ELECTRONIC COMMERCE

One of the most profound changes currently transpiring in the world of business in the introduction of
electronic commerce. The impact of electronic commerce (E-commerce or EC) om procurement, shopping,
business collaboration, and customer services as well on delivery on various services is so dramatic that almost
every organization is affected. E- commerce is changing all business functional areas and their important
tasks, ranging from advertising to paying bills. The nature of competition is also drastically changing, due to
new online companies, new business models, and the diversity of EC –related products and services. EC
provided unparallel opportunities for companies to expand worldwide at small cost, to increase market share
and reduce costs. In this chapter we will explain the major applications of EC., the issue related to its
successful implementation and to its failures, and what services are necessary for its support. We look at
business-to-consumer (B2C) commerce, business-to-business (B2B) commerce, intrabusiness commerce and e-
government. Also, we will demonstrate the impact on the various functional areas of organization.

CHAPTER OUTLINE
 Overview of E-Commerce
 Business-to-consumer Applications
 Market Research, Advertising, and Customer Service
 B2B and Collaboration Commerce application
 Innovative Application of E-commerce
 Infrastructures an E-commerce Support Service
 Legal and Ethical Issues in E-Commerce

E-Commerce or Electronics Commerce is a methodology of modern business, which addresses the need of
business organizations, vendors and customers to reduce cost and improve the quality of goods and services
while increasing the speed of delivery. Ecommerce refers to the paperless exchange of business information
using the following ways −
 Electronic Data Exchange (EDI)
 Electronic Mail (e-mail)
 Electronic Bulletin Boards
 Electronic Fund Transfer (EFT)
 Other Network-based technologies
Features
E-Commerce provides the following features −
 Non-Cash Payment − E-Commerce enables the use of credit cards, debit cards, smart cards, electronic
fund transfer via bank's website, and other modes of electronics payment.
 24x7 Service availability − E-commerce automates the business of enterprises and the way they
provide services to their customers. It is available anytime, anywhere.
 Advertising / Marketing − E-commerce increases the reach of advertising of products and services of
businesses. It helps in better marketing management of products/services.
 Improved Sales − Using e-commerce, orders for the products can be generated anytime, anywhere
without any human intervention. It gives a big boost to existing sales volumes.
 Support − E-commerce provides various ways to provide pre-sales and post-sales assistance to
provide better services to customers.
 Inventory Management − E-commerce automates inventory management. Reports get generated
instantly when required. Product inventory management becomes very efficient and easy to
maintain.
 Communication improvement − E-commerce provides ways for faster, efficient, reliable
communication with customers and partners.

Traditional Commerce v/s E-Commerce

SN Traditional Commerce E-Commerce

1 Heavy dependency on information Information sharing is made easy via electronic

exchange from person to person. communication channels making little dependency on
person to person information exchange.

2 Communication/ transaction are Communication or transaction can be done in

done in synchronous way. Manual asynchronous way. Electronics system automatically
intervention is required for each handles when to pass communication to required person
communication or transaction. or do the transactions.

3 It is difficult to establish and maintain A uniform strategy can be easily established and maintain
standard practices in traditional in e-commerce.
commerce.

4 Communications of business depends In e-Commerce or Electronic Market, there is no human

upon individual skills. intervention.

5 Unavailability of a uniform platform E-Commerce website provides user a platform where al l

as traditional commerce depends information is available at one place.
heavily on personal communication.

6 No uniform platform for information E-Commerce provides a universal platform to support

sharing as it depends heavily on commercial / business activities across the globe.
personal communication.
 E-Commerce - Advantages
E-Commerce advantages can be broadly classified in three major categories −
 Advantages to Organizations
 Advantages to Consumers
 Advantages to Society

Advantages to Organizations
 Using e-commerce, organizations can expand their market to national and international markets with minimum
capital investment. An organization can easily locate more customers, best suppliers, and suitable business
partners across the globe.
 E-commerce helps organizations to reduce the cost to create process, distribute, retrieve and manage the paper
based information by digitizing the information.
 E-commerce improves the brand image of the company.
 E-commerce helps organization to provide better customer services.
 E-commerce helps to simplify the business processes and makes them faster and efficient.
 E-commerce reduces the paper work.
 E-commerce increases the productivity of organizations. It supports "pull" type supply management. In "pull"
type supply management, a business process starts when a request comes from a customer and it uses just-in-
time manufacturing way.

