E-Commerce

What It Means

E-Commerce, or electronic commerce, is the conducting of business through electronic means (typically computer systems and the Internet) rather than through traditional face-to-face, mail-order, or telephone transactions. There are two major categories of e-commerce transactions: business-to-business and business-to-consumer. A business-to-business transaction occurs when one business makes a purchase from another business, for example, when a store manager orders merchandise from a supplier. A person who runs a landscaping business would likely purchase more peat moss by going to his supplier’s website and entering a code to access his online account (the record of his purchases and payments to the supplier). The landscaper would request more supplies by clicking on the proper links and icons, the fees would be automatically deducted from his business’s bank account, and the supplier would ship the peat moss to him.

An electronic business-to-consumer transaction occurs when a customer goes to a business’s website to purchase goods or services. For example, many people buy books and DVDs at Amazon.com rather than going to a traditional store to purchase these items. Most business-to-consumer transactions require the consumer to visit the company’s website and place items in an online “shopping cart” (by clicking on computer images or links that signal a request to purchase an item). The customer “checks out” by providing credit-card and mailing information in the appropriate boxes. There are, however, other types of business-to-consumer e-commerce. For instance, people can arrange to pay bills electronically. If a customer were to set up a bill payment plan with his or her telephone company, the phone company would automatically deduct the amount of the phone bill from the customer’s checking account at the end of each month.

When Did It Begin

Charting the beginnings of electronic commerce depends on how one defines the term electronic. In the broadest sense of the definition, electronic commerce was first made possible in 1844 when Samuel Morse (1791–1872) invented the telegraph. By 1858 stock brokers (agents who negotiate purchases and sales of stock) in Europe were telegraphing orders to buy and sell stock (shares of ownership in corporations) to brokers in North America. Almost 20 years later, in 1877, Western Union, the world’s largest telegraph company, arranged for a total of $2.5 million in electronic financial transactions.

What contemporary American consumers normally consider e-commerce (the buying and selling of goods over the Internet) was made possible in 1994, when the World Wide Web became available to large numbers of people. Amazon.com and eBay, two of the largest e-commerce websites, were both created in 1995. Amazon.com originally sold books online but has since expanded; it sells a wide range of merchandise that includes clothes, appliances, auto parts, computer software, and home appliances. eBay is an auction website, which means that sellers put products up for sale and potential buyers bid against each other for the products. When a transaction is complete, the buyer and seller make arrangements for shipping the merchandise. eBay makes money by charging the seller in the transaction a fee for facilitating the sale.

More Detailed Information

Most market analysts (people who analyze trends in the economy) agree that the success of e-commerce depends primarily on consumers’ faith in the technology that conducts the transaction. This was true even before before the Internet was first used to sell products. In the 1980s automated teller machines (ATMs), which offer another form of e-commerce, became commonplace in the United States. These machines had taken a long time to catch on in this country, however. The first ATM was installed in 1939 in New York City but was removed after just six months because the customers of the City Bank of New York were reluctant to use it. The next ATM is believed to have been installed in the late 1960s in London. This time bank clients gradually came to trust the technology and by the mid-1970s ATMs, sponsored mostly by Lloyd’s Bank, were being installed throughout the United Kingdom.

By comparison, the general population developed faith in web-based technology and online purchasing quickly, taking approximately five years to grow comfortable with Internet transactions. Several factors restricted the early growth of online markets, however. First, many customers were not comfortable entering their credit-card numbers onto a website to be transported to the company via the Internet. These consumers worried that hackers (people who gain illegal access to other people’s and businesses’ computer systems) could use the Internet to break into a company’s computer files and steal all of the credit-card numbers stored in a database there. This problem was largely resolved by 1998 with the development of a secure encryption system, which is a very complex method of scrambling, or encoding, credit-card information so that only the vendor’s computer system can read it.

Though encryption is a highly technical process that is difficult for the average consumer to understand, it is relatively easy for a consumer to know whether or not his credit-card information will be encrypted. Normally, the initial portion of a website’s address reads “When a customer begins the check-out portion of online shopping, however, the initial part of the web address should read “https://.” The added “s” indicates that all data entered onto that web page will be encrypted. Even though this secure technology existed in 1998, consumer purchasing statistics indicate that the average consumer did not become comfortable with online transactions until 2001-02.

Another factor that slowed the growth of online shopping was that the average consumer did not have access to web technology in the 1990s. According to most reports, about 40 million people across the globe were connected to the Internet by the end of 1996. That number grew to 605 million people in 2002. Customers were also reluctant to give up the social aspects of shopping, such as gathering in a common area (a mall or large store) with large numbers of people and speaking with check-out clerks. Perhaps the most important obstacle to online shopping was the fact that consumers generally want to have their products or services immediately after they make a purchase, which is frequently impossible when buying online.

Recent Trends

By 1996 Internet use was doubling every 100 days, and business people viewed the World Wide Web as a remarkable new opportunity to reach more customers. At that time some economists predicted that business-to-consumer e-commerce would be a $300 billion dollar industry by the early 2000s. Thus between 1998 and 2000, the number of dotcom companies (businesses that sell goods and services exclusively on the Internet rather than in traditional brick-and-mortar, or actual, stores) increased drastically. Two examples of online-only or dotcom enterprises were Pets.com, which sold pet food, and Webvan, which sold groceries. In the spring of 2000, the e-commerce boom ended, primarily because many of the companies attempted to grow too large too quickly, and a general recession followed, lasting through 2001 followed. Many of the dotcoms, including Pets.com and Webvan, went out of business.

Since 2002 e-commerce has gradually increased, but the market has changed. Whereas before the recession there were numerous businesses like Pets.com and Webvan, there are now fewer enterprises that sell merchandise exclusively on the Internet. Most large brick-and-mortar businesses, however, such as Barnes and Noble (a bookstore) and Macy’s (a clothing store) offer online shopping. In addition many medium-sized and small local businesses conduct sales online as well as offering a traditional in-store shopping experience.