The Internet is transforming the way people do banking in China, according to a senior official from the People's Bank of China, the central bank.

"The Internet has changed the way traditional financial institutions operate in terms of their interaction with customers," says Mu Huaipeng, director of PBOC's legal affairs department.

"In the past, customers provided information over bank counters but now they are used to doing this over the Internet," he says at a recent forum attended by bankers.

Online banking transactions in China hit 382.7 trillion yuan ($63 trillion) in the second quarter of this year, a 27.8 percent jump compared with the same period last year, according to China market intelligence group Enfodesk.com.

Although the big players are the major banks such as Industrial and Commercial Bank of China Ltd, with a 34 percent share, and China Construction Bank Corp, with 15.3 percent, there is increasing competition from non-bank entrants.

These include Internet giants Baidu, Alibaba and Tencent, which are challenging the traditional banks with innovative online and mobile banking products.

Mu said the Internet companies are a real challenge to established players, particularly Tencent, which has taken advantage of the payment tool it has developed for its instant messaging platform WeChat.

"Tencent has won clients from its huge customer base. It is harder for traditional banks to promote new products and increase their own customer base."

Bank of China Ltd was the first to pioneer Internet banking in China in 1996. This was seven years after HSBC became the first Western bank to launch Internet banking in 1989.

China Merchants Bank Co Ltd was the first to launch an Internet payment system in 1997, after which Internet banking and telephone banking spread rapidly throughout the country.

Some 1.63 trillion yuan worth of transactions were made using third-party Internet payment tools in the first quarter of the year, according to Enfodesk.com, a 110.5 percent increase on the previous quarter, a figure inflated by spending before the Chinese New Year holidays. Just over three quarters (77.8 percent) were made using Alibaba's Alipay payment service.

The Internet has also provided a platform for a massive expansion of P2P, or peer-to- peer lending. This has led to a major increase in lending to small and medium-sized enterprises.

The leading company in this area is Credit Ease, a Beijing-based company launched eight years ago. It is now twice the size of its US equivalent, Lending Club.

Tang Ning, the company's founder and CEO, says the Internet is now leading the market.

"Technology has added wings to the finance sector. It has made the impossible become possible. Big data can now be used to check the authenticity of any documentation to solve fraud issues that were hard for us to solve before," he says.

Steve Owen, executive vice-president for global sales and marketing for NXP Semiconductor, a leading semiconductor company that provides banking technology solutions, says Internet banking poses a major challenge to the established players not just in China but globally.

"Now clients want to use smartphones and the Internet for banking. If you as a bank don't meet this challenge, you cannot catch up with changes in the market."

Albert Chan, leader of financial client services for international management consultants Accenture Greater China, says Internet banks are very good at meeting customers' needs.

"Although traditional banks already possess the technologies, they haven't formed a mode of thinking to properly provide services according to customer needs," he says.

Mu at the PBOC insists there is plenty of scope for collaboration between the established banks and the new players since in many cases they offer different services and are highly complementary to each other.

Contact the writers at huhaiyan@chinadaily.com.cn