Ecommerce Fraud Risk: China
Being a retailer in China can be challenging, thanks to the high number of small cities — many in relatively remote areas — and an ecommerce explosion over the past few years. But the opportunity for businesses to expand into China via online sales is increasing. Ecommerce sales are expected to reach $2.3 trillion in 2022 and $3.2 trillion by 2026. In fact, McKinsey & Company reports that China is “set to retain its preeminent role as the engine of global consumption growth post-pandemic.” And yet, along with tremendous potential, China brings many unusual risks from unexpected sources.
Businesses need to be aware of these risks as they build their strategy to tap into this vast market. Let’s look more closely at what these risks are and what businesses can do to protect their customers and their businesses.
What Makes Ecommerce Sales Unusual in China?
Successfully growing an ecommerce business in China means paying careful attention to how Chinese consumers shop. Here’s what ecommerce businesses need to know.
Livestreaming Ecommerce Is a Growing Market
The livestreaming ecommerce market in China grew significantly in 2020 and is anticipated to quadruple by 2023. Brands are capitalizing on this trend – more than 100,000 brands on the Taobao Live platform leveraged their livestreaming modes during 2021 Singles' Day with great success.
This reliance on KOLs and KOLCs to market products is similar to how QVC works in the United States. Consumers can ask questions in real-time while quantity numbers flash on the screen. With one click, shoppers can make purchases.
Social Commerce Is Wildly Popular
Nearly 80% of Chinese consumers are active social media users, spending up to six hours per day online. And brands open their online stores within messaging and social apps where consumers can socialize, play games, buy tickets, order food and shop. The integrative nature of the apps makes these platforms particularly attractive.
Chinese Cardholders Are Responsible for Credit Card Fraud
The low incidence of credit card fraud in China (when compared with the high dollar amount of transactions) isn’t a result of tough security or advanced fraud protections. Instead, it’s in large part due to the fact that consumers simply don’t use credit cards for purchases.
The reason is simple: Credit card holders in China are generally financially responsible for any fraudulent charges made to their accounts. That’s unlike the United States, where consumers can dispute fraudulent transactions and require businesses to be financially responsible for chargebacks.
Consumers Demand Two-Factor Authorization
Because Chinese credit card users are on the hook for any fraudulent purchases made on their cards, if consumers do use their credit cards, they expect ecommerce businesses to have two-factor authentication in place to mitigate any risk.
Mobile Payments Are the Payment Method of Choice
About 80% of all ecommerce transactions in China are made on mobile devices, so it’s not surprising that Chinese shoppers prefer using mobile payments over credit cards for their ecommerce transactions. In fact, over 77 million shoppers in China use digital wallets to the tune of more than $620 billion.
Online payment methods like Tencent’s WeChat Pay and Alibaba’s Alipay are the most preferred because of accessibility, ease of use and integration speed. And consumers aren’t just using mobile payments for everyday purchases. Because single-transaction limits for mobile purchases can top $45,000, Chinese consumers tend to use mobile payments for big-ticket transactions.
Ecommerce Fraud in China Is Rampant
China’s increase in ecommerce has also resulted in an increase in online fraud. Lawmakers passed a law in September 2022 intended to prevent both online and mobile fraud. The new law takes effect in December and will help combat the country’s growing fraud problem.
Brushing Has Become the Most Common Fraud Scheme
A fraud scheme referred to as “brushing” is the most pervasive in China. The tactic lures victims into paying for products they may not have received, downloading fake apps and creating profiles. Usually, a rebate of some sort is promised in exchange for more payments. Consumers can lose as much as $60,000 in these schemes.
Counterfeit apps are the source of considerable investment fraud in China. The Cyberspace Administration of China (CAC) and the Ministry of Public Security have been investigating investment fraud platforms with a focus on 42,000 counterfeit apps.
To put the pervasiveness of this type of fraud into perspective, the CAC’s fraud database includes approximately 3.8 million websites and 514,000 apps, which have resulted in over 2 billion alerts. The fraud schemes involve creating fake websites that lure consumers with rebates and even some claiming to be state agencies.
Mobile Payment Fraud Is Common
Thanks to the popularity of mobile payments, fraudsters have to get creative when it comes to defrauding customers. With few regulations in place to protect the mobile payments industry, an estimated 67% of Chinese consumers are instead exposed to a variety of mobile payment security threats, including data breaches, money laundering, mass-registering mobile wallets and stealing SIM card information from mobile devices.
How Chinese Retailers Can Protect Themselves
For ecommerce businesses interested in expanding their business internationally, scenarios that might seem suspicious at home may be commonplace and legitimate in China.
For example, consider “red envelope” gifts that are given to friends and family in China to commemorate special occasions. While these historically have been cash gifts, today, Chinese consumers often use online payment platforms like Alipay to make their gifts digitally. Payment providers in the United States would likely flag a barrage of payments leaving one customer’s account and going to multiple other people, but in China, this scenario has a rational explanation.
This points to the need for ecommerce businesses to implement advanced fraud detection techniques that account for the idiosyncrasies of each individual country in which they sell.
Select the Right Fraud Protection Solution
Businesses that are expanding into the Chinese ecommerce market have a lot of opportunity, but no small amount of risk. Not only are the most purchased items considered high risk for fraud, but Chinese ecommerce shoppers also have a reputation for risky online behavior.
There are a host of fraud protection solutions on the market with varying levels of expertise. But the key is to understand every aspect of fraud protection, including chargebacks, friendly fraud, criminal fraud, high-risk industries and much more. For this market, an end-to-end, hybrid solution is highly recommended.
At ClearSale, our hybrid solution includes multiple strategies to offer one of the most comprehensive fraud and chargeback prevention solutions on the market. Beginning with an AI-enabled algorithm that leverages trends, intelligence and data gathered from decades of fighting fraud in the most high-risk regions of the world. Using this technology, we can automatically approve most orders quickly.
Suspicious orders are flagged for secondary reviews performed by our more than 1,500 fraud analysts who can recognize some of the hardest-to-recognize fraud patterns. The data gleaned from those secondary reviews are used to train our system to become better at distinguishing valid transactions from fraud.
We also offer chargeback management solutions, including:
- Total Chargeback Protection allows businesses to recoup a portion of losses due to fraudulent transactions.
- Chargeback Guarantee reimburses the transaction amount plus the chargeback amount for any unauthorized transaction that’s approved.
- End-to-End Chargeback Management delivers comprehensive chargeback mitigation and resolution services, including team training, data audits and timely responses to issuers.
When you’re ready to join ClearSale’s 6,000-plus customers who are effectively and safely growing their business internationally, get in touch. We’re ready to help.