the payment services and stir up the existing competition among its rivals,” she says.

In 2009, transactions initiated through third-party online-payment platforms soared to 555 billion yuan, up 136.6% from 234.6 billion yuan the previous year, with the top three players being Alipay, (operated by Tencen Technology (Shenzhen) Co. Ltd.)  and China UnionPay’s subsidiary, according to Beijing-based research firm Analysys International.

Alipay now is facing an even bigger challenge. In August, China’s central bank will launch an online-banking network, which will connect all the banks in China. It will support such services as enabling users to make transactions that settle almost immediate at any time, interbank withdrawals and online shopping, all of which now go through a third-party payment platform.

But the central bank’s platform does not necessarily mean the government is trying to edge out the third-party players, Zhang says. “It is part of China’s financial reforms,” she says. “The third parties will eventually benefit from the continuous optimization of the online-payment business.”

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