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An Introduction to E-Commerce in Hong Kong

News / / Hong Kong

One definition of e-commerce is “the sale and purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders”1. That sale can be conducted via the seller’s own website, via a specific platform or portal (such as Amazon or Alibaba or new platforms such as Freightos in the shipping context), via a mobile app or via EDI. 

The process of e-commerce can be divided into 3 stages: 

  1. Discovery / pre-purchase: The consumer is directed to the product via a website, third party advertising, search engines etc. 

  2. Transaction / purchase: A contract is formed and the consumer buys the goods with an online transfer of payment. 

  3. Delivery and post-purchase: Either digitally (such as purchase of music files, movies etc.) or physically. 

E-commerce distribution

The on demand nature of e-commerce requires supply chains to be reconfigured to make fast, next or same-day delivery (and convenient return) of goods possible. The logistics and supply chain infrastructure required to support e-commerce is dictated by consumer demand, with consumers wanting goods delivered quickly, with demand fluctuating quite dramatically on a seasonal basis.  End consumers are diffuse and spread geographically, with small shipments as compared to traditional retail logistics where orders would be delivered cyclically, to a concentrated number of businesses and in bulk.

Given the complex and demanding nature of e-commerce logistics, it is no surprise that a survey by HKTDC found that 60% of online merchants in Hong Kong are struggling to manage in-house logistics with participants ranking finding logistics/warehousing service providers as medium difficulty2.

E-commerce in Hong Kong

According to the UNCTAD B2C E-Commerce Index 2017, a measure of countries’ readiness for e-commerce, Hong Kong ranks 16 out of 144 countries, with China ranked 65th, Singapore 18th and Korea 4th.  Whilst this makes Hong Kong one of the highest ranking Asian economies, the data also shows that only around 30% of the population are “internet shoppers”.3

Surveys suggest that the relatively low use of e-commerce in Hong Kong is due, in part, to a general lack of trust of quality of products purchased online, a dislike of paying shipping costs and an immediate need for the products / services4.  From January to October 2017, the Consumer Council received over 3,000 complaints in relation to online shopping.  The highest proportion of those (around 25%) related to delayed delivery, with the second most common complaint (around 22%) related to a price / charge dispute.

What is the ideal regulatory framework for facilitating e-commerce?

Taking each of the 3 stages of e-commerce identified above, the foundational regulations required for each stage to run effectively are:

1.   Discovery / pre-purchase: Regulations obliging vendors to describe products fairly and accurately and to control deceptive practices.

2.   Transaction / purchase: Regulations covering security of payments, control of unfair contract terms, and validity of digital contracts and signatures.

3.   Delivery and post-purchase: Regulations covering mandatory time limits for delivery, customs compliance and liability for loss / damage / theft.

As regards policies for addressing the perceived lack of consumer trust in e-commerce in Hong Kong, the international guidelines for consumer protection and e-commerce make the following recommendations5:

1.   In general, e-commerce consumers should be offered a level of protection not less than that afforded to other consumers;

2.   Governments should set up a robust legal and institutional framework governing e-commerce / adapt existing regulations to the particular requirements of e-commerce;

3.   Governments should ensure effective enforcement of applicable laws;

4.   Laws should require full disclosure of all necessary information related to businesses, goods / services and the transaction;

5.   Regulations should be implemented to ensure the reliability and security of online payments;

6.   Regulations should be implemented to prevent misuse of consumer data;

7.   Regulations and institutions should be set up to provide consumers with access to effective dispute resolution;

8.   Regional and international cooperation and standardisation is required to encourage cross-border trade and to protect consumers in the event of cross-border breaches of consumer protection law.

In addition to the above, for cross-border e-commerce, efficient customs clearance is essential.  This may require implementing special regulations for e-commerce goods to ensure they can cross borders quickly.

One example is the Chinese government’s scheme of regulating e-commerce goods as “personal items” in a limited number of pilot cities. On 7 December 2017, MOFCOM announced the extension of the scheme to 10 pilot cities until the end of 20185. This means subjecting the goods to less stringent checks at the border, with no requirement that the goods meet domestic standards and no quarantine. MOFCOM reports that there have been instances of quality and safety problems during risk-monitoring inspections mainly including packaging, carriage of pest and non-standardised labelling but these are clearly not significant enough to compel the Chinese government to roll-back the scheme.

What is the current Hong Kong regulatory framework?

There is no, single dedicated e-commerce law in Hong Kong.  Rather, e-commerce is governed by a network of laws, none of which are specifically drafted to address e-commerce in particular. Taking the above list of requirements and recommendations, we can see that Hong Kong’s set of laws is fairly well developed, but that it does not go as far as some of the more established e-commerce laws such as those in the EU and South Korea:

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The ETO 2000

The Electricity Transactions Ordinance 2000 (“ETO”) was enacted on 5 January 2000 and all of the provisions came into operation by April of the same year. The ETO:

·  Aims to give electronic records and digital signatures the same legal recognition as their paper-based counterparts;

·  Establishes a framework for recognition of "certification authorities" in Hong Kong; and

·  Permits "virtual" contracts to be concluded through the use of electronic signatures.

