(Editor: Leona) 

“We will have a nasty war with Alibaba in the future,” says the president of China UnionPay, the world’s leading debit card network.

Alibaba Group, the fast-growing Chinese e-commerce giant, is not only rattling competitors in retail, but also in the banking industry.

The president of China Unionpay, the country’s leading payment card network, sent a letter recently to employees—which has since been widely republished online in China—warning of the threat from the Alipay mobile and online payment products offered by an Alibaba affiliate.

“Alibaba is moving into offline payment quickly,” China Unionpay president Shi Wenchao wrote in the letter. “Payment is an important market for China Unionpay and banks. If we were defeated in payment, we will lose our consumers and even lose tens of trillions of yuan worth of business in personal banking in the future.”

Shi wrote that the volume processed by Chinese online payment companies grew 143.8% to 10.3 trillion yuan ($1.66 trillion) last year. That includes payments handled by Alipay, but also by competitors like the Tenpay system of rival Internet powerhouse Tencent Holdings. “That growth rate is three time faster than the growth rate of banking card transactions during the same time,” Shi said.

Unionpay—which is the only network authorized to handle yuan-denominated card transactions in China—is also growing its transaction volume. The network of 400 bank card issuers in China handled $5.3 trillion worth of transactions in 2013, an increase of 48% from the prior year, the company has reported. Under pressure from the World Trade Organization and foreign competitors, China’s government said last fall it would take applications for foreign companies like Visa Inc. and MasterCard Inc. to operate payment card networks in China.

Alipay, meanwhile, has been moving aggressively to promote its Alipay Wallet, a mobile app that lets consumers pay with their mobile phones in bricks-and-mortar stores. Alipay says there are 190 million active users of the Alipay Wallet and that daily transactions topped 45 million in October.

In a one-day promotion in December, Alipay provided a 50 yuan ($8.05) bonus to each consumer who made a purchase with Alipay Wallet at more than 20,000 participating stores and restaurants. Alipay says there were 4 million transactions in first 12 hours of the promotion, and Chinese media reported that many participating stores sold out most of their inventory that day.

Alipay is also appealing to merchants by undercutting the transaction fee retailers pay for accepting cards. Alipay charges 0.6% of the transaction, while UnionPay charges 1%. That is reminiscent of the approach Alibaba took to become the dominant e-commerce company in China, as it attracted merchants to its Taobao online marketplace by charging no listing fees or commissions, eventually reaping huge revenue from advertising once hundreds of millions of Chinese consumers started shopping on Taobao, and later on Alibaba’s Tmall shopping portal. Alibaba accounts for about 80% of e-retail purchases in China, a dominant position that propelled it to a record-breaking $25 billion initial public offering of stock on the New York Stock Exchange in September.

Alibaba initially created Alipay, a service similar to PayPal, to assure consumers it was safe to purchase on Alibaba’s e-commerce sites. There are now 600 million users of Alipay in China, Alipay says, and they often use the payment service to pay utility and other bills via their computers. Alipay’s parent company, Small and Micro Financial Services Co., is controlled by Alibaba chairman Jack Ma.

Alibaba is also taking other steps to become a major provider of financial services. Through a Joint venture, Alibaba obtained an Internet banking license in 2014 and plans to provide loans to small companies, gauging their credit by their by their online transactions on Alibaba sites.  

To counter the threat from Alibaba, China Unionpay plans to provide additional services to banks and merchants.

“We will have a nasty war with Alibaba in the future,” Shi wrote in his letter. “China Unionpay must provide more services to support the payment process, and not services involved in the payment process. For example, we could build a large cross-bank credit card membership system to help banks save costs and allow cardholders to get more discount information. Also, there are many bricks-and-mortar merchants who only provide services and can’t sell on an e-commerce platform. We can build a platform to help them get more traffic from online channels.”

In fact, China UnionPay took an initial step last September to move into Alibaba’s turf, launching a shopping portal that connects to e-commerce sites around the world where Chinese consumers can pay with their China UnionPay debit and credit cards.