2010 International Conference on E-Business and E-Government

A theory analysis and model research on e-commerce credit risk management

Dengke Yuan, Tingjie Lu, Xu Yang, Lei Yan
School of Economics and Management Beijing University of Posts & Telecommunications Beijing, China e-mail: yuandengke100@163.com, lutingjie@263.net
AbstractE-commerce is the core content and inevitable trend of the information society. With the rapid growth of e-commerce in recent years, internet fraud and credit risk in e-commerce environment occurs more and more frequently, especially in China. The credit risk has become the critical factor restricting the development of e-commerce. It is of great importance to study the credit risk management of online transactions to enhance the trust between the sellers and buyers, avoid the internet fraud, and reduce the credit risk. In this study, we start at the theory analysis of e-commerce credit risk management, propose the hierarchical structure of e-commerce risk, and build the Trust-Based whole process e-commerce credit risk management model. Keywords-e-commerce; credit risk management; model

commercial credit. However due to the rapid development of e-commerce as well as that the credit risk management in China is still at an exploratory stage, we have to thrash out the issue of e-commerce credit comprehensively and systematically. The e-commerce credit risk management theory analysis and model research is very important and urgent with both theoretical and practical significance. The ecommerce-oriented credit risk evaluation method and model research will become a new theory system differing from traditional commercial and bank credit and it is still hang behind of the demand. This paper is organized as follows: the first part is the introduction, providing an overview of the e-commerce development and the current situation of relevant studies. The second part is a literature review to explain the major achievement and academic viewpoint of e-commerce credit risk management theory and model research. Basic categories and theoretical research of e-commerce credit risk are presented in the third part, and the fourth part is the research of trust-based e-commerce whole process transaction credit risk management model. Part five is the conclusion and reference. II. LITERATURE REVIEW

I.

INTRODUCTION

According to the 24th Statistical Report on China Internet Development issued by China Internet Network Information Center (CNNIC, 2009), up to June 30, 2009, the number of Chinese netizens had reached 338 million, with a 25.5% coverage rate. There was a growth of 40 million comparing with the number at the end of 2008, rise 13.4% within six months. These figures show the high-speed development of internet users in China. In the first quarter of 2009, the U.S. B2C E-Commerce retail sales reached 31.7 billion U.S. dollars, accounting for 3.48% of the total U.S. retail sales. Throughout the year 2009, the U.S. B2C E-Commerce retail sales will exceed 130 billion U.S. dollars. At the same time, the U.S. Internet Crime Complaint Center (IC3), which is jointly established by the U.S. National White Collar Crime Center (NW3C) and the U.S. Federal Bureau of Investigation (FBI), released a report showing that the number of internet fraud cases increased by 33% in 2008(IC3, FBI, 2008). The reports of IC3 show that with the economic recession triggered by the global financial crisis further deepened, the situation of e-commerce fraud might be even worse. In China, e-commerce is facing the serious lack of credit management. Credit is not only the foundation of the market economy but also the bottleneck of e-commerce development. On one hand there is the rapid growth of international and domestic e-commerce, on the other hand there is the excessive credit loss and internet fraud. E-commerce credit, different from the bank credit, is an important new area in the
978-0-7695-3997-3/10 $26.00 2010 IEEE DOI 10.1109/ICEE.2010.507 2006

The research on e-commerce credit is related to the trust, honest and reputation. Trust is an important aspect in ecommerce credit research. Mingxia Wei (2005) considered ecommerce security and privacy as two major dimensionalities which form the e-commerce credit. Resnick and Zeckhauser showed in their research that traders with great reputation are more likely to sell their goods at an expected price. Eric K, Clemons (2007) adopted the empirical research method, discussing the third-party rating system taking buy SAFE as the case. In his study, he pointed out several deficiencies of the current eBay feedback rating system based on the buyer's evaluation. The certification provided by buy SAFE improved information asymmetry between Buyers and sellers. With the development of third-party logistics, formulation of relevant laws, upgrading of information security technology and continuous development of e-commerce environment, the online enterprise level playing field (Watson et al., 1998) will be available in e-commerce. In the confidence-building process, people who have obtained complete information do not need trust, while people without access to any information

