Ecommerce Fraud Risk: China

Ecommerce Fraud Risk: China

Being a retailer in China can be a difficult experience. Thanks to the high number of small cities — many in relatively remote areas — many brands have been unable to establish a widespread physical presence in the country.

But with the explosion of e-commerce, merchants now have the opportunity to expand into China via online sales, and as a result, e-commerce sales have soared – topping $1.5 trillion in 2018. And yet, along with tremendous potential, China brings many unusual risks from unexpected sources, as well.

Merchants 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 merchants can do to protect their customers and their businesses.

What Makes e-Commerce Sales Unusual in China?

Successfully growing an e-commerce business in China means paying careful attention to how Chinese consumers shop. Here’s what e-commerce merchants need to know.

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 merchants 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 e-commerce merchants to have two-factor authentication in place to mitigate any risk.

Mobile Payments Are the Payment Method of Choice

Chinese shoppers simply prefer using mobile payments over credit cards for their e-commerce transactions. In fact, mobile payments in China totaled $9 trillion in 2016 — compared with just $112 billion for U.S. shoppers during the same time period. 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.

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 60% 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.

Transactions Most at Risk

In 2016, the Beijing Public Security Bureau received nearly 21,000 reports of online fraud, with losses exceeding $28 million. While any e-commerce merchant or consumer is at risk of fraud, two verticals in China can be particularly risky:

1.      Telecommunications

Telecommunication fraud has been widespread in China, with the bureau reporting more than 110,000 cases concerning 180,000 bank accounts between January 2012 and August 2013 alone.

2.      Luxury Goods

Sales of luxury goods totaled more than $22 billion in 2016-2017 in China, with Chinese consumers making up 32% of the global market. Still, many international merchants are suspicious of orders originating from China — assuming they’re fraudulent. The risk here to merchants isn’t always fraud — it’s that they’re falsely declining up to 75% of legitimate Chinese orders. And that can be just as costly as fraud to a business.

How Chinese Retailers Can Protect Themselves

For e-commerce merchants 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 U.S. 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 e-commerce merchants to implement advanced fraud detection techniques that account for the idiosyncrasies of each individual country in which they sell.  

Ideally, a fraud prevention solution will include a robust machine learning component (i.e., an application that can get smarter as it’s fed more data) and a well-trained human team of fraud analysts who can identify emerging fraud patterns.

And yet, with all the options available, how do you know which is the right approach for your business?

Our online guide walks you through the most important aspects of a card-not-present fraud protection solution and describes how ClearSale can address your needs. Then, when you’re ready to join ClearSale’s 2,500-plus customers who are effectively and safely growing their business internationally, get in touch. We’re ready to help.

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