Electronic commerce is the ability to perform transactions
involving the exchange of goods or services between two or more parties
using electronic tools and techniques. Long employed by large businesses
and financial service organizations, several factors are now converging
to bring electronic commerce to a new level of utility and viability for
small businesses and individuals -- thereby promising to make it part of
everyday life.
These enabling factors include improved broader competitive
access to networks, and the reduced cost and increased user-friendliness
of both general-purpose computers and specialized devices. The rapid growth
of primarily the Internet and other on-line services, convenient point-of-sale
payment systems, and automated teller machines all set the stage for broad-scale
electronic commerce. Further, with relentless pressures of competition
at all levels of the economy, the efficiencies offered by electronic commerce
are becoming hard to ignore.
This white paper discusses primarily technical issues
that, if properly addressed, can guide the evolution of electronic commerce.
However, it is recognized that numerous complex social, legal and regulatory
issues of equal importance must also be addressed if the potential of electronic
commerce is to be realized. These include finding acceptable methods for
authentication and protection of information, accomodating the special
needs of law enforcement and international transactions, and creating the
requisite means, technological and otherwise, of settling disputes. We
point them out here specifically to emphasize their importance, but do
not treat them at length in this paper. The remainder of the paper answers
the following questions about electronic commerce:
Section 2 describes the advantages of electronic versus
paper-based commerce and discusses several shortcomings of present electronic
commerce systems. It then describes the kinds of progress that will need
to be made to overcome these deficiencies and create an electronic commerce
infrastructure. Section 3 describes the actual requirements of electronic
commerce in terms of (1) the framework that must be in place, (2) the activities
and functions that must be supported, and (3) the building blocks required
to support these activities and functions. Section 4 presents an architecture
and model for electronic commerce. Section 5 draws implications for future
technical needs and for electronic commerce.
1.1 Types of information providers
Traditionally,
in the physical world, we distinguish between three different types of
information-driven companies: those that create content (e.g TV production),
those that define the form or format (e.g recording studio) and finally
those that provide the distribution medium.(e.g TV broadcasting station
and cable operators). Companies that are targeting vertical markets need
access in all three areas (see red, dashed circle, fig 1).
1.2 EC functions
The following ten functions must be provided in order
to EC to occur; in essense, they are the enablers of EC:
- Standards setting body
- WAN service provider
- Hosting service (i.e data center)
- Software developer (ISV or VAR)
- Certification authority
- Publisher/Aggregator (presense provider)
- Copyright broker
- Metering auhority
- Auditing authority
- Information consumer
The provision of the above ten EC functions does not necessitate
the involvement of an equivalent number of parties; many of these will
be carried out by the same provider. For example, the Hosting Service can
be the same organization as the Publisher/Aggregator.
2.1 Advantages
Today, EC is admittedly still in its infancy. Online purchases
today account for only 4 percent of total global sales. Even a relatively
simple transaction (see fig 2) requires a rather complex process of electronic
transactions and advanced interoperability among different information
systems.
There is, however great potential and many advantages
for all parties involved in EC. Electronic commerce has substantial advantages
over traditional, face-to-face, paper-based commerce:
- It gives the customer more choices and customization
options by tying orders, design, and production more closely to product
and service delivery.
- It decreases the time and cost of search and discovery,
both for customers trying to find products and services and for companies
trying to find customers.
- It expands the marketplace from local and regional markets
to national and international markets with minimal capital outlay, equipment,
space, or staff.
- It reduces the time between the outlay of capital and
the receipt of products and services.
- It facilitates just-in-time production and payments,
reducing overhead and inventory through increased automation and shortened
processing times.
- It decreases the high transportation and labor costs
of creating, processing, distributing, storing, and retrieving paper-based
information and of identifying and negotiating with potential customers
and suppliers.
- It enables, through automation, production of a reliable,
``shareable'' historical database of design, marketing, sales, and payment
information.
- It facilitates increased responsiveness to customers,
including on-demand delivery.
Innovations in electronic commerce on such National Information
Infrastructure (NII) recursors as the Internet are still in their infancy.
But electronic commerce will likely grow dramatically over this decade.
Various predictions have been made about this growth. For example, within
six years, global shoppers could use the NII to purchase as much as $500
billion of goods and services -- or almost 8 percent of present purchases
worldwide. Similarly, it's been predicted that by 2005, the number of NII-based
transactions could rise to 17 billion, which is almost half the number
of transactions made in today's credit card market.
