As the boom in online shopping continues in China, many websites have started looking for a niche in order to stand out and gain a bigger share of the market. One recent example is a surge in the number of cash-back websites.

These websites, such as fatwallet.com and upromise.com, have been popular among Western Internet users for almost 10 years. But in China, this kind of site only started to emerge in around 2006, when egou.com and 51fanli.com appeared on the Internet.

Competition has increased in recent years with the entrance of several big names. Leading Internet companies like Tencent, Taobao and NetEase have launched cash-back sites in order to attract price-sensitive consumers.

Wang Xiangning, a young mother in Beijing who loves online shopping, said that she has been using cash-back websites for almost a year, and that they have saved her a lot of money.

Tempting option

A cash-back website does not sell goods to consumers directly. Instead, it directs them to the websites of online retailers. When consumers buy something, the cash-back websites get a commission from the online retailers, part of which is then paid back to the consumers.

"A common practice in the industry is to give 80 percent of the commission to consumers, and the rest will go to the cash-back websites," Ge Yongchang, CEO of cash-back website 51fanli.com, told the Global Times.

Wang said that 51fanli.com helped her get back 20 yuan ($3.16) in a recent online purchase of a 200-yuan purse. The money was transferred to her account, and she can use it for her next online purchase.

Ge said that so far over 11 million Internet users have registered on 51fanli.com, and the monthly transaction volume via the website has topped 600 million yuan.

Currently, 51fanli.com is cooperating with over 300 online retailers, including leading sites like Taobao, Vancl and Suning.

"Cooperating with top online retailers is the key to creating a better user experience," said Ge.

But the leading online retailers are also eyeing the cash-back market themselves. In 2010, Taobao founded a website called etao.com, which provides cash-back services for consumers, as well as discount information and price comparisons.

Though the site is a latecomer to the market, it has certain obvious advantages.

"Etao.com shares user and goods information with taobao.com, which has the largest online user base in China," Dou Sheng, a spokesman for etao.com, told the Global Times.

Currently the sector is crowded, with around 1,000 similar sites. "Just like group-buying websites, the sector will see fast growth at the beginning, but eventually only three to five leading sites will survive," Ge noted.

In 2011, 51fanli.com received venture capital investment of $10 million from Qiming Venture Partners and Steamboat Ventures, and the company is also eyeing an initial public offering in the US.

Industry image tarnished

Since April this year, a series of websites claiming to offer cash-back services have been shut down because of their involvement in online pyramid selling.

In July, police in East China's Jiangxi Province found that nearly 370,000 users of a so-called cash-back website, huaxiatw.com, had been drawn into an online pyramid scheme.

Users of huaxiatw.com had to pay a minimum of 1,000 yuan to register, which would generate a daily refund. They also had to pay a certain amount of money as a website maintenance fee. If the users could introduce more people to register on the website, they would be rewarded with more payments.

No real transactions took place during the process. And when no more new users are introduced, the capital chain of such websites broke down and problems came to the surface.

"They are not real cash-back websites," said Ge, who noted that users need to make purchases in order to get refunds from a reliable cash-back website. Also, proper sites will not promise an "unbelievably high" refund, he said.

"Plus, we do not require users to pay any fees. All the profits are generated from the commission from online retailers," said Ge, who also pointed out that it is unrealistic to believe that one can make a fortune out of cash-back websites.

However, as these illegal sites called themselves "cash-back" websites, the image of the whole sector has been tarnished.

"Most consumers, even some of the media, do not know the difference between real cash-back sites and the illegal ones. I've been asked several times whether I was fleeing with unpaid debts," said Ge.

How to survive

Experts said that the recent scandals will trigger a reshuffle in the sector, and dubious websites will be phased out.

However, the challenge for the sector does not only lie in rebuilding consumer confidence. Analysts have also cast doubt on the value of the business model of cash-back websites.

"The e-commerce sector in China is dominated by several big companies such as Taobao and 360buy.com, and as they gain increasing popularity, little room will be left for other companies," Chen Shousong, an industry analyst with Internet consulting firm Analysys International, told the Global Times.

Wang Zhouping, an expert with the China e-Business Research Center, told the Global Times that cash-back sites could also affect the user loyalty of online retailing websites, which could hinder the cooperation between online retailers and cash-back websites.

"I sometimes forget to log into cash-back websites. After all the refund is not that big," said Wang the young mother in Beijing, who also noted that some unpleasant experiences with cash-back websites have put her off slightly.

In June, online retailer 360buy announced it would stop its cooperation with cash-back websites. Many believe the reason was that as the retailer has become more popular, it does not need the promotion from cash-back websites anymore.

"As long as online retailers care about attracting more customers, they will need the promotion of cash-back websites," said Ge, who noted that most Chinese consumers are still very price-sensitive.

Ge also revealed that 360buy has resumed talks with 51fanli.com as the competition with rival retailers Suning and Gome intensifies. Suning is also a partner with 51fanli.com.

Dou from etao.com also said that shopping navigation services still have great potential.

"For new online buyers, they may choose to make purchases directly from online retailers, but for experienced online buyers, they still care very much about comparing the goods and prices of different sites. That's why shopping navigation still has great potential," said Dou.