Introduction to Electronic Commerce
Electronic Commerce
Electronic commerce (e-commerce or e-business) in its broadest sense
can be defined as the process of buying and selling or exchange of
products, services, and information using telecommunication technology,
primarily those that are part of the Internet and Web, that improve existing
business processes and to identify new business opportunities.
Three technologies that contributed to the rapid development of electronic
commerce are:
 The Internet
 The World Wide Web
 The networked PCs
These technologies helped implement business processes that could not
be implemented before in the global scale and in reduced transaction
costs.
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Classification of e-Commerce
Electronic commerce can be classified into several categories according to
the nature of transaction. For example:
Business-to-Consumer (B2C): Frequently people refer electronic
commerce as the shopping on the part of the Internet called World Wide
Web (or on-line shopping), because it is the most visible part of the ecommerce. This is termed as business-to-consumer electronic commerce.
Business-to-Business (B2B): When the electronic business transactions
take place between two trading partners or businesses, it is termed as
business-to-business e-commerce.
Consumer-to-Consumer (C2C): In this category, consumers sell directly
to consumers. Examples are, individuals selling personal property through
classified ads (www.classified2000.com) and auctions.
Consumer-to-Business (C2B): This category includes individuals who
sell products or services to organizations, as well as individuals who seek
sellers, interact with them, and conclude a transaction.
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History of Electronic Commerce
Although the Internet and World Wide Web made electronic commerce
very popular among businesses, consumers, and government agencies,
electronic commerce existed for many decades.
Electronic Fund Transfer (EFT): Traditionally, banks have been using
electronic fund transfer (EFTs or wire transfer), which are electronic
transmissions of account information over private communication networks.
Banks have been using ATM machines to provide account information and
cash transactions to customers through electronic fund transfers.
Electronic Data Exchange (EDI): Businesses have been using electronic
data exchange (or EDI) to transmit invoices, purchase orders, and
payments vouchers between trading partners. In this case, business
partners transmit computer-readable data in a standard format that is
understandable by both partners.
A common example is the purchase of gas from a gas station using credit
cards and gas cards. Using EDI, businesses not only reduced cost by
avoiding printing and mailing, but also using a standard format, they were
able to reduce errors that occur every time new data is entered to print a
form.
Until recently, the cost of EDI was high due to high cost of hardware and
software, and especially the telecommunication network that was needed
to make direct connections between the trading partners using leased
telephone lines or subscribing to a Value Added Network.
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Pure versus Partial Electronic Commerce
Electronic commerce can take many forms depending on the degree of
digitization of product (or service) sold, the process, and the delivery agent.
A product can be physical or digital, an agent can be physical or digital, and
the process can be physical or digital. These create eight cubes, each of
which has three dimensions.
In traditional commerce, all dimensions are physical (lower left cube), and
in pure e-commerce all dimensions are digital (upper right cube). All other
cubes include a mixture of physical and digital dimensions.
If there is at least one digital dimension, we consider the situation as ecommerce, but not a pure one. Buying a book from Amazon is not pure,
because the book delivery is through FedEx. However, buying a software
through download is pure, because the delivery, payment, and agent are
digital.
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The Framework of Electronic Commerce
Electronic commerce is more than a Web site. It encompasses areas such
as home banking, shopping in online stores and malls, buying and selling
stocks, finding jobs, conducting an auction, and collaborating on research
and development projects.
To execute these applications, it is necessary to have supporting
information and organizational structure and systems.
Electronic commerce applications are supported by technology
infrastructure and their implementation is dependent on four major pillars:
people, public policy, technical standards and protocols, and other
organizations.
The electronic commerce management coordinates the applications,
infrastructures, and supporting pillars. In this course, we will concentrate
more on the technical infrastructure of e-commerce.
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Essential Elements of an Electronic Commerce
There are certain key elements that are required to set-up an electronic
commerce site. These elements work together to provide marketing
opportunities for buyers and sellers over the telecommunication network.
The most common elements or activities that are required to have an
electronic commerce presence and complete a secured electronic
transaction for an online merchant are:
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Technology
Electronic Market
Electronic Shops
Payment
Settlement
Security
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Technology
The fundamental basis of electronic commerce is the Internet, a global
network of computers and the World Wide Web, Web servers with
hypermedia pages.