2.2 Shortcomings and Deficiencies of Present Systems
In recent years, great strides have been made in automating
many of the labor-intensive, paper-based aspects of commerce. Examples
abound of corporations that use electronic data exchange (EDI), mail (e-mail),
forms, and catalogs; and of electronic financial networks that speed the
transfer, settlement, and clearing of funds and other financial instruments.
These electronic tools and techniques impart many benefits to both customers
and merchants. Even so, electronic commerce is not today's preferred method
of effecting business transactions. That is because most transactions still
require the physical exchange of paper documents and instruments. Also
blocking widespread use of electronic commerce is the fact that present
approaches are not sufficiently well-integrated, secure, open, or easy
to use. Specific shortcomings of today's electronic commerce approaches
include the following.
Partial solutions -- Present electronic commerce
implementations automate only a portion of the entire transaction process.
For example, although ordering and distribution of an information-based
product (such as an electronic magazine or a software program) can be nearly
simultaneous, the supporting accounting and inventory information, payment,
and actual funds transfer tend to lag, often by days. This time lag, and
the decoupling of the accounting and payment information from the ordering
and delivery of goods and services that results, increases the transaction's
credit risks. It also increases the likelihood of discrepancies between
the various information sources, requiring expensive and time-consuming
reconciliation. Ideally, an electronic commerce application should eliminate
these gaps between ordering, distribution, and payment, enabling development
of real-time links to recordkeeping and accounting systems with minimal
transaction costs. A fully integrated electronic commerce solution would
also facilitate control over cash flows -- for instance, allow the majority
of one's funds to work in bank savings accounts and/or investments -- and
minimize cash shortfalls.
High costs -- Today's electronic commerce implementations
are costly to develop and operate. The high cost of entry bars more spontaneous,
high-volume, low-value electronic transactions.
Rigid requirements -- Electronic commerce applications
usually require highly structured protocols, previously established arrangements,
and unique proprietary bilateral information exchanges. Those requirements,
for the most part, involve dedicated telecommunications lines and/or value-added
networks (VANs) and batch processing. For EDI to work, for example, rigid
agreements must be in place between the transacting parties about the structure
and meaning of data. These agreements are often time consuming to negotiate,
inflexible, and difficult to maintain -- especially in a rapidly changing
business environment. The resulting costs and lead-times frequently create
barriers to investment in and widespread use of electronic commerce applications
by small and medium-sized companies, and inhibit the expansion of electronic
commerce beyond large companies and their major trading partners.
Limited accessibility -- In today's electronic
commerce applications, the consumer usually can't communicate or transact
with vendors in a simple, direct, freeform environment. For example, to
access most electronic shopping services, a consumer must subscribe to
an online service which then provides proprietary hardware and/or software
with which to communicate with the vendors that have also registered with
that service.
Limited interoperability -- Most existing implementations
depend on proprietary solutions
which don't easily interoperate -- if at all. Internet
e-mail and many applications emerging on the World Wide Web are notable
exceptions that point in the right direction. A truly interoperable electronic
commerce infrastructure would facilitate private transactions, reducing
the need for intermediaries unless they provide some real added value,
such as credit services. In addition, this infrastructure would make it
easier for any and all interested people to become service providers as
well as consumers.
Insufficient security Inadequate search capabilities
-- Participants in today's electronic commerce applications must find methods
and means of navigating effectively through fragmented online electronic
information and services in order to find trading partners and items of
interest. This problem will only increase as more information and businesses
go online unless scalable solutions are found.
2.3 Bridging the Gap
Many new systems and service initiatives have been announced
for the evolving NII, particularly the Internet, that address one or more
of these current deficiencies to varying degrees. These include initiatives
for advanced protocols for secure data transport, electronic catalogs and
repositories, search engines, e-mail-enabled EDI, and a variety of digital
cash and payment schemes. Industry alliances and partnerships have been
announced that address the need for secure, affordable payment, linked
in real-time to ordering and billing systems. Working systems will be available
in 1995 and promise to rapidly decrease the overhead and time associated
with today's paper- and people-intensive activities, and accelerate the
future growth of electronic commerce.
Many of the new value-added electronic commerce services
will build foundations for trust and security by incorporating the following
capabilities:
- authentication over public networks;
- certification of information, parties, and transactions;
- performance bonding;
- escrow;
- automated dispute resolution;
- transaction insurance;
- appraisal services;
- broker services; and
- trusted institutions to resolve disputes and other claims.