In relation to 'virtual' or electronic contracts, the ETO both permits electronic documents to fulfil a requirement for 'writing' (s5) and recognises an electronic signature as fulfilling the requirement for a 'signature' (s6).

The Ordinance distinguishes between six different “digital” concepts:

1.       Certification Authority – A trusted entity that issues electronic documents that verify a digital entity’s identity on the Internet. Certificates will usually include the owner’s public key, the expiration date of the certificate, the owner’s name and other information about the public key owner.

2.       Digital Certificate – An attachment to an electronic message used for security purposes. This electronic “passport” allows a person, computer or organisation to exchange information securely over the internet using the public key infrastructure.

3.       Electronic Record – A collection of data captured through electronic means and managed and processed to become information. Also called the machine readable record.

4.       Digital Signature – An encrypted digital code used to validate the authenticity and integrity of a message, software or digital document. There are two requirements for the digital signature. First, it must be generated using an asymmetric cryptosystem which provides a layer of validation and security to messages sent through a non-secure channel. Secondly, a digital signature must be generated through a hash function (or algorithm).

5.       Electronic Signature (e-signature) – Any symbol in digital form attached to an electronic record for the purposes of approving or authenticating such an electronic record. If parties are non-governmental entities, signatories can choose whether to use electronic or digital signatures at the consent of whom the signature is given.

6.       Cryptosystem – A computer system that involves hiding information. A cryptosystem will involve a set of algorithms needed to implement a method of encryption and decryption.

There are additional limitations outlined in the ETO as certain transactions still require a paper signature. These include testamentary documents, trusts, court orders or assignments of land.

What other bodies are involved in promoting and regulating e-commerce in Hong Kong?

In addition to the statutory framework, a number of other governmental / business organisations have been set up to promote and regulate e-commerce in Hong Kong. 

On the government side, the Commerce and Economic Development Bureau oversees the operation of E-commerce in Hong Kong. Additionally, the HKMA has an important role to play in ensuring that different forms of digital payment can be accommodated and processed in Hong Kong.  In September 2017, HKMA announced the “Faster Payment System” initiative which supports the use of mobile phone numbers or email addresses for payments in Hong Kong dollar and Renminbi anytime and anywhere.  FPS is scheduled to be launched in September 2018.

On the commercial side, there are a number of associations working to promote e-commerce7. Most notable is the Hong Kong Federation of e-commerce who, in August 2016, launched the “Hong Kong Trust Mark”.  The aim is to provide consumers with comfort that they are buying from a reputable online retailer, which has been accredited as meeting the required standards of the Hong Kong Trust Mark. 

Implications for logistics operators in Hong Kong

The Hong Kong government has committed to a digital future, both with its 2008 “Digital Strategy” and its more recent Smart City Blueprint.  Additionally, the government has re-stated its commitment to supporting the transportation and logistics industries in the recent Policy Report 2017. Specifically, the government has recognised that the booming growth of e‑commerce has generated an ever‑increasing demand for, in particular, air mail and trans-shipment services, which requires an expansion of the Air Mail Centre at the HKIA.

In addition to the favourable policy environment, infrastructure developments such as the Zhuhai-Macau-Hong Kong link, the Three-Runway System and the proposed new premium warehousing facility at HKIA all provide opportunities for Hong Kong, and its logistics companies, to cement its position as a key e-commerce hub.

As service providers operating digitally, logistics companies in Hong Kong will also need to ensure that their online sales practices comply with the relevant laws and regulations and that they remain up to date.  Notwithstanding the lack of statutory obligations relating to the provision of information and a right to cancel, companies would be well-advised to consider voluntarily adopting international best practices and standards to enhance their customer service reputation and competitiveness.

1 http://economists-pick-research.hktdc.com/business-news/article/research-articles/Hong -Kong-s-e-commerce-ecology-the-value-chain/rp/en/1/1X000000/1X0AA0PB.htm

2 http://unctad.org/en/PublicationsLibrary/tn_unctad_ict4d09_en.pdf

3  “Outlook for e-commerce in Hong Kong”, KPMG, November 2017

4  UN Guidelines for Consumer Protection and OECD Recommendation of the Council on Consumer Protection in E-Commerce

5  http://english.mofcom.gov.cn/article/newsrelease/press/201712/20171202686876.shtml

6  https://www.consumer.org.hk/si...

7  These include: Hong Kong Federation of E-Commerce, Hong Kong General Chamber of Cross Border E-Commerce,  E-Commerce Association of Hong Kong, HK Internet and E-Commerce Association, HK Netpreneurs Association and HK Cross Border E-Commerce Association