Advantages to Customers
 It provides 24x7 support. Customers can enquire about a product or service and place orders anytime,
anywhere from any location.
 E-commerce application provides users with more options and quicker delivery of products.
 E-commerce application provides users with more options to compare and select the cheaper and better
options.
 A customer can put review comments about a product and can see what others are buying, or see the review
comments of other customers before making a final purchase.
 E-commerce provides options of virtual auctions.
 It provides readily available information. A customer can see the relevant detailed information within seconds,
rather than waiting for days or weeks.
 E-Commerce increases the competition among organizations and as a result, organizations provides substantial
discounts to customers.

Advantages to Society
 Customers need not travel to shop a product, thus less traffic on road and low air pollution.
 E-commerce helps in reducing the cost of products, so less affluent people can also afford the products.
 E-commerce has enabled rural areas to access services and products, which are otherwise not available to them.
 E-commerce helps the government to deliver public services such as healthcare, education, social services at a
reduced cost and in an improved manner.
 E-Commerce - Disadvantages
The disadvantages of e-commerce can be broadly classified into two major categories −
 Technical disadvantages
 Non-Technical disadvantages

Technical Disadvantages
 There can be lack of system security, reliability or standards owing to poor implementation of e-
commerce.
 The software development industry is still evolving and keeps changing rapidly.
 In many countries, network bandwidth might cause an issue.
 Special types of web servers or other software might be required by the vendor, setting the e-
commerce environment apart from network servers.
 Sometimes, it becomes difficult to integrate an e-commerce software or website with existing
applications or databases.
 There could be software/hardware compatibility issues, as some e-commerce software may be
incompatible with some operating system or any other component.

Non-Technical Disadvantages
 Initial cost − The cost of creating/building an e-commerce application in-house may be very high.
There could be delays in launching an e-Commerce application due to mistakes, and lack of
experience.
 User resistance − Users may not trust the site being an unknown faceless seller. Such mistrust makes
it difficult to convince traditional users to switch from physical stores to online/virtual stores.
 Security/ Privacy − It is difficult to ensure the security or privacy on online transactions.
 Lack of touch or feel of products during online shopping is a drawback.
 E-commerce applications are still evolving and changing rapidly.
 Internet access is still not cheaper and is inconvenient to use for many potential customers, for
example, those living in remote villages.
 E-Commerce - Business Models

E-commerce business models can generally be categorized into the following categories.

 Business - to - Business (B2B)

 Business - to - Consumer (B2C)
 Consumer - to - Consumer (C2C)
 Consumer - to - Business (C2B)
 Business - to - Government (B2G)
 Government - to - Business (G2B)
 Government - to - Citizen (G2C)

Business - to - Business
A website following the B2B business model sells its products to an intermediate buyer who then sells the
product to the final customer. As an example, a wholesaler places an order from a company's website and
after receiving the consignment, sells the endproduct to the final customer who comes to buy the product at
one of its retail outlets.
Business - to – Consumer

A website following the B2C business model sells its products directly to a customer. A customer can view the
products shown on the website. The customer can choose a product and order the same. The website will
then send a notification to the business organization via email and the organization will dispatch the
product/goods to the customer.

Consumer - to – Consumer

A website following the C2C business model helps consumers to sell their assets like residential property,
cars, motorcycles, etc., or rent a room by publishing their information on the website. Website may or may
not charge the consumer for its services. Another consumer may opt to buy the product of the first customer
by viewing the post/advertisement on the website.
Consumer - to – Business

In this model, a consumer approaches a website showing multiple business organizations for a particular
service. The consumer places an estimate of amount he/she wants to spend for a particular service. For
example, the comparison of interest rates of personal loan/car loan provided by various banks via websites. A
business organization who fulfills the consumer's requirement within the specified budget, approaches the
customer and provides its services.