The Internet provides the data transmission service between two
computers and the Web servers provide the hosting service for the
electronic shops. Thus a client computer in one part of the global network
can request a hypermedia page from the Web server connected in another
part of the global network.
Several other hardware and software components must be in place to
support an electronic commerce application. These are: Web browser,
network server, database server, commerce server, network switches and
hubs, encryption hardware and software, and multimedia tools (HTML,
DHTML, ASP, XML, Java Applets, etc.).
Electronic Market
A market is a network of interactions and relationships where information,
products, services, and payments are exchanged. When the market place
is electronic, the business center is not a physical location but rather a
network-based location where business interactions occur.
Electronic market is the place where shoppers and sellers meet. It is virtual
trading area where deals are struck over a network. The market handles
all the necessary transactions, including the transfer of money between
banks.
The size and scope of the electronic market is open. The principal
participants – transaction handlers, buyers, brokers, and sellers, are not
only at different locations but they seldom know each other.
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Electronic Shops
The electronic shop can be thought of as the ‘look and feel’ of the screen
that fronts the customer. Just like street-stores, the aim is to attract the
customer to browse and ultimately, to buy.
The fundamental requirement for presentation of online products and
services in the e-business world is the catalogue, which may range from a
simple Web page to a large-scale corporate catalogue that can be
customized.
There is difference between the electronic shops that are made for
business-to-business and business-to-consumer markets. The consumeroriented catalogues tend to be stronger on presentation to attract
consumers. The business catalogues are more focused on quick access to
another business’s needs, and these tend to be high volume and fairly
routine.
Payment
In traditional business, there are three basic ways of payment for a
purchase; cash, check, or credit card. When a customer arrives at an
electronic store’s checkout counter, merchants also want to offer them
payment options that are fast, safe, convenient, and widely accepted.
Various payment mechanisms are developed for electronic commerce that
can handle large payments, small payments of few dollars
(micropayments), or even payments of a fraction of a dollar
(nanopayments).
Four technologies are commonly used in business-to-consumer ecommerce. They are: electronic cash, software wallets, smart cards, and
credit/debit cards.
Business-to-business e-commerce commonly use EDI to exchange
electronic accounting documents to pay for multiple purchases, payment of
which are cleared directly from banks.
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Settlement
The ‘virtual payment’ for goods and services offered over the Internet by a
customer, needs to be converted into dollar bills, by a merchant offering
electronic shopping.
In a traditional credit/debit card transaction, typically a store-clerk runs a
credit card through an online terminal and the customer’s account is
charged immediately. The process is slightly different for Internet
shopping.
For some credit cards such as American Express and Discover, who offer
these cards directly to consumers, banks and other financial institutions
serve as a broker between the card users and the merchants accepting the
cards.
In other cases, such as VISA or MasterCard, which is offered by multiple
financial institutions, a third-party clearinghouse is used who is responsible
for handling authorization and transactions between the customer’s bank
and merchant’s bank.
Thus, technologies (hardware and software) must be in place and an online
merchant must set up an account with a clearinghouse to process
customer credit card transactions through a clearinghouse Web server.
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Security
In a typical business, a physical location and human beings are involved in
transactions. A virtual shop does not have these properties even it is
offered by a trusted merchant. Thus there are concerns about hackers
stealing credit card and personal information while data are transmitted
over the Internet.
Data communication in a secured environment is necessary to provide
confidence on the shopper to shop in an electronic marketplace. Various
methods of ‘encryption’ and ‘coding’ mechanisms are used to handle
secured data transmission.
As a merchant in the Web opens a virtual shop and there is no physical
location, there is a need to have a third party who provides authenticity of
an online merchant.
Thus in addition to encrypted data transmission, there are various trusted
third party, who provides a Web site’s digital certificate in the form of a
public key-private key pair. The public key can be same for all merchants
and it is used in the encryption algorithm to lock a data packet during
transmission. Only the merchant who has the ‘paired’ private key (stored in
their Web server) can open the data packet.
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