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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