As new initiatives start up under a common framework and
set of standards, performed over low-cost ``commodity'' computers linked
by open public networks, competitive pressures and technology advances
should drive down associated costs and increase interoperability. New forms
of commerce will arise that were impractical under the old cost structure,
and flexible ``virtual enterprises'' will be enabled. Consider the following
examples of what life might be like in the future NII when this electronic
commerce infrastructure is realized.
3.1 Framework
The vision outlined above for electronic commerce assumes
a set of basic infrastructure services and standards consistent with a
broad architectural framework. This framework must permit the flexibility,
interoperability, and openness needed for the successful evolution of electronic
commerce over the NII. This framework, and its services and products, will
offer the consumer a diverse set of interoperable choices, rather than
a collection of independent solutions that may not work in concert.
Many of today's ambitious electronic commerce initiatives
vary in their approach to security and privacy, their ability to handle
micropayments, and their applicability to various types of transactions.
They also differ in their business models -- for example, in their pricing
strategy and in their assumptions as to who bears the risk in case of insufficient
funds or disputes. Such diversity promotes innovation and allows for provider
and consumer choices. Still, to achieve wide acceptance and scale to truly
mass markets, a broad framework is needed, which encompasses the following
requirements and idiosyncrasies of conducting new forms of business in
the emerging electronic environment.
Interoperability -- Electronic commerce must be
based on a common set of services and standards that ensure interoperability.
Preferably, service providers and application designers will be able to
use these services and standards as building blocks that can be combined,
enhanced, and customized.
Maximum flexibility for innovation -- As the NII
evolves, it will grow and mature in ways not even imagined today. As it
does so, new services and businesses will emerge. For example, the NII's
electronic marketplace will provide new opportunities for narrowcase marketing
to very short-lived niche markets. Existing services and products will
be redefined and modified. The electronic commerce framework must be sufficiently
flexible to accommodate all of these changes and be able to address new
applications and requirements as they arise.
Information-intensive products -- A particularly
important class of products on the NII are those that are pure information.
These products are actually enabled by information technology, not just
distributed more efficiently by it. Information products include electronic
publications, catalogs, videos, and the like, as well as interactive video
games, software programs, electronic tokens, customized design specifications,
and even electronic keys to hotel rooms, cars, storage compartments, and
airport boarding gates. Many of these products will not be simply ``offered''
by a vendor; they will be designed or tailored by a customer. Customers
can, for example, choose their own selection of articles to be bound in
an electronic book, or customize their own clothing designs. This capability
adds a customer-driven activity -- a design phase -- to the purchase cycle.
It is likely that for these products, ordering, billing, payment, and distribution
would be tightly integrated and happen virtually simultaneously.
New revenue collection methods -- Electronic commerce
will need to support advanced types of revenue collection in addition to
traditional methods (e.g., payment upon receipt, payment in advance, etc.).
For example, an information product service provider could distribute its
product widely and charge on a usage basis; that is, charge the customer
only when the information (be it a software program, digital document,
or electronic key that opens and starts a rental car) is used. One innovative
approach that permits usage accounting and payment is called meterware.
It provides local hardware and/or software to record and bill customers
continuously based on their product usage. Meterware, electronic cash and
checks that don't need an online payment processor, and other advanced
revenue collection ideas create opportunities for reaching new customers
and for distributing products and services. These methods make a lot of
sense in a low distribution cost environment supported by the electronic
commerce infrastructure.
Legacy systems -- Many "legacy systems"
exist in the electronic commerce domain. These include paper checks, mainframe-based
settlement and payment systems, and EDI VANs. None of these legacy systems
will go away overnight: A successful electronic commerce infrastructure
must let the user transfer easily and transparently between these older
systems and newer, all-electronic systems, applications, and processes.
Transaction devices -- Electronic commerce transactions
will involve all kinds of legacy and newly developed devices and media,
and networks over which these are delivered. Electronic commerce must accommodate
the technologies and devices needed to reach and sustain the mass market.
A framework developed with all of these needs and considerations
in mind will form the strongest basis for a powerful and useful electronic
commerce infrastructure. We next describe the specific activities and functions
this infrastructure must support.
3.2 Activities and Functions
- advertising and shopping,
- negotiating,
- ordering,
- billing,
- payment and settlement,
- distribution and receipt,
- accounting,
- customer service, and
- information and knowledge processing.
The specific functions associated with these activities
in an electronic commerce setting are discussed below. Note that not all
of these activities are performed in every transaction, nor are they necessarily
performed in this order; indeed, they may be performed in parallel. Also,
all activities are not necessarily conducted electronically. Finally, these
activities can vary in complexity and importance depending on the transaction's
size and scope.
