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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story
An E-tailing Credit Crunch
Net shoppers in Asia may have no way to pay

By Claire MacDonald

Illustration by Emilio Rivera III
ONE-SIXTH OF ALL ASIAN households will shop on the Internet next year, according to a recent estimate by Mastercard International. While there is little question e-commerce is taking off - virtual shoppers will spend about $900 million in the region this year, triple the 1998 total - growth forecasts may be overly optimistic. Despite all the buzz, Asia still lacks basic systems allowing consumers to purchase and easily pay for goods and services electronically.

In the U.S., where e-tailing has boomed into a multi-billion-dollar market, a ready solution to the problem of online payment is available through the country's well-developed credit card industry. After basic security safeguards were built into Internet browsers so card numbers could not easily be stolen by hackers, most shoppers, accustomed to paying for mail-order goods with their credit cards, turned to plastic for Internet purchases too. Transaction settlement - a complicated process whereby the credit-issuing bank gets the e-bill, authorizes the purchase, pays the merchant and adds the charges to the customer's card account - is handled through a clearinghouse network connected to nearly every financial institution in the country. The system allows consumers to use just about any brand of card at thousands of online stores.

But in Asia, where cash is king and consumer credit not widely used, it's all but impossible to set up e-shop and accept all major cards as payment. Clearinghouses for Internet transactions are absent, even in financially sophisticated markets such as Hong Kong, and until recently banks and card companies have been unable to offer a solution. "For a start-up with a key target market of Asia, the lack of a payments infrastructure is a big obstacle," says Jay Javeri, chief information officer for, a soon-to-be-launched site offering worldwide sales of Asian music CDs, movies and other entertainment products.

Although a few banks have been willing to handle Internet-based credit card transactions, they are unwilling to do so for multiple currencies. "That's a difficult issue for a company selling CDs and videos in Hong Kong and Taiwan, where people naturally want to conduct business in their local currencies," says Javeri. In fact, most Asian banks don't offer merchant services to e-tailers at all. They consider the e-commerce business at this stage to be too small - and too risky because of the potential for fraud and shoddy business practices - to justify the expense of adapting internal computer processing networks to the Internet.

"There is risk in not doing transactions face-to-face," explains John Tully, senior manager for merchant services at HongKong and Shanghai Banking Corp. (HSBC). Jeff Perlman, electronic commerce marketing and sales director for Visa International in Singapore, says bank wariness "protects against people putting together a website in their back room and calling themselves a business."

E-tailers can get transaction-processing services, but they have to pay dearly for it because of the perception that the Internet business is rife with "charge-backs," credit purchases where the buyer refuses to pay. Many merchant-service providers require e-tailers to post a security deposit in the range of 10% to 25% of projected sales - an up-front cost that can run to several hundred thousand dollars. Card-processing services also charge up to 15% per transaction, roughly three times the typical fees paid by brick-and-mortar stores for settlement.

The solution for Asian e-tailers is to establish their businesses where the infrastructure is. Toy e-tailer was founded in Hong Kong but was incorporated in the U.S. OneAsia is based in Vancouver, Canada. "In an internet-based business, it is not of great concern to us where the payments are processed, just that they will get processed," says Craig Lindsay, OneAsia's chief financial officer. Lindsay notes that more than half of his company's sales are expected to come from Asians living abroad.

Incorporating in America is a compromised fix - start-ups are exposed to higher foreign tax rates. The prospect of Net company flight is particularly troubling since Asian governments are trying to encourage domestic e-commerce. The lack of credit facilities "is the biggest thing holding back e-commerce in Asia," says David Haines, managing director of

With Asia's larger companies planning online strategies, banks are starting to pay attention. Bank of China and Citibank have established online credit card transaction processing. "The number of virtual shoppers in Hong Kong doubled in the last year, and there's been a big increase in the number of our merchant customers asking about Internet payment capabilities," says Tully of HSBC, which plans to open a credit-card payment "gateway" in October. The system, developed with Compaq Computer, will allow e-tailers to accept Visa, Mastercard and JCB cards in multiple currencies. To participate, however, merchants must have Hong Kong offices.

Governments, including those in Singapore and Hong Kong, have been pushing for online payments to be based on a technology called SET, for Secure Electronic Transactions. But the security standard, which requires consumers to use digital signatures when they buy, is expensive to implement and has not gained many followers.

Asian e-tailers instead are opting to use the simpler system in place in the U.S. What's needed is a clearinghouse for online credit-card transactions that covers the world. A Hong Kong start-up is trying to provide one. Four months ago, First (FEC) began offering Visa and Mastercard processing through the Bank of Bermuda (Bermuda imposes no income taxes, so merchants don't face additional levies). "The global trend is to go for one centralized processor with everyone outsourcing to it," says FEC chief executive Gregory Pek. The arrangement with the Bank of Bermuda, which has been settling credit transaction since 1995, provides a link to banks everywhere, making the physical location of the merchant irrelevant, according to FEC - which is the way it ought to be in cyberspace.

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