Ma, 53, will unveil a plan to find a successor, and is set to remain as executive chairman while the search is carried out, according to reports.
He now intends to focus on philanthropy and education but also pursue unspecified "new dreams", he said in a statement Monday.
Alipay became a freestanding financial company, Ant Financial, in 2014.
According to Ma, a "sustainable Alibaba" would have to be built on "sound governance, culture-centric philosophy, and consistency in developing talent", adding that no company can rely exclusively on its founders.
Ma will also complete his current term as a member of Alibaba Group's board of directors until its annual general meeting of shareholders in 2020.
Ma will give up the chairman role in exactly one year on September 10, 2019 and complete his current term on Alibaba's board of directors following the company's annual general meeting in 2020, the company said.
Zhang joined Taobao in 2007 as chief financial officer of the consumer-to-consumer marketplace.
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Zhang's appointment may come as a surprise to those accustomed to tracking Ma's other high-profile lieutenants, such as Vice Chairman Joseph Tsai.
Odd are the ways in which tech honchos function: News about a change of guard came via his interview on Friday with The New York Times - at a time when US-China trade war is at its zenith - and not from Alibaba itself.
Ma is moving on with Alibaba in a dominant position in China and pushing into overseas markets from Southeast Asia to Russian Federation.
Ma, a former English teacher, founded Alibaba in 1999 in an apartment in the eastern city of Hangzhou to connect Chinese exporters with foreign retailers. Alibaba Cloud, the Cloud-computing arm of Alibaba Group, provides computing services to businesses of all sizes globally.
Alibaba listed in NY in 2014 in what was then the world's biggest initial public offering of shares.
"Ma possesses an enviable clarity about how everything fits together", said Mark Tanner, founder of Shanghai-based research and marketing company China Skinny.
"I want to return to education, which excites me with so much blessing because this is what I love to do". He has created a foundation in his own name, modeled in part on the efforts of Microsoft Corp.co-founder and fellow billionaire Bill Gates. "All these things that I've been preparing for 10 years", he said, who is now China's richest man.