By Sumeet Chatterjee and Elzio Barreto

HONG KONG (Reuters) - As part of plans for an up-to-$10 billion initial public offering, Postal Savings Bank of China (PSBC) aims to transform itself from a brick-and-mortar lender into a digital player, helped by its investors Ant Financial and Tencent Holdings.

According to both the state-owned bank's IPO prospectus and people familiar with its plans, PSBC plans to work with online services firm Tencent and Ant, an online payments affiliate of e-commerce giant Alibaba Group Holding, to launch a range of internet-based consumer finance services.

In the document, made public this week, the bank with a network of 40,000 branches across China said it wanted to deepen cooperation with Ant and Tencent's online finance arm, WeBank, in internet and mobile finance.

PSBC said it plans to "actively explore" the setting up of a mobile payment system and speed up the development of mobile phone-based services. The 843-page prospectus officially started the countdown towards an IPO as early as September that is expected to be the world's biggest new listing in about two years.

Both Ant and Tencent, China's biggest social network, came on board as PSBC shareholders as part of a nearly $7 billion pre-IPO investment round late last year.

PSBC, which has reported a very low level of bad loans compared to peers, is trying to leverage its vast physical network across the country to support online financial services development, said a person familiar with the bank's plans.

"Because it's so clean and there's the advent of the new economy that they can leverage, this will be one of the big surprises of the year," said the person, who declined to be named as he was not authorized to talk to the media in the run-up to the IPO.

PSBC acknowledged in the prospectus that it faced challenges in plans to offer personal loans and wealth management products online and on mobile. "If we are unable to successfully respond to these challenges, our business, financial condition and results of operations could be materially and adversely affected," it said.

PSBC declined to comment beyond its prospectus filed with the Hong Kong exchange. Ant and Tencent didn't respond to requests for comment.

PSBC's technology-enabled services currently include online loan applications, self-service banking, checking the status of credit card applications and making inquiries about branches, according to its website and the prospectus.

"In general the banks in China have been a little bit behind the ball in terms of getting on top of things and creating innovative product services," said Zennon Kapron, founder of Shanghai-based financial industry research firm Kapronasia.

PSBC's plans come against the backdrop of a range of companies looking to tap China's booming online finance market, where tech giants and hundreds of startups offer a range of financial products via the internet and mobile devices.

The move could also help banks like PSBC, which has a big presence in rural areas, to tap a new segment of clients that don't currently have access to online banking services.

But bank will find it challenging to prepare a large customer base of rural and small depositors like Wang Shengwen, a 70-year-old farmer in Sishipu town of northwestern Chinese province Shaanxi, for transition to online services.

"Now young people use their phones for everything – to read news, buy clothes, save money, transfer money, lots of things," said Wang. "We're old, we don't know how to use smartphones, even if we had a phone all we'd use it for is to make calls."

(Reporting by Sumeet Chatterjee and Elzio Barreto; Additional reporting by Denny Thomas and Tris Pan in HONG KONG, John Ruwitch in SHANGHAI and Sue-Lin Wong in BEIJING; Editing by Lisa Jucca and Kenneth Maxwell)