User:Dkueter/kueter stockholm paper

'''There has been no Electronic Commerce Revolution - yet

Derek KUETER

PricewaterhouseCoopers, 9, rue Schiller, L-2519 Luxembourg, Grand-Duché de Luxembourg'''

Tel: +352-492-249-2351; Email: dkueter@ip.lu

Abstract. Internet commerce (electronic commerce) today relies heavily on conventional (non-Internet) payment-side mechanisms developed in the 1960 ’ s and fails to leverage decision-side technologies and techniques currently available. To qualify as a revolution, Internet commerce must offer substantive benefits to users and merchants, as opposed to merely offering traditional mail order disguised with technology. Projects and products based on traditional mechanisms (e.g. EFT, credit cards, electronic checks, and their variants) abound, while those based on digital cash usually concern stored-value/stored-account hybrids (as opposed to “ true ” digital cash, which exists only when transacting parties enjoy all of the same benefits offered by paper notes. ), relying on authentication and some kind of account for settlement. These payment-side problems are rarely addressed in current European projects. In the paper, decision-side techniques and technologies available now, yet rarely or poorly leveraged (such as interbrand marketing, 3D, animation, push, incentives, personalisation, personalities, indirection in identity and true community-building) are explained and, in some cases, myths surrounding them debunked. 1. Definitions and background A recent paper divides the electronic commerce (e-commerce) process into three phases: information, negotiation, and settlement i . This is a perfectly good classification scheme. The requirements of this discussion, however, are less exacting; it is easier here to divide the e-commerce process into only two phases – decision and payment – both of which are self-explanatory. In this discussion, the term “ electronic commerce ” refers only to Web-based trade in physical or intangible goods of appreciable worth between a) merchants, manufacturers, brokers, and service providers on one side and b) consumers on the other. The term “ appreciable worth ” refers to items priced in the range for which credit cards are generally intended – between a few tens and a few thousands of US dollars. This would not include micropayments (generally valued between one mil and a few US dollars), nor would it fully apply to purchases in the $US10 range, although Web purchases are often this small. What it would include are things like books, CDs, videos, clothes, computers, and transport and entertainment tickets, to name a few examples. In addition, this discussion will not address all types of consumer goods and services. For example, business in commodity items generally will not benefit from things like 3D visualisation and consumer profiling; There will not be any community-building chat rooms for people who buy flowers on the Web, but there will be people who buy things in general on the Web. Likewise, there will not be any newsgroups for people who buy a particular brand of bread or butter on the Web, but there might be for people who subscribe regularly to home grocery delivery services. Furthermore, this discussion will concentrate primarily on the consumer side of e- commerce, as opposed to the merchant side. Also, it shall not make a real distinction between credit cards and debit cards; they will be considered roughly equivalent. Lastly, “ I-commerce ” is probably a better term than “ e-commerce ” for the following reasons: a) “ e-commerce ” almost always means Internet commerce; b) the world already has a decades-old, global, functioning, tested e-commerce network - the web of private networks run by the various credit card companies ii . But the term “ e-commerce ” will be used here for purposes of brevity and familiarity. 2. What is e-commerce, really? For e-commerce to denote something special, something different, something with “ value add ” iii – something that would qualify as a revolution – then it must actually offer some appreciable differentiating benefits to users (and merchants as well, but this discussion only concerns itself with users). It is not enough to merely provide a different way to do something. Alternatively, perhaps e-commerce could qualify as a revolution if it was responsible for a large increase in commerce overall, or if it opened markets of significant size that would otherwise not have been active. None of this has happened – yet. For example, when a consumer wants to buy something from a mail order house using traditional mail order processes, he looks through a catalogue, which was received via post or picked up in person, and selects purchases. The customer will then either fill out a form and send it via post or fax, or order items using the telephone. Payment is almost always solely via credit card. When that same consumer want to buy something on the Web, he looks through the Web-based catalogue, adds items to a shopping basket and then proceeds to the payment form where, again, payment takes place almost always via credit card. Instead of post, voice or fax, an HTML form and an SSL connection is used. How is this fundamentally different from traditional mail order? It is not, for a number of reasons, such as the following: The medium via which the catalogue, order, payment, and confirmation travel is irrelevant. It does not have to be, but it almost always is. As for the catalogue: Is an online catalogue somehow better than a paper catalogue? It could be, but it almost always is not, at least not substantially. Paper catalogues provide the usual advantages that paper offers over online – they are higher resolution, more portable, involve no connection fees, are easy to annotate, are human-readable, have no learning curve, and are easy to share with offline friends. In addition, major mail order houses iv generally provide only a portion of their wares online – if a customer wants to see everything, he must order the paper catalogue. On the other hand, online catalogues do provide advantages over paper catalogues, but many of these are rarely leveraged. Those that are include the following: a) online catalogs are free (if one ignores connections fees and the like); b) they can be viewed at short notice, as opposed to paper catalogues which generally must arrive in the post; c) they are machine-searchable; and d) they perform various calculations such as currency conversion and the calculation of subtotals and totals (e.g. tax and shipping cost calculations). All fine and good, but do these advantages represent a “ revolution ” in consumer commerce? Unfortunately, they do not. Machine-searchability is not insignificant, but taken as a whole, these benefits only constitute e-commerce ’ s larval stage. 3. The real e-commerce revolution What would constitute a revolution in e-commerce? On the decision side, it will probably require a number of features working together. The biggest opportunities at this juncture lie on the payment side, where at least one killer feature – the wide availability of “ true ” electronic cash – would, in itself, constitute a revolution (there are currently no publicly- implemented true electronic cash systems; more on this in section 3.2, titled “ Payment ” ). 3.1 Decision stage On the decision side there is still plenty to be done, such as (but not limited to): • interbrand marketing
 * Advertising does not simply sell products and services, it

