* Baidu plans to do more than sell money market funds, including online payment
* Internet will topple traditional finance - CEO
* Govt will promote healthy development of Internet banking - Premier Li
BEIJING, March 7 (Reuters) - Baidu Inc has formed a partnership to apply for a private banking license, as China's biggest search engine provider moves from acting as a store front for money market funds to a certified financial institution.
Baidu and other Chinese Internet companies such as Tencent Holdings Ltd and Alibaba Group Holding Ltd have offered wealth management products since last year.
They have attracted millions of investors thanks to interest rates on consumer deposits that are higher than those offered by banks, which are subject to a cap of 3.3 percent for one-year savings.
"Of the businesses the Internet will topple they naturally include finance," Chief Executive Robin Li said on the sidelines of China's annual parliament on Friday.
"Baidu is now applying for multiple banking licences, including payment, but because we're still in the process of applying it's not convenient to reveal too much," Li told a group of reporters.
Official control of interest rates has left commercial banks offering slim pickings for individual depositors, with yields of most savings products barely matching inflation. That is changing as the government liberalises interest rates and as online savings products compete with higher returns.
"What Baidu does at the moment is market financial products. This is just a more convenient way of selling currently available financial products to an audience," said Li.
E-commerce leader Alibaba kick-started China's online finance industry with the high-yield Yu'e Bao money market fund, which has amassed 400 billion yuan ($65.38 billion) in assets under management in less than eight months, according to the official Shanghai Securities News.
Baidu and social networker Tencent followed suit, drawing the ire of China's banks who are lobbying to introduce curbs on the growth of online funds offered by non-banks.
State broadcaster CCTV dubbed Yu'e Bao a "vampire", accusing it of sucking the life out of China's banks.
Non-finance Internet firms offer such products online through partnerships with fund managers such as Tianhong Asset Management Co Ltd, of which Alibaba has applied to buy 51 percent.
Three state-owned banks have since halted interbank deposit transactions with Tianhong, citing high costs, the official Xinhua news agency reported on Thursday, citing an anonymous bank source.
A spokeswoman for Tianhong told Xinhua the fund is in contact with over 170 banks in China each day and is unaffected by the halt.
Premier Li Keqiang threw the government's support behind online finance in his opening address to parliament on Wednesday but said the industry needs to be closely watched.
"We will promote the healthy development of Internet banking, improve the mechanism for coordinating financial oversight, keep a close watch on the cross-border flow of capital, and ensure that no systemic or regional financial risks occur," Premier Li said.
Baidu's Li previously said that online finance needs greater regulation as Internet companies are not finance experts, adding that lack of oversight increases risk, according to a Xinhua report on Monday.