* ICBC restricts trade with Alipay to one branch
* Could hit Alipay's revenues from interest
* Latest in Chinese crackdown on online payments
By Paul Carsten and Heng Xie
BEIJING, March 25 (Reuters) - Industrial and Commercial Bank of China Ltd (ICBC) will restrict trade with Alibaba's online payment arm to one branch, the bank said on Tuesday, in the country's latest crackdown on a nascent online finance industry.
Alibaba Group Holding Ltd's payment arm, Alipay, previously had contracts with numerous branches of ICBC for negotiated corporate deposits, and could place deposits with the branch offering the highest yield.
Tuesday's move means ICBC branches will no longer compete to offer high yields on Alipay's deposits, hitting the online payment business's revenues from interest, and potentially setting a precedent for other banks to follow.
The clash between entrenched interests in China's traditional finance sector and its internet companies has escalated in recent weeks, with banks imposing limits on how much their customers can transfer to online finance services and the authorities looking into potentially heavy regulation.
Though small, online and mobile payment transactions in China have been growing rapidly. The online payment market last year grew 47 percent to 5.37 trillion yuan ($869.20 billion) in transactions, according to Beijing-based consultancy iResearch.
Most of the concern about online finance, according to regulators such as the People's Bank of China (PBOC) and commercial banks, revolves around the security of payments made by virtual credit cards and smartphones and risks relating to money laundering and customer information security, as well as the wider financial system.
Other services have drawn the ire of banks, particularly the internet companies' wealth management products that have taken the Chinese public by storm and analysts say are contributing to interest rate liberalisation in China.
The payment systems of Alibaba and rival Tencent Holdings Ltd's could also hit state-owned China UnionPay, the country's monopolistic credit card provider.
"The market doesn't fear competition, it fears injustice," Alibaba founder Jack Ma wrote online on Sunday after banks set harsh new limits on how much their customers could transfer from their accounts into Alipay.
"It's not the monopolies and powers that determine success in the market, it's the consumer," wrote Ma.
Banks, including ICBC, Bank of China Ltd, Agricultural Bank of China Ltd and China Construction Bank Corp, have restricted how much their customers can spend on Alibaba's and Tencent's online payment services.
Wealth management products, offered by Alipay, Tencent and Baidu Inc, can offer almost double the interest rate that China's traditional banks give depositors.
Regulators including the PBOC, China's central bank, are now discussing draft regulations to govern the Internet banking industry in China, including their own limits on how much people can spend on individual purchases and transactions between bank accounts and online finance services.
Alipay and Tencent declined to comment but last week said they would work with regulators to help draw up new rules for internet banking. Baidu also declined to comment. Earlier this month Chief Executive Robin Li said online finance required greater regulation.
The current PBOC draft regulations would impose draconian limits on how much money can be transferred to wealth management products like Alibaba's Yu'e Bao, China's 21st Century Business Herald reported this month.
These restrictions could prove fatal to online wealth management services, and a heavy blow to Internet firms' financial ambitions, the report said.
In August, Chinese media reported that Alipay halted its offline point of sales service for small companies. The move came after UnionPay put pressure on Alipay to route the service through UnionPay's system so it could increase its commission earnings on transactions.
Tencent and Alibaba said this month they were also applying for licences from the bank regulator to participate in a trial plan for privately-owned banks. (Additional reporting by Bi Xiaowen in HONG KONG and Gabriel Wildau in SHANGHAI; Editing by Mark Potter)