Credit Environment

1.5.3 Credit Environment

With the globalization of e-commerce, credit crisis in e-commerce invades secretly and various illegal behaviors happen repeatedly such as false trade, counterfeit products, contract cheat, price pushing in online Auction and the impingement of consumers’ legitimate right and interests. All the above hinders to a great extent the rapid and health development of our e-commerce or global e-commerce.

Credit is the basis and lifeline of market economy, the credited commodity economy, and even becomes the passport to international market after the globalization of economy. As to e-commerce, a kind of commercial activity, credit is also its foundation and lifeline.

The reasonable and normative credit system is not only favorable for the sound and normative development of e-commerce but for establishment of credit conscience, perfection of our market economy system to establish a just and fair market economy. After making a comprehensive view on the international society, it is easy for us to find out that the Western developed countries have achieved a lot in establishing the social credit system and mainly adopted the following patterns:

1. Pattern of market operation and legislation guide

This Pattern is with the characteristic that the establishment, operation and extinction of credit organization are all operated by market mechanism, while the management of government is reflected by legislation. This pattern can further be divided into two types:

First, credit management system formed in commercial operation is carried out by credit companies. US is the representative of the pattern. In this system, all enterprises and personal credit companies are all centered on market operation, fall into the category of privately-owned enterprises and be determined and become

Introduction to E-commerce

standard by market mechanism, no matter what industry the credit company belongs to. As to governments, they make neither investment nor business certificates. Business start and authorization thoroughly rely on laws and operation mechanism of market system. Therefore, the focus of the pattern is benefits and the management of government is reflected by legislation to specify the behaviors of all parties in credit activities in order to make all parties behave according to game rules, observe fundamental principles of market rules and compete freely.

Second, credit management system established by central banks with the characteristics of central financial credit registration. The representative of the pattern is Europe. Similar to US, developed areas in Europe are typical of “market-driven”. In the pattern, a government is just responsible for legislation and the supervision of credit management system. As for the death of credit organizations, it depends on how much satisfaction the system brings to the investors. In supervision of national credit, central banks play a significant role because they have financial credit of both enterprises and individuals in financial credit registration system, by which credit organizations can analyze and comment on the credit of enterprises and individuals.

2. Pattern of government-driven and direct supervision

This pattern is established and lead by government with large amount investment. Some developing countries, most countries without credit information service, fall into this category of “government-driven” pattern. In this pattern, government is not only the supervisor of credit information service market but the direct driving force of credit information service industry. In terms of experiences of Asian countries, “government-driven” pattern is not ideal, though many credit rating companies were established with the governments of Indonesia, India and Malaysia as initiators.

A sound credit management system shall comprise corresponding national legislation and law enforcement, governmental supervision and management and trade self-discipline etc. However, the system in our country is now far from perfect and has no supervision and punishment systems for dishonor and irregularities. We are still in the primary stage in establishing credit system. Therefore, there are many problems in the system.

(1) Though there are signs of an upturn on the horizon in market operation schema, the operation of it is still non-standard. Credit information service is a case in point. Credit information service companies of different types have competed with others in the market by the principles of commercialization. For instance, there are many distinguished credit information service companies such as China Chengxin Security Valuation Co., Ltd., Dagong International Credit Rating Co., Ltd, China Lianhe Credit Rating Co., Ltd etc. Nevertheless, corresponding supervision system relatively lags behind, because there is not effective management of credit information service companies and activities. This brings

1 Fundamentals of E-commerce

about credit information companies’ cut-throat competition for market by low price, high brokerage, and high rating, which makes rating become a commodity.

(2) Effective administrative management system has not come into being. Manifold management and non-universal requirement become the burden to enterprises. What is more, different departments do not cooperate with each other and there are no administrators to carry out universal management.

(3) Industry self-discipline has not come into being. Generally, the staff engaging in credit information service industry is low in quality. In addition, there are no staff functions to administrate the staff, to work out industry standard and to organize international communication.

