A couple of years ago one of the most commonly cited obstacles to e-commerce penetration in China was the lack of effective methods of payment, especially considering the very limited credit card use at that time. Trying to deal with these issues and in an effort to win consumer confidence Taobao introduced its Alipay escrow accounts system whereby customer payments are held in escrow until shoppers receive their orders. By contrast, Paypal, Alipay’s Western counterpart, transfers the payment to the merchant automatically when the buyer places the order and merchants do not send out orders until payment is received.

Generally, China is a cash-oriented country. In everyday life cash is by far the preferred way of payment because smaller companies and local shops do not accept cards. New payment solutions have emerged over the last years as a result of the growth of e-commerce activities. Paypal is theoretically permitted as a way of payment on the Chinese online market, but it is still practically impossible to use a Chinese bank account for Paypal payments because Chinese banks are incompatible with this service. Another stumbling stone comes from the local government’s policy which consists of keeping a stable national currency by restricting cross border transactions.

The growth of online shopping in recent years inspired the creation of new payment methods, such as Union Pay, which is the Chinese version of Mastercard or Visa, and Alipay, which is a third party payment system that has been mentioned above.

The explosive growth of e-commerce is largely due to the wide distribution and use of credit and debit cards in recent years as well as the growth of third party payment systems such as Alipay and Tenpay which have enabled consumers to feel more secure while carrying out online transactions. Online customers choose a variety of payment methods which are different from their counterparts in other countries. The most recent figures from 2012-13 suggest that they prefer cash on delivery, wire transfers, online banking and third party online payment methods when shopping online.

Cash on Delivery (COD) remains a very popular payment method in China. However, while in 2012 almost 50% of online consumers chose COD, this number decreased to 33% in 2013. Roughly 65% of Chinese e-shoppers preferred online banking in 2012 as a way of payment for their online purchases, using both credit and debit card options. As for third party online payment it represents roughly 62%.

Third party platforms offer several practical advantages to foreign SMEs mainly because they combine gateways of several Chinese and international banks. They function as middlemen between the seller and the buyer ensuring that customers will be satisfied with their purchases before any payment is remitted to the merchant. These platforms overcame one of the major drawbacks of ecommerce: consumer trust. Third party payment is currently the most popular payment method in China. Third party platforms offer a wide selection of card brands buyers can choose from before submitting their bank account number along with a password on the issuer’s webpage.

An additional advantage of third party payment methods is that they are easier to apply for and install on the company’s Taobao or Tmall storefront. For instance, in the case of Alipay, installation is carried out by downloading and installing the required Alipay applications on the company’s website. Alipay is by far the largest and most trusted third party payment provider and it is no surprise that China’s e-tailing industry really took off when Alipay introduced its services to the Chinese market.

Practically, it is a two-step settlement process: an interbank credit transfer takes place from the consumer’s account to the provider’s account, followed by a credit transfer from the provider’s account to the seller’s account. Typically, payments are settled periodically and not on a trade by trade basis. Alipay recently launched a mobile wallet application, allowing users to make online-tooffline payments.

Alipay charges fees based on the company’s total annual transaction amount. Their sliding scale fees policy means that the larger the volume of your company’s transactions, the lower the fee you pay.

Cash or POD is still among the most popular payment methods in China. Despite the development in online banking, a large number of Chinese consumers still don’t trust online payment systems enough to complete their transactions. This group of shoppers prefers to pay cash, or simply swipe their card in the deliverer’s point of sales machine once the goods have reached them.