Business - to – Government

B2G model is a variant of B2B model. Such websites are used by governments to trade and exchange
information with various business organizations. Such websites are accredited by the government and
provide a medium to businesses to submit application forms to the government.

Government - to – Business

Governments use B2G model websites to approach business organizations. Such websites support auctions,
tenders, and application submission functionalities.
Government - to - Citizen

Governments use G2C model websites to approach citizen in general. Such websites support auctions of
vehicles, machinery, or any other material. Such website also provides services like registration for birth,
marriage or death certificates. The main objective of G2C websites is to reduce the average time for fulfilling
citizen’s requests for various government services.

E-Commerce - Payment Systems

E-commerce sites use electronic payment, where electronic payment refers to paperless monetary
transactions. Electronic payment has revolutionized the business processing by reducing the paperwork,
transaction costs, and labor cost. Being user friendly and less time-consuming than manual processing, it
helps business organization to expand its market reach/expansion. Listed below are some of the modes of
electronic payments −
 Credit Card
 Debit Card
 Smart Card
 E-Money
 Electronic Fund Transfer (EFT)

Credit Card
Payment using credit card is one of most common mode of electronic payment. Credit card is small plastic
card with a unique number attached with an account. It has also a magnetic strip embedded in it which is
used to read credit card via card readers. When a customer purchases a product via credit card, credit card
issuer bank pays on behalf of the customer and customer has a certain time period after which he/she can
pay the credit card bill. It is usually credit card monthly payment cycle. Following are the actors in the credit
card system.
 The card holder − Customer
 The merchant − seller of product who can accept credit card payments.
 The card issuer bank − card holder's bank
 The acquirer bank − the merchant's bank
 The card brand − for example , visa or Mastercard.
Credit Card Payment Process

Step Description
Step 1 Bank issues and activates a credit card to the
customer on his/her request.
Step 2 The customer presents the credit card information to
the merchant site or to the merchant from whom
he/she wants to purchase a product/service.
Step 3 Merchant validates the customer's identity by asking
for approval from the card brand company.
Step 4 Card brand company authenticates the credit card
and pays the transaction by credit. Merchant keeps
the sales slip.
Step 5 Merchant submits the sales slip to acquirer banks and
gets the service charges paid to him/her.
Step 6 Acquirer bank requests the card brand company to
clear the credit amount and gets the payment.
Step 6 Now the card brand company asks to clear the
amount from the issuer bank and the amount gets
transferred to the card brand company.

Debit Card
Debit card, like credit card, is a small plastic card with a unique number mapped with the bank account
number. It is required to have a bank account before getting a debit card from the bank. The major difference
between a debit card and a credit card is that in case of payment through debit card, the amount gets
deducted from the card's bank account immediately and there should be sufficient balance in the bank
account for the transaction to get completed; whereas in case of a credit card transaction, there is no such
compulsion.

Debit cards free the customer to carry cash and cheques. Even merchants accept a debit card readily. Having
a restriction on the amount that can be withdrawn in a day using a debit card helps the customer to keep a
check on his/her spending.

Smart Card
Smart card is again similar to a credit card or a debit card in appearance, but it has a small microprocessor
chip embedded in it. It has the capacity to store a customer’s work-related and/or personal information.
Smart cards are also used to store money and the amount gets deducted after every transaction.

Smart cards can only be accessed using a PIN that every customer is assigned with. Smart cards are secure, as
they store information in encrypted format and are less expensive/provides faster processing. Mondex and
Visa Cash cards are examples of smart cards.

E-Money
E-Money transactions refer to situation where payment is done over the network and the amount gets
transferred from one financial body to another financial body without any involvement of a middleman. E-
money transactions are faster, convenient, and saves a lot of time.
Online payments done via credit cards, debit cards, or smart cards are examples of emoney transactions.
Another popular example is e-cash. In case of e-cash, both customer and merchant have to sign up with the
bank or company issuing e-cash.

Electronic Fund Transfer

It is a very popular electronic payment method to transfer money from one bank account to another bank
account. Accounts can be in the same bank or different banks. Fund transfer can be done using ATM
(Automated Teller Machine) or using a computer.