educates the consumer as well. Overwhelmed by the electronic logjam of commercial images we are subjected to daily, it is irritating to hear that said, but, to a certain extent, it is true. Advertising educates the consumer. On the Web, buying is educational as well – for the merchant. It is a well known marketing principle that consumers who purchase one sort of product will often be interested in other products characteristic of their demographic group. Yes, targeted banner ads are a start, but they are generally offered by hosts in order to attract advertisers and do not represent any true alliance between merchants. To take this idea to the next level, merchants will form alliances so that, rather than, say, merely clicking on a banner ad and being shunted to another merchant ’ s “world”, originating sites will keep the user within a unified experience while promoting allied products and services. Moreover, when the consumer is sent to an allied merchant, substantive, personalised offers will be waiting for him when he arrives. v • 3D: The simple ability to rotate an object – say, the new VW Beetle – in three dimensions can permit a large increase in understanding and affinity in the consumer. This need not require lots of bandwidth. • animation: Commerce in mechanical goods, for example – or, rather, goods in which movement is an integral part of the product, especially products that incorporate novel or unfamiliar movements or modes of operation - can benefit from animation capabilities. Sports equipment, appliances, automobiles, computers, peripherals, and even certain types of clothing fall into this category. • incentives: Incentives are an essential sales tool offline, but are not as prevalent online. If anything, consumers need additional incentives to try the new, unfamiliar (and sometimes more costly and time-consuming) mode of shopping that is e-commerce. • personalisation, personalities and indirection in identity: A lot has been written about personalisation in e-commerce and information services in general, and the aims and barriers - such as privacy concerns - are well known (personalisation does not have to impinge on one ’ s privacy – pseudo-identities vi and adherence to the basic tenets of computer security can see to that – but the media will hype the issue anyway). What consumers want when they walk through the doors of an online shop is exactly what they want when they walk into a store or brasserie in their neighborhood – to be recognised and to be automatically offered what they want (or probably want) without having to ask for it. With so many Web sites requesting (or demanding) personal and preference information, shopping on the Web can be something to dread. Indirection in identity refers to a simple mechanism whereby consumers can create personalities for themselves, such as “ professional ”, “ car ”, or “ vacation ‘ 99 ”, which are, essentially, a people and organisations can use digital cash as freely and securely as they now use paper notes . This, however, might very well require a revolution of a more profound sort, one not limited to electronic commerce. Perhaps the most serious current problem is the lack of attention paid to the payment side in e-commerce. For example, a recent annual journal on information society topics xiii devoted 300 of its 1000 pages (or 42 of 131 papers) to a section titled “ electronic commerce ” . However, scanning through the 13 papers in the electronic commerce section which, from their titles, looked the most promising - i.e. looked most like they would contain a discussion of e-commerce payment - yields the following results regarding the payment stage of e-commerce: One paper mentioned only EDI, one paper mentioned only credit cards and SET, one paper mentioned only EDI and SET, and the remaining nine papers did not mention any payment scheme at all. xiv Why should we be concerned about the lack of progress in the payment stage in e- commerce and about its near-total reliance on traditional settlement networks? In large part because truly new markets in e-commerce are not being opened, such as markets where credit cards are not appropriate. This includes the sale of very low priced goods, geographies possessing a poorly developed banking system, geographies where credit card ownership rates are low, and products, such as investment instruments, where immediate financial settlement is essential. Yet, we continually read about the e-commerce “ revolution ” xv. A big part of the reason concerns transaction costs. For example, for small purchases – say, a