The "refund-only" policy in China's e-commerce sector - where consumers can get back money for goods bought from merchants, without returning the products - is now under scrutiny, as analysts point to how the practice has been abused in the local market.
China's market regulator has directed PDD Holdings, operator of popular budget-shopping platforms Pinduoduo on the mainland and Temu overseas, to fix this refund-only practice, according to a Bloomberg report on Wednesday.
The State Administration for Market Regulation (SAMR) and the Ministry of Commerce have summoned PDD executives to a meeting in Beijing over the matter, according to the report. The regulators did not slap PDD with any punishment.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
PDD did not immediately respond to a request for comment on Thursday. No information about PDD's meeting was found on the two agencies' website.
The intervention by the SAMR and the Commerce Ministry reflects how an unchecked and aggressive "refund without return" practice has been abused and hurt online sellers' earnings.
"The policy has been used by platforms to leverage their dominant position to attract consumers at the expense of merchants, leading to unfair practices and market distortion," said Wu Libin, senior partner at M&T Lawyers. "Regulatory intervention aims to balance interests between platforms and merchants, while ensuring fair competition."
PDD Holdings-owned budget-shopping platform Pinduoduo has been a major proponent of the "refund-only" policy. Photo: Shutterstock alt=PDD Holdings-owned budget-shopping platform Pinduoduo has been a major proponent of the "refund-only" policy. Photo: Shutterstock>
The refund-only policy was initially adopted to protect consumers' rights and push merchants to improve product quality and customer service. It has also boosted sales for major proponent Pinduoduo, which has been keen to meet the needs of price-sensitive Chinese consumers.
Recently, Pinduoduo has started to curb the practice, according to several merchants who declined to be identified. While the refund-only option remains available to consumers, merchants can appeal cases in which they have a high likelihood of victory.
"The refund-only policy has had a negative effect on the industry," said Li Chengdong, founder of Beijing-based tech consultancy Dolphin.
"As return rates surged, many products could no longer be resold, so waste has increased significantly," Li said, adding that merchants' profit margins "are being squeezed".
The policy fails to drive positive retail sector growth or support industrial upgrades at this moment, which prompted regulatory intervention, according to Li.
In October, Alibaba Group Holding's main e-commerce unit reported that it had rejected an average of over 400,000 refund requests from consumers per day in August and September, as part of efforts to balance the interests of merchants and consumers on its platform. Alibaba owns the South China Morning Post.
According to a September report by Chinese e-commerce research institute 100ec, only 1.06 per cent of surveyed merchants said they had avoided disputes related to the refund-only policy, while 89.05 per cent expressed strong opposition. This report has been shared with the State Council, SAMR, the Ministry of Commerce and the Cyberspace Administration of China, according to 100ec.
The "refund-only" practice has been abused by unscrupulous parties to help lower shipping expenses. Photo: Shutterstock alt=The "refund-only" practice has been abused by unscrupulous parties to help lower shipping expenses. Photo: Shutterstock>
Merchants have been concerned about exploitation of the policy by unscrupulous parties. At China's second-hand online markets, for example, sellers place orders on mainstream e-commerce platforms at full price, then secure refunds through the refund-only policy or by returning counterfeit or empty packages. The practice essentially has no costs.
Another form of abuse involves shipping insurance, originally designed to lower transaction costs by covering partial shipping expenses during returns. Some exploit this system by placing bulk orders for items covered by shipping insurance, applying for returns and negotiating lower shipping rates with couriers, pocketing the cost difference. Discussions on how to game this system are active on subforums on Chinese online community forum Baidu Tieba.
PDD chairman and co-chief executive Chen Lei said the firm is focused on "driving the high-quality development" of its platforms. In a statement, co-chief executive Zhao Jiazhen said: "In the third quarter, we stepped up the investments in our platform ecosystem through merchant support policies and trust and safety updates."
