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Electronic Commerce Summary
With electronic commerce, the world is on the threshold of a new revolution. Because electronic commerce provides a fundamentally new way of conducting commercial transactions, it will have far-reaching economic and social implications. Current ways of doing business will be profoundly modified: anyone with a computer and Internet access can become a merchant and reach consumers all over the world; any consumer can acquire products and services offered anywhere in the world. New and far closer relationships will be forged between businesses and consumers; many of the traditional intermediaries will be replaced; new products and markets will be developed.
What exactly is electronic commerce? Why is its potential so large? Is it accessible to all? Is the present communications infrastructure sufficient to support its development? What are the consequences for growth, trade and jobs? Are electronic transactions safe and reliable? Will electronic commerce safeguard consumer interests? Can privacy be protected? What are the implications for taxation, tariffs and quotas? What is electronic commerce?
The term electronic commerce refers generally to commercial transactions, involving both organisations and individuals, that are based upon the processing and transmission of digitized data, including text, sound and visual images and that are carried out over open networks (like the Internet) or closed networks (like AOL or Minitel) that have a gateway onto an open network.
Although much media attention has focused on on-line merchants selling books, wine and computers, the vast majority of products marketed electronically business-to-consumer are intangibles such as travel and ticketing services, software, entertainment (on-line games, music, gambling), banking, insurance and brokerage services, information services, legal services, real-estate services, and increasingly health-care, education and government services. Why is the potential of electronic commerce so large?
Electronic commerce dramatically reduces the economic distance between producers and consumers. Consumers can make their purchases directly without involving traditional retailers, wholesalers and in some cases distributors. They benefit from improved information, lower transaction costs and thus lower prices, larger choices which can include products tailored to individual requirements, and instant delivery for intangible services and products in digital form.
For sellers, electronic commerce also presents many advantages: producers can gain access to a global marketplace with relative ease. Specialist resellers enjoy the same advantage. Neither need maintain a physical store or shop and inventory can be managed more efficiently. Labour cost savings can be considerable. For instance, one estimate places the cost of buying software over the Internet at $0.20-0.50 per transaction as opposed to $5 for a telephone order and $15 for a traditional retailer. But just as electronic commerce offers new market opportunities, it will also intensify competition. Can everyone have access to electronic commerce?
Anyone with access to Internet has access to electronic commerce. On-line commerce requires hardware (such as computers and servers), software, and the ability to connect to the network itself, which may involve access by telephone, cable TV, cellular mobile networks, satellites or broadcasting networks. Equipment costs, access charges and the complexity of the evolving Internet itself are barriers to universal Internet access. At present, regulatory structures in many countries still limit market access by infrastructure providers, but this is changing with the liberalisation of telecommunications.
Estimates of the number of Internet users vary between 30 and 50 million. This is a very rapidly growing population. Three to four years ago, the number of users was only a few thousand. The number of commercial transactions made over the Internet is also rapidly growing. Nearly all analysts predict growth by a factor of ten by the year 2000; at that time electronic commerce will be about the size of mail catalogue sales in the United States. Is today's communications infrastructure adequate?
Internet communications are generally established through telephone systems, which were built to carry voice, not data. This system needs to evolve. At present, most customers connect to communication networks via a standard telephone line and local telephone tariffs currently account for more than 60 per cent of the cost of Internet access. The expansion of electronic commerce depends on speeding up data transmission while keeping costs low. Increasing competition in the communications market is the best way to encourage network upgrading. One key to increasing competition is to put in place regulatory structures that encourage the creation of networks providing and supporting all types of applications, including entertainment, voice telephony and electronic commerce. What are the consequences for jobs, growth and trade?
By raising economic efficiency, electronic commerce will increase overall wealth. In doing so, it will impose adjustments on existing economic structures. Thus, for example, electronic commerce may well result in a loss of employment in traditional distribution and retailing. However, experience demonstrates that technological change will create new and better replacement jobs. Electronic commerce is already creating new high-quality computing and communications jobs linked to the development of global digital markets.
From the perspective of the firm, the cost of doing business on new electronic networks is significantly lower than the cost of traditional methods. This advantage, plus the ability to offer high value, content rich products and services, has led to exponential growth in the number of firms entering electronic commerce and related businesses. This is most evident in the United States, but it is becoming evident in other countries as well. Finally, by bringing buyers and sellers closer together, electronic commerce will facilitate trade growth. Are electronic transactions safe?
As the importance of information systems for society and the global economy intensifies, systems and data are increasingly exposed to a variety of threats, such as unauthorised access and use, misappropriation, alteration and destruction. Security of information systems involves the protection of the availability, confidentiality and integrity of those systems and the data that is transmitted and stored on them. Both technological and legal solutions are required to replace in the electronic world the physical security of the paper-based world. Cryptography will play a particularly important role in ensuring the security of data and the reliability of transactions by safeguarding both the confidentiality and the integrity of data. However, the use of strong cryptography to conceal data related to illegal activities raises a number of law enforcement issues for governments. Are electronic transactions verifiable?