Nowadays, internet-based EFT is getting popular. In this case, a customer uses the website provided by the
bank, logs in to the bank's website and registers another bank account. He/she then places a request to
transfer certain amount to that account. Customer's bank transfers the amount to other account if it is in the
same bank, otherwise the transfer request is forwarded to an ACH (Automated Clearing House) to transfer
the amount to other account and the amount is deducted from the customer's account. Once the amount is
transferred to other account, the customer is notified of the fund transfer by the bank.

E-Commerce - Security Systems

Security is an essential part of any transaction that takes place over the internet. Customers will lose his/her
faith in e-business if its security is compromised. Following are the essential requirements for safe e-
payments/transactions −
 Confidentiality − Information should not be accessible to an unauthorized person. It should not be
intercepted during the transmission.
 Integrity − Information should not be altered during its transmission over the network.
 Availability − Information should be available wherever and whenever required within a time limit
specified.
 Authenticity − There should be a mechanism to authenticate a user before giving him/her an access
to the required information.
 Non-Repudiability − It is the protection against the denial of order or denial of payment. Once a
sender sends a message, the sender should not be able to deny sending the message. Similarly, the
recipient of message should not be able to deny the receipt.
 Encryption − Information should be encrypted and decrypted only by an authorized user.
 Auditability − Data should be recorded in such a way that it can be audited for integrity requirements.

Measures to ensure Security

Major security measures are following −
 Encryption − It is a very effective and practical way to safeguard the data being transmitted over the
network. Sender of the information encrypts the data using a secret code and only the specified
receiver can decrypt the data using the same or a different secret code.
 Digital Signature − Digital signature ensures the authenticity of the information. A digital signature is
an e-signature authenticated through encryption and password.
 Security Certificates − Security certificate is a unique digital id used to verify the identity of an
individual website or user.
Security Protocols in Internet
We will discuss here some of the popular protocols used over the internet to ensure secured online
transactions.

Secure Socket Layer (SSL)

It is the most commonly used protocol and is widely used across the industry. It meets following security
requirements −
 Authentication
 Encryption
 Integrity
 Non-reputability
"https://" is to be used for HTTP urls with SSL, where as "http:/" is to be used for HTTP urls without SSL.

Secure Hypertext Transfer Protocol (SHTTP)

SHTTP extends the HTTP internet protocol with public key encryption, authentication, and digital signature
over the internet. Secure HTTP supports multiple security mechanism, providing security to the end-users.
SHTTP works by negotiating encryption scheme types used between the client and the server.

Secure Electronic Transaction

It is a secure protocol developed by MasterCard and Visa in collaboration. Theoretically, it is the best security
protocol. It has the following components −
 Card Holder's Digital Wallet Software − Digital Wallet allows the card holder to make secure
purchases online via point and click interface.
 Merchant Software − This software helps merchants to communicate with potential customers and
financial institutions in a secure manner.
 Payment Gateway Server Software − Payment gateway provides automatic and standard payment
process. It supports the process for merchant's certificate request.
 Certificate Authority Software − This software is used by financial institutions to issue digital
certificates to card holders and merchants, and to enable them to register their account agreements
for secure electronic commerce.
 E-Commerce - B2B Model
A website following the B2B business model sells its products to an intermediate buyer who then sells the
products to the final customer. As an example, a wholesaler places an order from a company's website and
after receiving the consignment, it sells the endproduct to the final customer who comes to buy the product at
the wholesaler's retail outlet.

B2B identifies both the seller as well as the buyer as business entities. B2B covers a large number of
applications, which enables business to form relationships with their distributors, re-sellers, suppliers, etc.
Following are the leading items in B2B eCommerce.
 Electronics
 Shipping and Warehousing
 Motor Vehicles
 Petrochemicals
 Paper
 Office products
 Food
 Agriculture