can hardly establish trust with other parties (Granovetter, 1992). Trust plays crucial part in the research of e-commerce credit risk management. Research is carried out in U.S., where e-commerce is more mature, about e-commerce success factors, and the result shows that trust is a major factor. Also there are some other studies with relatively the same results (C. Liu, etc., 2005; A.F.Salam, etc., 2005). Trust plays a positive role in e-commerce, while using the traditional control mechanisms to facilitate online transactions and control the risks is of high costs and low efficiency (C. Dellarocas, 2003). To promote the e-commerce transactions carry out smoothly (D.W.Straub, D. Gefen, 2004).Many scholars have explored ecommerce credit issues from different methods. Those issues then become a part of e-commerce credit risk management theory and model research. Resnick (2001) takes eBays credit system as an example to discuss the e-commerce credit relationship meanwhile point out the complexity to establish such credit relationship in e-commerce environment. Gefen (2000) claims the completeness of the information and the importance of credit in e-commerce; at the same time he believes that credit has the effect of information display. Kolleck (1999) also had an investigation of the credit in the virtual market. Using simulation systems for testing, discuss the distribution of personal credit grade in the auction market is also a new methods recently adopted to explore e-commerce credit issue (Dahui li, 2002). From the evaluation aspect, several researches demonstrate the effect of third-party trust seal on the establishment of consumer credit and the use of experimental economics methods to study the effectiveness of B2C Web site trust seal are important content in e-commerce credit risk research (Head and Hassanei, 2002; Xiaorui hu et al, 2002). From the Literature Review, we can find that almost the entire scholars do not provide the core conception of ecommerce credit and e-commerce credit risk. They do not analyze the credit risk from whole process of transaction on ecommerce, and explain the relationship of Credit, Trust, Reputation and Honest, and research the trust-based ecommerce whole process transaction credit risk management. III. RESEARCH ON E-COMMERCE CREDIT RISK MANAGEMENT

totally or partly fails to fulfill the contract. It could be either the seller refuses to provide goods or services specified in the contract, or the buyers are unable to repay the debt according to the provisions of the contract. Thus, the e-commerce credit risk has a bi-directional characteristic. At the same time, due to the special nature of e-commerce transactions, the e-commerce credit risk may also show the characteristics in particular patterns. About e-commerce credit risk, we conduct several statements about four factors as follows: (1) The uncertainty in e-commerce credit risk refers to the possibility of transaction participants non-compliance with the contract in the network transaction process;(2) E-commerce credit risk is a multidimensional system, affected by the transaction participants credit willingness, trust environment of online credit transaction and credit worthiness. It is shown as below; (3) E-commerce credit risk is a dynamic process. The perception of uncertainty in credit risk differs due to people various experiences, personal characteristics and different transaction patterns. Therefore, it is undeniable that perceived e-commerce trust is an objective existence in ecommerce credit risk; (4) From the point of experience, ecommerce credit risk mainly includes system risk, management risk, information risk, services risk, settlement risk, and delivery risk, all of them can be summarized as system security risk, logistics risk and operating risk.
E -co m m erce cred it risk S ecu rity risk O p eratin g risk logistics risk

S ystem risk

M an agem en t risk

In form ation risk

S erv ice risk

S ettlem en t risk

D elivery risk

Figure 1.

