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V.a. Weaving a Web of Trust: Consumer Protection and Competition Policy

Written by: OECD Development Centre

Article Overview: Trust is needed at many levels, including hardware and software security, the regulatory regime, familiarity and users’ perceptions. Factors affecting the level of trust required and provided include:

V.a. Weaving a Web of Trust: Consumer Protection and Competition Policy

Trust is needed at many levels, including hardware and software security, the regulatory
regime, familiarity and users’ perceptions. Factors affecting the level of trust required and
provided include:
— where and how payment takes place (whether real or virtual — for virtual settlement,
either electronic money or payment instructions must be transmitted over the Internet);
— when settlement takes place (prior to, at the time of, or after the transaction);
— who settles (established incumbents or new entrants);
— whether the transaction is B2B or B2C (with online settlement much less advanced in
the former than the latter); and
— whether settlement can be traced36.Establishing trust in the eminently impersonal environment of the Internet is not
straightforward. Traditional paper-based rules and regulations may leave room for
uncertainty as to the validity and legal effect of electronic transactions. In many societies,
especially in the developing world, trust is established and reinforced through family
association, repeated personal contact and interaction. Modern societies have devised
ways of extending the basis for trust through the impartial enforcement of the law and its
adaptation to a new technological environment. This is the basis of the trust that underpins
e-commerce in the developed world. Where legal and juridical institutions are
underdeveloped, as in much of the developing world, e-companies find themselves at a
disadvantage because of insecurity, whether real or perceived. The reluctance to entrust
sensitive personal information — like credit card numbers — to businesses operating on
the Web remains strong. Surveys of e-commerce users in developing countries suggest a
low willingness to provide sensitive financial information over the Web. In China, for
example, banks only recently began issuing true credit cards, but they are rare, and while
many people have debit cards that draw directly from their bank accounts, few trust using
the cards online37. As a result, cash on delivery is the most common method of e-commerce
payment. The auction house EachNet, with listings that span nine cities, links buyers and
sellers in any one city. After the bidding is closed, they arrange to meet each other face to
face38. Online payment is, however, becoming easier, with a new Shanghai-based company,
Chinapay, offering the first city-wide online payment system39 and a similar company (Cyber
Beijing) operating in the capital (though without being able to process transactions in real
time).
OECD e-shoppers may be reluctant to entrust confidential financial details to
businesses operating in developing countries that have a weak reputation for rule of law
and prosecution of business fraud. The site of the above-mentioned Costa Rican coffee
company, for example, is not currently secured, so that consumers have to call a toll-free
number to place an order. One government effort to address security concerns is
Singapore’s acting Certification Authority (CA), Netrust, which will verify merchant and
consumer identities, examine merchants’ transaction and security procedures and issue
digital certificates to those who comply with standard criteria. Private solutions may also
be possible: for instance, websites like Hypermart host (and help build) storefronts for
thousands of small- and medium-sized businesses, providing a common secure payments
system for all (ITC, 2000).
A broader issue of confidence arises with respect to the accuracy of product
descriptions and claims and the enforcement of contracts. This is a general consumer
protection issue, but the newness and relative anonymity of e-commerce presents new
challenges40. New entrants have generally not had time to build reputations for honesty
and reliability, and low entry and exit costs also weaken incentives for honest dealing. For
this reason, as noted above, brand recognition may matter even more in the world of
e-commerce than in the real world41. To some extent, the problem of trust is being addressed
through private sector innovation42. Some private service providers offer to design secure
websites for small enterprises 43. Also, an effort is underway to develop a system of
collaborative ratings that small e-businesses could display on their websites to inform,
and presumably reassure, consumers. For example, in the case of electronic exchanges,
those transacting through the exchanges can rate suppliers on the basis of quality of
service, speed of delivery and other measures. Even here, there is clearly scope for fraud.
So, certain safeguards are built into the rating system: e.g. evidence of a purchase is
required for one’s rating to count, and ratings of regular customers are assigned a higher
weight. Trends in ratings would be available to users, as well as comments by specific
customers. Such initiatives do not, however, fully address consumer protection concerns.
Thus, regulators in OECD countries see it as incumbent upon themselves to offer
e-consumers a level of protection on a par to that afforded other consumers, and the
business community is currently thrashing out self-regulation guidelines to pre-empt more
restrictive legal measures. Relevant issues in this context are full disclosure of the terms of sale; the opportunity to review the transaction and all costs (including shipping); standards
for cancellation, return, refund and warranty; and security for customers’ personal records.
The risk that information gathered on the Internet can be gained by private investigators,
used by a thief, or passed on to an insurance company is at the core of the debate on
privacy concerns in OECD countries. The US Federal Trade Commission published data
showing that fewer than 1 in 10 Internet sites that collect personal identifying data display
the industry’s voluntary privacy seal. It suggested that Web sites should be required by
law to tell users in clear language what information they collect (often surreptitiously, through
“cookies” implanted in computers to track users’ movements), and to/with whom they sell/
trade personal data44.
A first-best solution to make it possible for agents to conduct business online without
need for face-to-face contact would be to put in place a legal and judiciary framework that
meets certain minimum standards of transparency, impartiality and timeliness. In many
countries, however, this remains a distant goal. In the medium term, self-regulated codes
of conduct currently under discussion in many OECD countries may provide a model from
which business in developing countries could take inspiration. Eventually, it may not be
too far-fetched to imagine that non-OECD businesses could subscribe, either individually
or as part of a group of like-minded e-ntrepreneurs (e.g. associations or co-operatives), to
codes such as OECD (2000d). For this to work, however, there is apt to be need of
independent compliance accreditation.
There are also concerns that in some cases electronic exchanges, instead of reducing
market power, may have the reverse effect if they lead to collusion. To the extent that B2B
electronic exchanges serve to aggregate demand, such exchanges can contribute to
monopsony (or oligopsony) power in markets characterised by a few large buyers and
many small sellers. Also, if the major trader on an exchange is its owner, this could give it
privileged access to market information as well as to revenue from transaction fees paid
by competitors using the exchange. Since for the foreseeable future, most of the major
global electronic exchanges are likely to be incorporated in the OECD area, developing
country regulators may have little power to shape their treatment by competition policy.
Their best hope lies in a coincidence of interests between the prospective OECD suppliers
to those exchanges and prospective developing country suppliers in ensuring against
collusive or other anti-competitive practices by large OECD-based buyers.

OECD DEVELOPMENT CENTRE
Working Paper No. 164
E-COMMERCE FOR DEVELOPMENT: PROSPECTS AND POLICY ISSUES
by
Andrea Goldstein and David O’Connor

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Article Tags: credit card numbers, credit cards, debit cards, developing world, electronic money, electronic transactions, establishing trust, familiarity, impartial enforcement, incumbents, insecurity, perceptions, personal contact, regulatory regime, reluctance, software security, technological environment, true credit, virtual settlement, world trust



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