3.2.1 Advertising and Shopping
This activity can include
- searching and browsing electronic directories and catalogs
on a network;
- enabling intelligent agents for various purposes on behalf
of one or many buyers and/or sellers;
- buyers sending electronic requests for proposal (RFPs)
and sellers responding with various offers;
- sellers advertising their products and services; and
- electronically navigating network-accessible services.
A major problem associated with the advertising and shopping
activity is the cost and time expended in developing, maintaining, and
finding relevant information, products, and services, given the plenitude
of available information. Obviously, this problem will become increasingly
complex as more data and services become available online and the choices
and possibilities multiply exponentially. We need better ways to find and
offer services and products.
3.2.2 Negotiating
Buyers and sellers may elect to negotiate the terms of
a transaction -- that is, the terms of exchange and payment. These terms
may cover delivery, refund policies, arranging for credit, installment
payments, copyright or license agreements, usage rights, distribution rights,
etc. These terms can be standardized for routine commodity use, or customized
to suit more unique individual situations. Often, in the case of two parties
with a well-established business relationship, the terms of exchange are
prenegotiated as standing contractual terms for all their future exchanges.
This process will frequently also include authentication of the two parties.
3.3.3 Ordering
The buyers eventually issue a contractual agreement of
the terms of exchange and payment. This contractual agreement is generally
issued as an order that sets forth the quantity, price, and other terms
of the transaction. The order may be verbal, in writing, or electronic.
It usually includes an acknowledgment of agreement by the various parties
to help prevent any future repudiation. This agreement can be confirmed
in a secure way, electronically safeguarded by cryptographic techniques
such as digital signatures.
In the case of some commodity purchases, the entire transaction
may begin at this ordering stage, bypassing the advertising/shopping and
negotiating activities. The ordering activity applies to all transactions,
regardless of whether billing will be involved. Even requests for free
public information should be issued as formal orders so that the service
provider can record and account for information requests.
3.2.4 Billing
Once a seller has delivered goods or services, a bill
is sent to the buyer. This bill generally includes remittance information
that should accompany the payment. Sometimes, a seller may require payment
in advance. Sometimes, a supplier sends advance shipping notification,
and the customer agrees to authorize payment upon confirmation of the arrival
of the products. And in some cases, as with the free information example
cited above, this activity is eliminated entirely.
3.2.5 Payment and Settlement
The buyer, or some financial intermediary, eventually
sends some form of electronic payment (this could be some form of contract
or obligation, such as authenticated payment instructions or digital cash),
usually along with some remittance information to the seller. This payment
may be sent for a single item, on a usage basis, or for multiple items
or usage. Settlement occurs when the payment and remittance information
are analyzed by the seller or the seller's agent and accepted as valid.
3.2.6 Distribution and Receipt
Either before, after, or concurrent with payment, the
seller arranges for delivery of the purchased goods or services to the
buyer; and the buyer provides the seller with proof of receipt of delivery.
Policies regarding customer satisfaction and return should be negotiated
prior to this activity and made part of the contract between buyer and
seller. For larger, more complex orders, distribution may involve more
than two parties and entail complicated distribution coordination strategies.
An ancillary distribution service involves acting as a fiduciary and holding
goods, certificates, bonds, stocks, etc., in trust.
3.2.7 Accounting
This activity is particularly important to corporate customers
and suppliers. Both buyer and seller must reconcile all electronic transactions
in the accounts receivable and accounts payable, inventory information,
and accounting systems. Account and management information system records
must also be updated. This activity can involve third parties if the transacting
businesses outsource their accounting services.
3.2.8 Customer Service
Customer service entails
- providing the buyer with timely information as to the
progress of the transaction;
- handling customer requirements when transactions go awry
-- i.e., resolving any mistakes, disputes, or complaints concerning product
quality, delivery, or payment (this includes managing returns and refunds,
further exchanges, and/or repairs); and
- providing expert advice and assistance in the use of
the products and services.
Customer service concerns may also include providing general
cash management advice, including addressing foreign exchange imbalances
and risk exposures; collecting delinquent payments and late fees; and repossessing
products for which payment is long overdue.
3.3 Electronic Commerce Building Blocks: Objects and
Object Classes
The activities and functions of electronic commerce need
certain basic building blocks, namely,
- unstructured information (reports and freeform text,
voice, and video);
- structured information (EDI messages, electronic forms,
contracts and contact rules, design specifications);
- accounts, account databases, and accounting rules;
- transactions;
- records;
- agents and brokers (information filters, translators,
trusted third parties);
- objects for sale (movies/videos, software objects, contracts,
information, documents); and
- decision support models and simulations.
