By Shirley Zhang
As global sales and purchasing trends continue to move online, increasing numbers of foreign investors are looking at breaking into the world’s largest online market – Chinese consumers.
Jul. 12 – After opening up a physical shop in China, a foreign investor can set up an online store by creating a website through which selling is conducted. This will require the foreign investor to first set up a foreign-invested commercial enterprise (FICE) for the physical store, and then create an online shop selling the same range of products. An Internet Content Provider (ICP) License is not required, but an ICP filing must be made. The online shop is not permitted to engage in delivery and online payment in addition to selling products simultaneously. To engage in delivery, a separate WFOE must be established and a transportation license must be acquired, which is a time consuming and complicated procedure. Most online shops outsource the delivery process to freight forwarders such as EMS, TNT, China Post, etc.
Online Payment Platforms in China
Most online trading platforms use online payment platforms such as AliPay, TenPay and PayPal. This sector is restricted for foreign investment, as it is similar in nature to financial institutions such as banks. Online payment is crucial to e-commerce development, and the safety of online payments is a key point of concern for customers in online transactions.
According to the China Internet Network Information Center (CNNIC) report released in October 2012, up until June 2012, only 34.8 percent of internet users in China (i.e., about 187 million people) have used online payment methods as many users still perceive making online payments as unsafe or complicated. Nonetheless, the average annual growth rate of 47.5 percent for people who have adopted online payments in China from 2008 to 2011 shows the potential for the development of online payments in China. Further, the CNNIC report shows that safety and convenience are the top concerns for internet users in China when choosing online payment methods.
Alipay is to Taobao as PayPal is to eBay. It is a popular and convenient tool for making online payments in China. Since its launch in 2004, Alipay has become China’s leading third-party online payment platform. It has more than 800 million registered accounts as of December 2012 and processes 105.8 million payments daily, involving a monetary value of over RMB20 billion (about US$3.25 billion). Furthermore, Alipay has created an escrow payment service, which considerably reduces the anxiety of Chinese consumers shopping online.
Most Chinese consumers prefer “escrow payments” when paying for online products, where they will put their payment in an escrow account hosted by a third-party payment platform after they have made an order, but before they actually receive their goods (this is especially popular when the commodity is not a virtual product that can be downloaded instantly but takes a few days to be delivered). After the buyer confirms the commodity has been safely received, the third-party payment platform will then transfer the payment to the vendors. This approach balances the risks between buyers and sellers – consumers suffer fewer risks compared to instant cash transfers, while merchants face fewer risks in comparison to payment-on-delivery transactions.
More than 100 domestic and global financial institutions have established cooperative efforts with Alipay, including Visa and MasterCard. Currently, Alipay supports transactions in 12 major foreign currencies, including USD, EUR, JPY, GBP, CAD, AUD, SGD, CHF, SEK, DKK, NOK, and HKD. Alipay is an affiliate of the Alibaba Group, along with Taobao and Tmall.
Alipay offers online payment solutions to merchants who want to sell directly to consumers in China, which means there is no need for these merchants to set up a company or open up a bank account in China, since the settlements are remitted directly to the merchants’ bank accounts.
Available payment options:
- Escrow payment;
- Instant payment; and
- Cross-border website and mobile payment.
In addition, there is a one-time setup fee of US$1,000 to use Alipay for cross-border payments. There is also a transaction fee of 3 percent or 7 percent on each transaction.
There are more options for domestic payment solutions in China, and the transaction fees for domestic payments range from 0.7 percent to 1.2 percent.
For more information on Alipay cross-border payment solutions, please visit: http://global.alipay.com/ospay/home.htm
For more information on Alipay China payment solutions, please visit: https://b.alipay.com/newIndex.htm
PayPal is also available for cross-border payments and settlements. However, PayPal only has a very small share in the Chinese domestic market, and Chinese people usually only use PayPal when they want to purchase items/services from foreign countries.
There is no setup fee to use PayPal, however, there is a 3.9 percent transaction fee on the total sales amount in addition to a fixed fee of US$0.30 per transaction.
RMB-only third-party payment platforms
There are at least 20 different RMB third-party payment platforms in China. Alipay is still the leading service provider among all of them, but TenPay, an online payment system developed by Tecent (the developer of QQ and Weixin), appears to be the second most popular payment tool for Chinese internet users.
Other third-party payment platforms include 99Bill, ChinaPnR, YEEPAY, and IPS.
B2C & B2B
Instead of setting up one’s own online shop, another option is to set up a shop on an existing platform. Tmall (a Taobao-branded B2C platform), 360Buy and Amazon China are good choices for B2C vendors, while Alibaba is the prevailing platform for B2B online transactions.
To start an online B2C or B2B business, FIEs are required to upload pictures of their business licenses, passports or identity certificates of their legal representatives and company bank account information for examination and approval by the online trading platform. After approval, they must prominently display their business license information on their store homepages as specified by AIC Order 49.
For representative offices of foreign enterprises, certificates of registration and organization code certificates (or tax registration certificates) issued by the competent Chinese authorities should be submitted to the platform. For enterprises in some industries, such as the cosmetics or food industry, applicants are also required to submit any relevant permits (e.g., cosmetics production license or food production license.)
Furthermore, some online platforms set minimum threshold levels for enterprises that can be listed as enterprise vendors on their platforms. For instance, 360Buy only accepts applications from companies with registered capitals at or over RMB500,000. Additionally, some platforms require B2C vendors that are registered as enterprises at the AIC to pay technical service fees or commissions. It may also be necessary for the B2C vendors to pay a deposit to the platform in case of a breach of any service terms.
Portions of this article came from the July 2013 issue of China Briefing Magazine titled, “E-Commerce in China,” which is available as a complimentary PDF download on the Asia Briefing Bookstore until the end of this month. In this issue of China Briefing Magazine, we cover the current laws pertinent to the e-commerce industry in China, as well as introduce the steps involved in setting up an online shop in the country in order to help provide foreign investors with an overview of the e-commerce landscape in China.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
For further details or to contact the firm, please email firstname.lastname@example.org, visit www.dezshira.com, or download the company brochure.
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