few US dollars – credit cards, debit cards and electronic bill payment are too expensive. xvi Using a credit card, the cost per transaction on a US$10 sale is equivalent to almost 5% of the total value of the transaction (see table). Using electronic cash, that cost drops to one half of 1%. Table 1 Cost per transaction US$ credit card $0.45 debit card $0.30 electronic bill payment $0.28 electronic cash $0.05 Source: The Boston Consulting Group However, as we know, a whole raft of problems accompanies electronic cash, some of which are mentioned above. These are not provably unsolvable problems, but problems that are unlikely to be solved if the pace of progress in alternative payment is as slow as it currently is and when research is, in large part, focused on the wrong problems. Micropayment schemes seem like a solution to the high cost per transaction, but there are problems there, too. For example, Digital ’ s MilliCent scheme stipulates that vendors keep “ about 90% of the revenue ” xvii , which could be viewed as equivalent to a 10% transaction fee, which dwarfs the highest fees listed in the above table. In short, there seem to be barriers at every turn. 4. Conclusion The information industry cannot rightfully pat itself on the back for starting a revolution – yet. If we are going to call Web commerce in hard goods “ e-commerce ”, then we should call traditional mail order “ e-commerce ” as well, as there is actually much less difference than meets the eye. It is no coincidence that many of the major mail-order houses offer their wares via Internet and that their sites are among the most well-designed, attractive and user- friendly sites the Web has to offer – to them, it is just glorified mail order. In both cases, the entire payment stage is generally handled by private, non-Internet based networks that are decades old, i.e. the Interbank Network-style networks set up by credit card companies. As Andrew Sullivan notes in a recent article in The New York Times Magazine, “ The Old World clings, even in its latest cultural and technological twitchings, to what it once was ” . xviii To open up new markets and possibilities, create a new platform for commercial creativity, thereby inciting a real revolution in e-commerce, the industry will have to widely implement truly substantive, differentiating features on the decision side; and solve or decide to live with (but not merely ignore) the payment-side dependence on traditional, private networks. Acknowledgements Many people assisted with this paper and most of them know who they are. In addition to those cited in the endnotes, I would especially like to thank M. Scott Marshall of CWI, the Dutch National Mathematics Institute, for his ideas and insights. References [1] Simson Garfinkel with Gene Spafford, Web Security and Commerce, ISBN 1-56592-269-7, O ’ Reilly, Cambridge, 1997 i Stanoevska-Slabeva, K., Schmid, B., and Heartsch, P., Information Objects – The First Virtual Software House in Switzerland, Technologies for the Information Society: Developments and Opportunities, J.-Y. Roger et. al. (Eds.), IOS Press, 1998. ii Hilt, Jeff, personal communication, 1998. iii Lega, P.Z., personal communication, 1997. iv e.g. Land ’ s End, La Redoute, Sears, and J.C. Penny. v The Netcentives ClickRewards program implements similar ideas. vi Bullinga, M. and Kueter, D., Netherlands Online Voting Architecture, Instituut voor Publiek en Politiek , 1995. vii Tom De Marco, Speech at Apple Computer, Cupertino, CA, 1990. viii News.com. ix Itoi, Nikki Goth, “P romises, promises: What ever happened to SET? ”, T he Red Herring, February, 1998. x Ghosh, Anup K., E-commerce Security: Weak Links, Best Defenses, John Wiley & Sons, 1998. xi Ghosh. xii Bannatyne, Rhoderic S., personal communication, 1999. xiii Technologies for the Information Society: Developments and Opportunities, J.-Y. Roger et al. (Eds.), IOS Press, 1998. xiv The European Commission ’ s Information Society Technologies 5 th Framework Programme 1999 work programme repeatedly encourages the submission of project proposals that include R&D into new payment systems. In fact, there is an entire “ key action ” e ntitled “New methods of work and electronic commerce ”, which is very promising. However, EC R&D projects are not intended (or permitted) to product marketable product. xv Recent Yahoo! searches resulted in 254 Web page hits on the subject. Recent Altavista searches resulted in 490 hits. xvi Ghosh. xvii digital.millicent.com. xviii Sullivan, Andrew, “What We Look Up To Now”, The New York Times Magazine, November 15, 1998