The structure of E-commerce credit risk

From this study, we can know that E-commerce credit risk management is the management of credit standing and respectability and transaction risk condition of the transaction participants, based on e-commerce credit evaluation in the ecommerce transaction environment. E-commerce credit risk management is a key component of e-commerce credit management as well as an important part in the social credit system. IV. TRUST-BASED WHOLE TRANSACTION PROCESS CREDIT RISK MANAGEMENT MODEL ON E-COMMERCE

In this study, e-commerce credit is defined as the probability or fulfilling capacity of the trade participants to meet their expectation under the particular environment of internet transaction. E-commerce credit is both an issue in the scope of honest and trust, but also included in category of solvency and ability of keeping a promise in the narrow economics. Therefore, we think that e-commerce credit has the following three aspects of characteristics: (1) e-commerce credit is different from traditional credit category; (2) e-commerce is bound with new features and connotations due to its online property ;( 3) e-commerce credit is a fulfilling capacity based on the online trust and the trade participants being in keeping with their expectation during the whole transaction process. The E-commerce Credit Risk refers to the risk in ecommerce transactions or online transactions, when one party

In e-commerce environment or internet transaction process, the faith of transaction participants in the ability and attitude of finishing certain activities, according to their own experience or someone else's recommendation, is the e-commerce trust. The Theory of Planned Behavior (TPB) is developed from the theory of reasoned action (Theory of reasoned action, TRA) which has some certain validity, but fails to fully explain the ethical behavior. The theory of planned behavior is on the premise that people are rational individuals and behavior motive is an important basis for detection of behavior. After in-depth study, it is found that the actors control of behavior willpower also affects the behavior. The three factors, perceived control, belief control, and behavior control are

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enhanced based on the original TPB (Ajzen, 1985, 1991). The model is shown as below:
Beliefs and evaluation Attitude

Normative beliefs Compliance motivation

Subjective norm

Behavior motive

Behavior

Control belief and convenience

Perceived behavior control

Actual behavior control

Figure 2. The model of TPB

Trust, honest, reputation and credit are hot topics, however the understanding varies a lot. Different scholars make analysis of these four concepts from various angles, forming different conclusions. In this study, we believe that these four conceptions all have different connotation, which should not be confused or mentioned in the same breath. From the connotation analysis, trust and honesty is the basis of credit, honesty is the ideological and moral foundation and spiritual support. Reputation is intangible assets while credit is the means of exchange and capacity. Reputation and credit are inseparable from trust and honest. Honest generally means integrity and trustworthy, more of a moral and social culture, which does not have economic means. Credit is an accumulation based on reputation. Reputation has the value of abstraction; it is the evaluation of the social groups to the main community towards their performance and abstract values. Reputation has its own economic significance as well as social morality and culture connotations; it is an intangible asset that can bring about larger market space and wealth to the main community. It is the dialectic relation among the four with interaction and mutually constraining. In e-commerce, trust, honest, reputation and credit respectively have their different connotations and manifestations, from which features of ecommerce is concluded.
E-commerce envoriment
Credit (fulfilling capability)