These building blocks are likely to become the standard
digital objects of commerce; over time, they will probably become
increasingly comprehensive and refined. Several key digital objects for
electronic commerce are listed below.
3.3.1 Contracts
Examples of contracts include
- orders,
- checks,
- bills,
- loan agreements,
- Treasury bills and bonds,
- letters of credit,
- account agreements,
- receipts, and
- electronic money/checks/tokens.
Contracts can include instructions regarding the handling,
routing, storing, scheduling, and workflow of the contract itself and of
other objects contained in or referenced by the contract. These instructions
can address liabilities; acceptable forms of payment (cash, credit card,
debit, or check); terms of payment (usage charges, periodic and one-time
charges); billing and payment instructions (credit to merchant, automatic
debit card deductions, billing and paying addresses, due date); delivery
instructions (where and how to deliver); return policies; methods of error
and dispute resolution; and conditions of good delivery. Contracts can
be negotiated, including prices, terms of payment, penalties, necessary
documentation, credit checks or required insurance, or collateral or margin.
They can be written to, signed, read, and amended. Contracts frequently
can also be bought, sold, and exchanged. And, in many cases (for example,
in the case of electronic cash), contracts should not be able to altered,
reproduced, or copied.
3.3.2 Information Documents
Examples of information documents include
- balance sheets,
- income statements,
- official statements,
- monthly billing statements,
- stock offerings,
- credit history,
- reports,
- discharge summaries,
- physician orders,
- process notes,
- electronic books,
- movies/videos, and
- video games.
Information documents can be unstructured, partially structured,
or completely structured. They can be browsed or searched; and bought,
sold, exchanged, and copied, under contractual constraints. They also can
be created, updated, signed, copyrighted, read, synchronized, compressed,
and decompressed.
3.3.3 Accounts
Accounts include the following information:
- name identification;
- address;
- user profile (e.g., authorization preferences, personal
information);
- outstanding balances;
- credits and debits;
- balances;
- tax computations;
- receivables and credits;
- payables and debits; and
- limits (e.g., credit limits).
Accounts can be opened, closed, linked, updated, blocked,
stopped, or attached. They can receive deposits, debit withdrawals, and
accept transfers. Also, accounts and account information -- such as account
balances -- can be verified. Since linked transactions (for example, billing,
paying, receipt, and delivery transactions) are not generally simultaneous
or one-to-one, it is often necessary to reconcile account information.
The ability to link and associate account and remittance objects to payment
transactions helps simplify account reconciliation. Account operations
are accomplished through transactions, which are discussed later in this
section. It is generally necessary to establish audit trails, so that the
consequences of multiple transactions on an account can be tracked.
3.3.4 Software Agents
Software agents can perform several functions and roles.
Notably, they can act as
- facilitators, who provide key infrastructure services
such as translation and communication/network security management and control;
- information filters and interpreters;
- translators;
- trusted third parties and witnesses;
- escrow agents;
- brokers;
- workflow managers;
- fiduciaries;
- expert advisors; and
- negotiators.
An agent should be able to serve in more than one of these
roles.
3.3.5 Products for Sale or Exchange
Both physical objects (e.g., cars and clothing) and digital
objects (e.g., program logic, digital movies, data, electronic design specifications,
electronic contracts) can be sold and exchanged.
3.3.6 Transactions
Transactions are generally governed by contracts and update
accounts. They can operate on all the other digital objects and generally
involve the transmission and exchange of two or more digital objects --
for example, a movie for money, medical services for money, exchange of
two currencies, etc. They can also include the exchange of bills and invoices
and of information and services.
Transactions can, but do not necessarily always, include
information on
- who is involved in the transaction;
- what is being transacted;
- the purpose of the transaction;
- the destination for payment and delivery;
- the transaction time frame;
- permissible operations;
- date/time stamps; and
- special information, such as unique identification, transaction
path, sequence information, receipts and acknowledgments, links to other
transactions, identification of money transferred outside national boundaries,
certificates of authenticity, etc.
Transactions can be reversed, repaired, disputed, monitored,
logged/recorded, audited, and/or reconciled and linked (e.g., matched and
associated) with other transactions. They can be designed to be anonymous
and untraceable, or traceable and auditable. If transactions are untraceable,
however, they lose many of their information features. A more satisfying
compromise is to execute a transaction that can only be traced with the
consent, approval, and active cooperation of the user.