It is difficult for e-commerce, a kind of virtual economy, to survive and advance without perfect credit system as guarantee. It is inevitable that both enterprises and individuals will run higher risks, for buyers cannot get commodity timely after payment and sellers cannot be guaranteed to get payment after selling commodity. In addition, quality of products and repeated auction on line may be encountered by them.

Presently, there are four typical credit patterns of e-commerce in China: mediator pattern, warrantor pattern, website operation pattern, and commission pattern. In the mediator pattern, e-commerce website functions as mediator. After the agreement is signed, the working body of the mediator will get the payment for goods sent by buyer and goods sent by sellers, and send goods to buyers and payment to sellers after check. This pattern intends to control the whole transaction process by means of working bodies of website, though it decreases the risks of cheat in business to a certain degree, it will cost flood of investment to build up enormous working bodies and cause the problem of transaction speed and cost. In the warrantor pattern, the website and the website host act as the guarantee of parties involved to resolve credit risks. In this pattern, there is a process of check and negotiation, which virtually increases transaction cost. In practice, this pattern is only suitable for enterprises with certain organizations. In the website operation pattern, transactions are made by establishing online stores. After obtaining the commodity transaction right, the website will require buyers to transfer the payment of goods to the appointed account, and deliver the goods after obtaining the payment. This unilateral credit pattern is based on the reputation of the website and only fits for website engaged in retail trade. In commission pattern, the website requires parties involved in transaction to establish, according to presetting terms, a public account in the agreed bank. And the NetPC will manage the transaction fund by means of presetting programs to see to it that the transaction is safe. In this pattern, e-commerce website does not directly participate in the transaction and the credit of transaction parties is on the basis of the fair supervision of the bank.

The above four patterns in Chinese e-commerce are explorations of e-commerce enterprises to tackle commercial credit. But they all have their own defects. For example, regulations of credit patterns are based on enterprise standards, which

Introduction to E-commerce

lack of stability and authority. Administrators (including banks, Administrations for Industry and Commerce, Ministry of Public Security, and Administrations on Taxation) shall cooperate with each other to build up confidence in e-commerce of parties involved with the aid of governments. Presently, the following aspects shall be perfected.

(1) Build up the online credit sale evaluation model. In the West, credit of clients is evaluated by the following two ways before e-commerce transaction: First, clients’ financial statements; second, credit evaluation system suitable for their own banks. However, most enterprises in China are still in the perceptual stage of cognition except some foreign trade enterprises. A few enterprises have drawn lessons from experience, begun to gather clients’ information and made great achievements. For example, overdue receivables rate and bad debts decreased greatly and enterprises performance has become better.

(2) Strengthen the management of online clients’ files. In the West, enterprises will generally investigate the files of tally customers at regular intervals (half a year in general) and adjust credit level in terms of clients’ information. However, because enterprises in China cannot make timely adjustment of credit level on the basis of clients’ information, they cannot increase the order of excellent clients and find out the less credit-worthy customers, thus bringing about the loss of bad debts and casting a cloud of gloom over enterprises.

(3) Build up a reasonable receivables account recovery system. As for the management of receivables account, Western countries and many developing countries have clearly specified that receivables account more than half a year shall be treated as bad debt, some with 3 months as deadline. To avoid the happening of bad debt, if the debt is overdue no more than 3 months, credit department of the enterprises will be responsible for demanding payment. If the debt is over 3 months, enterprises will turn to exterior specialized institutions for help. If the debt is over 6 months, enterprises will take legal measures to recover the past due. However, in China, as to the overdue payment left by the former leader, the successor of an enterprise would rather charge it to an account than actively demand the receivables account, for they are worried that if the overdue payment translates into bad debt, it will influence his achievement. Accordingly, with the changes of different leaders, overdue payment of an enterprise will become more and more in amount, longer and longer in time, and most will become bad account.