At the end of 2013 and the beginning of this year, many commercial banks in China increased the rate of return on their financial products. As a long-term client of several banks, Wu Jing was surprised to find that Bank of Beijing Co Ltd provided a one-year wealth management product with an annualized yield of 6.3 percent, about 2 percentage points higher than the average rate of return on such products three months ago.

The 62-year-old retired editor invested 500,000 yuan ($82,500) in the Bank of Beijing's financial product, which sold out immediately.

Other commercial banks including China Merchants Bank Co Ltd and Ping An Bank Co Ltd also launched wealth management products with an expected annualized yield up to 6.35 percent. Such products have a minimum investment limit of 50,000 yuan and usually take a financial period of at least 40 days.

Financial experts said the banks kept raising the returns on wealth management products to compete for market share partly because Internet finance products are becoming increasingly popular among the clients.

The effect of Internet finance on the banks has already emerged.

Before Alipay, the online payment service of China's e-commerce giant Alibaba Group Holding Ltd, launched an online mutual fund investment service called Yu'E Bao in June, Zhang Lingyun devoted a large proportion of her savings to wealth management products issued by banks.

But now, the 32-year-old compliance officer of a pharmaceutical company in Chengdu, Sichuan province, has stopped buying financial products offered by the banks. Instead, she transferred more than 40,000 yuan from her savings account to Yu'E Bao.

Compared with wealth management products that usually take at least three months to receive an annualized return of around 6 percent, Yu'E Bao enjoys a higher annualized yield and the convenience of being able to withdraw money at any time. Its seven-day annualized yield reached 6.225 percent on Monday.

In addition, Yu'E Bao sets the investment bar as low as 1 yuan while the minimum investment limit of wealth management products by banks still remains 50,000 yuan for individual investors.

"Almost all my friends and colleagues under 50 — except for a few who don't really care about financial management — are turning away from the banks to Yu'E Bao," said Zhang. Her boyfriend also put 60,000 yuan into the mutual fund platform.

"Some of my former classmates working in banks said Yu'E Bao has greatly affected their business. In the past, people had few channels for investment outside the banking system. Once a new channel becomes available, it breaks the banking monopoly immediately," she said.

Yu'E Bao had achieved 250 billion yuan in assets by Jan 15 and more than 61 million customers by Feb 6. Its growth hit a record high at the beginning of 2014.

During the first 15 days of this year, the money market fund increased by 64.7 billion yuan in assets, up 35 percent from the end of 2013 with an average hike of 4.31 billion yuan per day.

Inspired by the success of Yu'E Bao, the Chinese Internet giant Tencent Holdings Ltd joined the competition by launching a wealth management service on its mobile messaging app WeChat on Jan 15.

"Internet finance has intensified competition for retail banking customers, raised the cost of capital and sped up China's market-based interest rate reform. Although it will not replace the banks, Internet finance will change the current financial structure, which is dominated by commercial banks," said Li Ying, a financial researcher with Bank of Communications Co Ltd.

Since the beginning of January, many banks have increased their interest rates. China Guangfa Bank Co Ltd announced on its official website that those who open an account at the bank for the first time before March 31 will enjoy an interest rate of 4.125 percent for a two-year deposit of more than 50,000 yuan, higher than the 3.75 percent benchmark interest rate set by the People's Bank of China.