Key Technologies
Following are the key technologies used in B2B e-commerce −
 Electronic Data Interchange (EDI) − EDI is an inter-organizational exchange of business documents in
a structured and machine processable format.
 Internet − Internet represents the World Wide Web or the network of networks connecting
computers across the world.
 Intranet − Intranet represents a dedicated network of computers within a single organization.
  Extranet − Extranet represents a network where the outside business partners, suppliers, or
customers can have a limited access to a portion of enterprise intranet/network.
 Back-End Information System Integration − Back-end information systems are database management
systems used to manage the business data.
Architectural Models
Following are the architectural models in B2B e-commerce −
 Supplier Oriented marketplace − In this type of model, a common marketplace provided by supplier
is used by both individual customers as well as business users. A supplier offers an e-stores for sales
promotion.
 Buyer Oriented marketplace − In this type of model, buyer has his/her own market place or e-market.
He invites suppliers to bid on product's catalog. A Buyer company opens a bidding site.
 Intermediary Oriented marketplace − In this type of model, an intermediary company runs a market
place where business buyers and sellers can transact with each other.

E-Commerce - B2C Model

In B2C model, a business website is a place where all the transactions take place directly between a business
organization and a consumer.

In the B2C model, a consumer goes to the website, selects a catalog, orders the catalog, and an email is sent
to the business organization. After receiving the order, goods are dispatched to the customer. Following are
the key features of the B2C model −
 Heavy advertising required to attract customers.
 High investments in terms of hardware/software.
 Support or good customer care service.

Consumer Shopping Procedure

Following are the steps used in B2C e-commerce −
A consumer −
 determines the requirement.
 searches available items on the website meeting the requirment.
 compares similar items for price, delivery date or any other terms.
 places the order.
  pays the bill.
 receives the delivered item and review/inspect them.
 consults the vendor to get after service support or returns the product if not satisfied with the
delivered product.
Disintermediation and Re-intermediation
In traditional commerce, there are intermediating agents like wholesalers, distributors, and retailers between
the manufacturer and the consumer. In B2C websites, a manufacturer can sell its products directly to
potential consumers. This process of removal of business layers responsible for intermediary functions is
called disintermediation.

Nowadays, new electronic intermediary breeds such as e-mall and product selection agents are emerging.
This process of shifting of business layers responsible for intermediary functions from traditional to electronic
mediums is called re-intermediation.
 E-Commerce - EDI

EDI stands for Electronic Data Interchange. EDI is an electronic way of transferring business documents in an
organization internally, between its various departments or externally with suppliers, customers, or any
subsidiaries. In EDI, paper documents are replaced with electronic documents such as word documents,
spreadsheets, etc.

EDI Documents
Following are the few important documents used in EDI −
 Invoices
 Purchase orders
 Shipping Requests
 Acknowledgement
 Business Correspondence letters
 Financial information letters

Steps in an EDI System

Following are the steps in an EDI System.
 A program generates a file that contains the processed document.
 The document is converted into an agreed standard format.
 The file containing the document is sent electronically on the network.
 The trading partner receives the file.
 An acknowledgement document is generated and sent to the originating organization.
 Advantages of an EDI System
Following are the advantages of having an EDI system.
 Reduction in data entry errors. − Chances of errors are much less while using a computer for data
entry.
 Shorter processing life cycle − Orders can be processed as soon as they are entered into the system.
It reduces the processing time of the transfer documents.
 Electronic form of data − It is quite easy to transfer or share the data, as it is present in electronic
format.
 Reduction in paperwork − As a lot of paper documents are replaced with electronic documents, there
is a huge reduction in paperwork.
 Cost Effective − As time is saved and orders are processed very effectively, EDI proves to be highly
cost effective.
 Standard Means of communication − EDI enforces standards on the content of data and its format
which leads to clearer communication.

Legal and Ethical Issues of E-Commerce

In the Information Age, technology evolves fast and data travels even faster. It can be difficult for the law to
keep up with new technologies and inventive ways to conduct e-business. Because of this, the law often lags
behind, and lawmakers end up drafting laws to clean up Internet messes instead of preventing them. Take
digital file sharing — dubbed piracy — for example, laws were not created to prevent digital piracy until
millions of albums were stolen and the music industry was crippled. The lag in laws mean that e-business
executives must rely on ethics as they move forward in e-commerce.

