The Future of Electronic Commerce

1
The Future of Electronic Commerce

• Retail, wholesale, service and mail-order
  expenditures( billions)

Source Business Week, 6/12/95, p. 70.
2
Electronic Commerce

• Many phases to a commercial transaction
• learning about what goods are available
• finding potential suppliers
• negotiating price
• ordering goods
• goods delivery
• payment
• after sales support

3
The Internet and Information Markets

• The global reach of the Internet makes it the
  leading network for disseminating information
• There are many ways to organize a market for
  information
• The lack of payment mechanisms to date has
  limited the variety of market structures

4
Payment Systems

• There are two kinds of money
• Token money tokens which represent value
• tokens can be exchanged for goods
• Notational money ledger entries in Demand
  Deposit Accounts
• money is transferred between accounts upon
  instruction
• e.g. by a check
• clearing required if accounts are at different
  institutions
• accounts may have negative balances
• e.g. credit card accounts

5
Payment Systems

• Payment System tradeoffs
• time
• setup cost
• transaction cost
• risk

6
Financial Transaction System-Cost Structure
7
Internet-Based Payment Models

• Secure transmission of credit card information
• Digital cash
• Digital checks
• Centralized online transactions

8
Credit Card Info Sent Direct to Merchant
(Netscape Model)
Merchant
Private Line
Credit Card Acquirer
Encrypted tunnel through the Internet

• Consumer sends card direct to merchant
• Similar to todays phone order
• Must trust merchant with card info
• High transaction costs

Internet
Consumer
9
Third Party Intermediary Model(CyberCash)

• Protects consumers card info
• Use Internet for reaching Cybercash gateway to
  acquirers
• Adds to credit card card cost

Merchant
Encrypted tunnel through the Internet
Internet
CyberCash
Consumer
10
Credit Card Acquirer On the Net (STTSEPPSET)

• Protects consumers card info
• Use Internet for reaching acquirer
• Still uses expensive credit card transactions

Merchant
Encrypted tunnel through the Internet
Internet
Consumer
11
Green Commerce Model(First Virtual)

• Messages sent in clear
• Credit card number stored at FV
• User must agree to pay after receiving
  information goods
• Credit Card transaction costs

Merchant
First Virtual
Internet
Consumer
12
Digicash Model

• 1- Consumer asks Bank for Digicash
• 2- Bank sends Digicash bits to consumer
• 3- Consumer sends Digicash to merchant in payment
• 4- Merchant checks that Digicash has not been
  double spent
• 5- Bank verifies that Digicash is valid
• Advantages
• Privacy, Scalability
• Disadvantages
• Complexity
• Detecting double spending
• Robustness against failure
• Accountability

Merchant
5
4
3
Bank
2
1
Consumer
13
Approach Digital Checks

• Consumers issue signed drafts on online bank
  accounts
• Merchants may do online or delayed clearing
• Examples NetCheque, FSTC NetAccount

14
Approach Online Transactions

• Funds transfer between accounts at a central
  server
• All accounts at the central server
• Prepaid or postpaid consumer accounts
• Advantages
• Low transaction overhead cost
• Disadvantages
• Scalability server may become a bottleneck
• Requires arrangement with accounting server
• Example NetBill, CompuServe, AOL, MSN

15
The NetBill Concept

• An electronic accounting server to enable network
  based commerce
• Accounts maintained at NetBill for rapid,
  inexpensive payment clearing (1 transaction cost
  for a 10 item)

Network
Service
Provider
End
User
NetBill
Server
Bank
16
Aggregation

• Users and Merchants create NetBill aggregation
  accounts.
• Each purchase transaction moves funds from the
  users NetBill account to the merchants NetBill
  account
• Money transferred into or out of the aggregation
  account using conventional money transfers
• credit card charge
• ACH
• Fixed cost of conventional transfers amortized
  over many microtransactions
• Aggregation account can be run as a prepaid or as
  a credit account
• Prepaid conventional debit in advance of
  micro-transaction
• Credit charge user after aggregated
  transactions reach a threshold

17
Issues of Trust in Electronic Commerce

• What does a merchant need to know about a
  customer?
• name? demographics?
• that the merchant will be (has been) paid?
• Who to trust
• financial intermediaries
• public key certificate authorities
• credential authorities
• The theory of reliable transactions has been
  based on premise that errors are accidental not
  deliberate.
• New mechanisms needed to protect against errors
  deliberately introduced with intent to defraud.

18
Summary

• The Internet is becoming the Global Information
  Infrastructure
• All phases of commerce can be supported by
  networks
• Organization of electronic information markets is
  currently limited by lack of Internet payment
  systems
• Numerous payment models are being developed
• For information goods, delivery and payment
  should be linked as a single atomic transaction
  at low cost.