The ability to verify certain information about merchants, consumers, and contracts in the electronic environment is essential to establish a reliable electronic transaction. Mechanisms are thus needed to verify independently certain information. For example, a buyer might want to know the commercial registration information which a business provides to the government when the company is created, proof that the person they are dealing with is indeed the company's representative, or whether the business is in compliance with certain standards such as a code of commercial practice or a data protection standard.
In the same context, a seller might want to know the buyer's identity, something about him or her (e.g. whether the consumer is old enough to buy an age-restricted product), or the buyer's ability to pay. Finally, both parties might need some assurance of payment and delivery, an enforceable copy of the agreement, or to know the applicable body of law which governs the transaction. The use of software which offers data security together with an independent trusted source which attests to some of the information being exchanged can make electronic transactions verifiable. Could consumer interests be endangered?
Electronic commerce has many qualities that consumers find attractive. It also has properties that facilitate fraud and make prosecution difficult. In addition, its international nature means that the laws and regulations a consumer relies on for protection at home may not apply in the merchant's country. Electronic commerce thus may require novel protection and redress mechanisms, some of which will develop through competition, others of which will require international co-operation among industry and governments. Financial intermediaries may be able to settle some disputes but legal authorities will have to control systematic fraudulent or misleading conduct. Digital products sold via electronic commerce _ such as software, music or services _ will create particular challenges for many existing consumer protection laws. For instance, in most cases, a consumer will consume the product immediately by downloading it and making a perfect digital copy; this will make returning the product for a refund problematic. Moreover, the status of click wrap licenses, which require consumers to abide by certain conditions prior to consuming, may violate basic consumer rights to redress. It is expected that some technological tools will offer new ways to resolve some of the issues and allow consumers to protect themselves if they use them and learn to trust them. Is privacy at stake?
As electronic commerce develops, the volume and nature of personal data (name, address, interests, purchases…) disclosed on networks during electronic activities and transactions will increase. New methods for processing the vast accumulation of data_ such as data mining techniques_ allow the creation of customer profiles that combine demographic data, credit information, usage patterns and details of transactions. If consumers do not have control over the collection and use of their personal data, electronic commerce will facilitate the invasion of their privacy.
But, if consumers are in a position either to decline or to give informed consent to the collection and use of their personal data, electronic commerce will not be different from traditional commerce. In today's world, consumers may participate in fidelity or loyalty shopping plans and choose to exchange their privacy for something they value (lower prices, convenience, personalisation). Businesses and consumers will have to help adjudicate the trade-off between protecting privacy and obtaining the benefits of electronic commerce that they both value. Education on this issue is therefore of primary importance. What about illegal and harmful content?
There has been public concern about the content of some of the information distributed and accessed on the Internet. Disagreeable or detrimental content is not more prevalent on the Internet than beneficial content _ quite the contrary _ but people who distribute and access disagreeable or detrimental material on the Internet enjoy the same advantages offered by the Internet as other users do. The positive elements are vast in terms of opportunities for electronic commerce, community development, communication, and access to information, but the reality is that with those benefits come the difficulties of coping with content judged to be detrimental. The development of electronic commerce could potentially be impeded by illegal and harmful content issues where users fear unwanted content, and where network service providers fear the liability they will take on if they are expected to be responsible for the content that flows across systems.
Although traditional methods for addressing these issues may not be as feasible in the electronic environment, advances in technology are offering new ways to resolve some of the issues. Are there consequences for taxation and tariffs?
Jurisdictional rules applying to taxes and tariffs are generally based on concepts of physical geography, such as place of supply or residence of a taxpayer. As electronic commerce is not bound by physical geography it may become difficult for taxpayers and governments to determine jurisdiction and revenue rights. For consumption taxes, there may be a need for action to avoid double or non-taxation.
The availability, reliability and completeness of commercial records generated in an electronic commerce environment, including those from electronic payment systems, are also of concern where such records must be relied upon to ensure that taxation and tariffs have been appropriately and fairly applied.
Further, many forms of taxation and tariffs are levied on physical goods. The ability, in electronic commerce, to create electronic substitutes, like electronic books, presents challenges for revenue collection and quota regimes. The existence of electronic products also raises issues of fairness between the taxes and tariffs imposed on physical goods and electronic substitutes. The ability, within electronic distribution channels, to bypass any or all of the traditional middlemen between producer and consumer raises serious issues for the collection of taxes, particularly withholding taxes.
Finally, the use of electronic commerce technologies, in the form of intranets, by multinaionals and collaborative groups, may tend to increase the prevalence of transfer pricing and increase the difficulty of detecting such behaviour. The predicted growth of international electronic commerce, much of which may be undertaken by smaller, less sophisticated businesses, may mean that the number of unintentional breaches of international revenue laws could increase.