 Client Privacy

Internet businesses have a legal obligation to protect the private information of their customers. E-commerce
activity often involves collecting secure data such as names and phone numbers associated with email
addresses. Many e-business activities also involve transactions, so customer banking or credit card information
also ends up stored online. Legally, it is up to the e-business to store and protect or dispose of this sensitive
data. The Children’s Online Privacy Protection Act, for example, protects the online privacy rights of children.
Under this law, parents have control of what personal information their children can give to e-businesses.

 Advertising Online

Several online marketing issues spring from the inherent anonymity of the Internet. It is often difficult to know
the real identity of an e-business owner. A few online businesses take advantage of this in unethical or illegal
ways. Some e-businesses track the online activity of their customers so that they can show advertisements
based on the customer’s behavior. Behavioral advertising is not illegal, and it is not illegal to refrain from
disclosing that an e-businesses tracks activity, although many people consider this nondisclosure unethical.

 Copyright Infringements

Due to the Internet’s free flow of information, plagiarism and copyright infringement is a continual problem.
The Digital Millennium Copyright Act addresses plagiarism and copyright infringement in the specific context
 of the Internet and e-business. Under this law, it is illegal to use online technology to copy and distribute
legally copyrighted material, such as photography, articles or books, music or videos.

 Net Neutrality

Net neutrality is the hotly debated idea that Internet users should have equal access to all websites. Most
computers retrieve websites at the same speed, depending on the user’s Internet account settings or service,
no matter if the site is a multibillion-dollar company or a neighbor’s blog. But some Internet providers have
the capability to deliver different websites at different speeds. This is an issue because some websites could
pay providers to deliver their content at faster speeds, while smaller business with less capital might not be
able to afford the faster processing, and the Internet would lose its free-access-for-all feel. The Federal
Communications Commission currently supports net neutrality and bans providers from participating in any
program that offers extra pay for higher speed access to any websites.

 Disintermediation and Reintermediation

 Intermediation is one of the most important and interesting e-commerce issue related to loss of jobs. The
services provided by intermediaries are-

(i) Matching and providing information.

(ii) Value added services such as consulting.

The first type of service (matching and providing information) can be fully automated, and this service is likely
to be in e-marketplaces and portals that provide free services. The value added service requires expertise and
this can only be partially automated.  The phenomenon by which Intermediaries, who provide mainly
matching and providing information services are eliminated is called Disintermediation.

The brokers who provide value added services or who manage electronic intermediation (also known as
infomediation), are not only surviving but may actually prosper, this phenomenon is called Reintermediation.

The traditional sales channel will be negatively affected by disintermediation. The services required to support
or complement e-commerce are provided by the web as new opportunities for reintermediation. The factors
that should be considered here are the enormous number of participants, extensive information processing,
delicate negotiations, etc. They need a computer mediator to be more predictable.

 Legal Issues

Where are the headlines about consumers defrauding merchants? What about fraud e-commerce websites? 
Internet fraud and its sophistication have grown even faster than the Internet itself. There is a chance of a
crime over the internet when buyers and sellers do not know each other and cannot even see each other.
During the first few years of e-commerce, the public witnessed many frauds committed over the internet. Let’s
discuss the legal issues specific to e-commerce.

 Fraud on the Internet

E-commerce fraud popped out with the rapid increase in popularity of websites. It is a hot issue for both cyber
and click-and-mortar merchants. The swindlers are active mainly in the area of stocks. The small investors are
lured by the promise of false profits by the stock promoters. Auctions are also conductive to fraud, by both
sellers and buyers. The availability of e-mails and pop up ads has paved the way for financial criminals to have
access to many people. Other areas of potential fraud include phantom business opportunities and bogus
investments.
INTERACTIVE LEARNING SESSION……

1. Describe Electronic Commerce, its scope, benefits, limitations and types.

2. Describe the major applications and issues of business-to-consumer commerce, service
industries in e-commerce, and electronic auctions.
3. Discuss the importance and activities of B2C market research, advertising and customer
service.
4. Describe business-to-business and collaborative commerce applications.
5. Describe emerging EC application such as e-government and mobile commerce.
6. Describe the e-commerce infrastructure and support services, including payment and
logistics.
7. Discuss legal and other implementation issues.

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