mechanism plays a very important role presenting important significance in e-commerce credit risk management. As the continuous speeding up of the e-commerce process, the average time for choosing the transaction partners is about 15 minutes, time for completing the transaction is about 10 minutes. The fast and dynamic trading process makes us realize that the effect of pre-transaction e-commerce credit risk management is obvious. E-commerce transactions mainly reflect the changes of business flow, capital flow and material flow. The fine sorted contents include Trust-based e-commerce transactions whole process credit risk management model is obtained based on the integration of varied e-commerce trust and e-commerce credit management theories. In order to integrate the entire influence factors of ecommerce credit risk management, and reflect clearly the schematics of e-commerce risk management, we need to design a model to synthesize the factors of e-commerce credit risk and the whole process of transaction on e-commerce. As shown as follows, the one foundation, two main lines, two levels and three links of the model are the main focus of this study. The one foundation is primarily the e-commerce trust. We build the whole process credit risk management model by integrating the basic models of trust, including Theory of Reasoned Action model (TRA), theory of planned behavior (TPB) model and Technology Acceptance Model (TAM), combining with the whole process of e-commerce. We can see from the model that the whole process of the e-commerce is a very important main line we paid much attention to. The whole process of e-commerce transaction can roughly be divided into pretransaction, transaction and post-transaction according to the traditional way of classification. Another main line is the ecommerce transaction credit flow which is uniquely proposed in this paper. E-commerce credit risk goes with the whole process of e-commerce transaction. Therefore, the e-commerce transaction credit flow refers to the e-commerce credit risk come from the process of e-commerce transactions. E-commerce transactions credit risk is not the same at different period of the transaction. The two level mainly refers to the online and offline trust level and e-commerce whole process credit service level. As the continuous penetration of e-commerce into the traditional areas and the innovative development of e-commerce pattern, the combination and linkage of online trust and offline trust become the latest research areas of many scholars. How to achieve the coordination and comprehensive analysis of both online and offline trust is a major attempt and an innovation of this study. In the trust-based whole process transaction e-commerce credit risk management model, there are three important links need to be well controlled, that is, the e-commerce credit standard system, ecommerce credit service system and electronic signature verification system as well as the e-commerce policy system, ecommerce legal system and e-commerce cultural system. These are different but interconnected aspects, forming an indispensable part of e-commerce credit risk management. From the above study, we believe that the model of trustbased whole process transaction credit risk management is an advanced theory analysis and model research on e-commerce. From this model, we know that the credit standard system, credit service system, policy system, legal system, cultural system and electronic signature verification system on ecommerce are the important parts of the model of trust-based

Reputation fulfilling accumulation Trust ( fulfilling foundation) (objective factor) Honest ( fulfilling willingness) (subjective factor

Figure 3. The model of Trust, honest, reputation and credit on e-commerce

In accordance with the concept of the whole process of transaction, we can divide the transaction process into three parts, respectively pre-transaction, transaction and posttransaction. If further refined, the pre-transaction process contains identifying requirements, information searching and selection comparing. The latter flag has a better reflection of the information flow changes, where e-commerce trust

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Security Privacy Online trust

Convenience

E-commerce credit standard system E- commerce credit service system E-commerce policy system Electronic signature verification system E- commerce legal system E- commerce cultural system

Credit risk flaw Transaction participants Transaction whole process Offline trust

Identity cognizance
Identifying requirements

Information screening
Information searching Selection comparing

Capital settlement
Contract signing

Accurate delivery
Logistics distribution

Service quality
After sales service

Information feedback
Customer management

Transaction accumulation

Payment and settlement

Postpurchases evaluation

Scale Debt analysis Debt collection

Track management Credit evaluation Time limit and money amount Relationship investigation Guarantee of promise Insurance management Risk control Credit form Qualification

Honest

E-commerce environment

Figure 4. The trust-based whole transaction process credit risk management model on e-commerce

e-commerce whole process transaction credit risk management. There is the innovation of this study that we contain the online trust and offline trust in the model, which including security, privacy, convenience, scale, qualification and honest on e-commerce. E-commerce credit risk management system is a complex system project, which is a very important component of the social credit system. In this model, dynamic e-commerce credit information collection mechanism, scientific evaluation of the mechanism of credit, credit information system and public disciplinary complaints mechanism becomes the core content of the model. V. CONCLUSION

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In this paper, we conduct an analysis of theoretical literature, and make an in-depth study of the basic theoretic category of e-commerce credit risk management together with the actual situation of e-commerce development in China. Through the analysis of credit, trust, reputation and credit risk, we present the basic connotation of e-commerce credit risk management meanwhile analyze the relationship among credit, trust and honest in e-commerce field, the initiatively put forward the trust-based e-commerce whole process transaction credit risk management model. Those models can effectively solve the demand of credit risk management on e-commerce and make some instructive suggestions. In subsequent studies, we will conduct quantitative validation and further analysis of the model through the way of empirical study and mathematical reasoning. REFERENCES
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