Discussion of Issues

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In 2000, the total revenue generated by e-commerce transactions in China constituted 0.87% of GDP. B2B transactions accounted for 99.5% of this revenue, whereas B2C transactions accounted for 0.5% (www.china.org.cn, 2001). B2B transactions accounted for a substantial proportion of e-commerce revenue because they were mostly conducted by state-owned enterprises or affiliated businesses, which still dominate the current economic system and operate under the influence of the government's directive for e-commerce development. The low level of B2C activities was the result of consumers' reluctance or hesitation in embracing Internet as a channel of trade. The failure to reach critical mass consumer acceptance for B2C online trading has been largely attributed to the absence or slow improvement of a number of critical success factors, such as public confidence in the security of online systems, technological support and regulatory frameworks. In e-commerce, a secure and efficient electronic payment system is a vital support for online trading because prompt settlement contributes to the stability and liquidity of the economic system. In addition, information is a critical strategic resource in this electronic medium, and therefore a stable and transparent operating environment is essential for instilling sufficient confidence and trust among participants in the transmission of important or confidential data. An underdeveloped electronic system is an easy target to external hackers or fraudulent insiders, whose abuse can result in unauthorised access to confidential information, unauthorised transfer of funds, loss of important data or significant operational disruptions and losses.

In a survey conducted in December 2002, 0.1% of Chinese Internet users cited online shopping as the main reason behind their Internet subscriptions (China Internet Network Information Center, 2003). Although a higher proportion of Internet users made online purchases in 2002(33.8%) than in 1999 (8.99%), the number of users who are inclined to conduct or repeat online purchases in both years has remained below the level of interest indicated in 1998 (China Internet Network Information Center, 2003, 2000). Online shoppers who have used electronic payment systems to settle their online transactions have voiced serious concerns about network security, inconvenient payment systems and the trustworthiness or authenticity of the Internet sellers.

Cyber Risk

The increase in the number of computers connected to the Internet in China has been accompanied by an increase in the number of illegal activities involving computers and the Internet. Computer crime activities were reported to have gone up by 30% annually in the late 1990s in China (World News, 1999). It was estimated that the actual computer crime rate was six times higher than the number of reported or detected cases (Kabay, 2001). A survey found that 59% of Chinese Internet users experienced computer invasion from hackers in 2002 (China Internet Network Information Center, 2003). The vulnerability of computer networks to hackers has largely deterred consumers from embracing e-commerce as a channel of trade. In the financial system, the number of fraudulent activities and crimes committed over the computer network has been on the increase too. According to Xinhua News Agency (2003), the financial industry suffered losses of more than 10 billion yuan (US$1.2 billion) each year, as a result of virus attacks or hacker invasions. In a separate study, it was found that at least 90% of reported cases of computer network crime committed between 1997 and 2000 in this industry were due to inadequate security control in the system (Chen, 2002). Chinese consumers are very cautious of the insecurity involved in online bankcard payments through the Internet. It is estimated that the value of retail consumption transacted and settled through the Internet (online bankcard payment and online purchase) in 2002 was 0.15% of the total value of all retail consumption transacted through bankcards (online and off-line purchases). The scepticism of consumers about electronic bankcard payment systems for e-commerce can be understood from the level of bankcard use and acceptance in off- line purchases. Of the 2.7% of Chinese retailers contracted to accept bankcards issued by the different local banks in the country, 30% avoided bankcard as a payment instrument from customers, offering various reasons (Chui, 2002). In addition, 50% of the 460 million bankcards issued were dormant cards (Zhou & Wu, 2002). Clearly, many Chinese prefer the traditional way of paying in cash for their goods.

Weak Technological Support

The absence of an effective coordinating force and a coherent strategy, at both the organizational and national levels, and at the onset of the payment technology adoption process in the economy, has resulted in incompatible technologies and non-interoperable networks. Manual processing is often used to supplement the quasi-automated payment system, but the manual process of bridging the gaps between noninteroperable networks undermines the security and integrity of the bankcard payment process, making it harder to prevent the unauthorised use of bankcards, for instance.

In the event of card loss or cancellation, the prevention of unauthorised use is time-consuming and tedious, especially in areas where support infrastructure is inadequate. For example, when bank branches receive the weekly ‘blacklist' (with details of invalid or suspended bankcards), they have to reproduce the same list for each of their contracted agents (who were contracted to accept bankcard for payment of transactions). This manual process takes up time and can create substantial risk in the electronic system if the agent does not receive the relevant information in time to stop the fraudulent use of such cards. In addition, the nascent legal framework can expose the bank, agent and cardholder to high financial risk. The unreliable electronic payment system and inadequate legal structure keep not only the cardholders from using the Internet as a channel of trade, but also the agents from relying on it for establishing online businesses.

Resource Constraints

Resource constraints and underdeveloped security controls within local banks have hampered the development of an efficient and secure electronic payment system to support e-commerce. For example, the inadequate bankcard credit verification facility (to support timely credit checks for all purchases) has exposed the banks to high credit risks. Furthermore, the lack of a credit information system in China has hindered the development of the card business for e-commerce.

A majority of the bankcards issued in China are debit cards, through which a cardholder can close transactions out of a preexisting credit balance, held by the card-issuing bank, to cover a certain value of the total transaction. But because the electronic payment system has not been capable of real-time processing or performing online credit limit checks, overdrafts have been a serious concern to the local banks. The banks' credit collection and pursuit of repayment of overdrawn amounts have been made difficult by outdated or fictitious records furnished by defaulting cardholders when they applied for a bankcard. In addition, the inadequate effort on the part of the banks in verifying and updating personal records on a consistent basis has aggravated the situation. In such cases, these banks have reluctantly become the bearers of losses.

Because of competition, banks do not share information on the credit standing or background of their cardholders or card applicants. As a result, there is duplication of resources for the same investigation procedure undertaken by the different banks on the same bankcard applicant. The proprietary nature of information on bankcard applicants has led to cases where applicants had successfully applied for various bankcards from different banks, because the banks were not able to detect the numerous applications lodged or the fraudulent information submitted by the defrauding applicants.

Regulatory Framework

The lack of sound bankcard payment and e-commerce regulatory systems has further slowed the progress of e-commerce. Although the Chinese government has been reviewing and tightening its legislative structure in support of the development of e-commerce, substantial effort is still needed to inject stability and confidence into the operating environment. For example, electronic contracts are recognised under the law of contract in China, but there is no reliable legislative framework for the use of digital signatures in online contracts. In addition, the banks have found that the existing legislation does not help them to recoup their losses without incurring high legal costs when bankcard guarantors shirked their responsibilities or agents breached their fiduciary position with the banks. The inadequacies in both legal and technological structures have caused banks to adopt a risk-averse attitude in the development of their bankcard businesses. The local banks tend to be overprotective of their own interests, compared to international card issuers, to the extent that their customers have to bear a higher burden of risk in the event of bankcard theft and unauthorised use of the stolen card. In order to brace themselves against economic loss or liability, most banks include a condition in the bankcard agreement with the cardholders that the latter are liable for any unauthorised payments made before, and even a day after, they notify the issuing bank of the loss of their cards (Wang, 2002). In addition, cardholders are required to pay a 40-yuan (US$4.80) processing fee when lodging the notification of card loss at the bank.

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