No.1-1997| No.1-1997 |
Other Issues |
With this first issue dealing with electronic commerce, the
OECD is launching a series of policy briefs intended to make
publicly available the latest information on its major ongoing
work.
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? How can the
OECD assist the harmonious development of electronic commerce?
This first OECD Policy Brief responds to these questions.
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.
In 1992 the OECD
issued Guidelines on Security of Information Systems. Since the
adoption of this framework, both the public and private sectors
have engaged in a continuing programme of activities to implement
the principles outlined in the Guidelines. They include the
enactment of legislation and the development of standards.
Furthermore, OECD Member countries adopted
Guidelines on Cryptography Policy in 1997. The OECD will monitor
implementation at the national level, and will engage a
continuing dialogue with the private sector on developments in
this area.
As early as in 1980, OECD countries agreed upon
principles for the protection of privacy and personal data. To
foster user confidence in electronic commerce, governments might
develop policies directed toward reaffirming these fundamental
principles as well as developing trustworthy technologies to
implement them. Given the global nature of electronic commerce,
it is important that the decisions taken continue to allow for
the international flow of data.
Moreover, technological tools will offer new ways to allow users to protect themselves. Some of them are Moreover, technological tools will offer new ways to allow users to protect themselves. Some of them are mechanisms for verifying information, such as labeling systems that certify that an on-line business meets certain good standards of business. Other mechanisms exist for notifying consumers of the legal jurisdiction or venue for resolving disputes arising from a transaction. Some others allow consumers to access education messages that describe their rights in the context of electronic transactions. The OECD will work together with other international organisations to provide a forum for a continuing exchange of views on developing technologies and an institutional framework to support them.
In consultation
with representatives from the financial services industry, the
OECD has developed a set of basic principles to guide
chargeback operations in both national and international
transactions. The objective is to encourage credit card
associations to provide a means to enable consumers to cancel
problem transactions and to remove repeat offenders from card
networks. The goal is to achieve an agreement on these
Guidelines on Consumer Redress: Chargebacks as an OECD
Council Recommendation before the end of 1997. The OECD also intends to produce Consumer Protection Guidelines
in electronic commerce to:
The key issues for revenue authorities are:
Work is underway at OECD to
explore these issues and reach agreement on policies to address
them.
Electronic
commerce, and the Internet more generally, have developed at a
spectacular pace. It is essential to maintain an environment in
which their potential can be realised. Achieving this, however,
requires co-operation on key issues, including those mentioned
above, between the private and public sectors on principles to
guide the development and implementation of electronic commerce
policies and on basic policy approaches to major issues. The role
of organisations such as the OECD is relevant to addressing
questions of where and how these principles and approaches might
best be formulated.
FOR FURTHER READING: |
|
| Communications Outlook
1997 ISBN 92-64-15460-4 US$53 pp. 520. Free on Internet: Tables of contents, highlights and sample data www.oecd.org/dsti/commblur.html Consumer
Product Safety Standards and Conformity Assessment, Cryptography Policy: the Guidelines
and the Issues (forthcoming publication). Declaration on Transborder Data
Flows The Economics of Information Society Electronic Commerce, Electronic Commerce, The Challenges
to Tax Authorities and Tax Payers The Emergence of Electronic Commerce
Overview of OECD's Work |
Gateways to the Global
Market: Consumers and Electronic Commerce, ISBN 92-64-160-16-7 US$12 (forthcoming).
Guidelines on the Protection of Privacy and
Transborder Flows of Personal Data, Guidelines for the Security of
Information Systems The Internet in Twenty Years: Cyberspace,
The Next Frontier? The OECD Observer, No. 208. STI Review No. 20 Tax and the information superhighway Towards a Global
Information Society, Global Information Infrastructure -
Global Information Society (GII-GIS) The World in 2020, Towards a New
Global Age |
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The OECD Policy Briefs are prepared by the Public Affairs Division, Public Affairs and Communications Directorate. They are published under the responsibility of the Secretary-General of the OECD.