Building e-trust

E-commerce is here to stay. We need only look at the history of Dell, or eBay for undeniable proof that it's a growth industry. But could it be better? Has the media coverage of e-commerce flaws as they relate to scams, identity theft, massive violations of privacy and lax security resulted in a fundamental lack of trust in e-commerce?

In a 2002 survey conducted by Consumers Union of the United States, only 29 percent of 1,500 U.S. Internet users polled said they trust Web merchants -- far fewer than those who trust brick-and-mortar retailers. Society has only begun to explore the real potential of e-commerce. While many people are content to purchase books and CDs from well-known sites, they are less likely to delve into online auctions because they don't trust the system, nor do they buy from smaller, less-well-known sites, even when those sites offer a better deal.

E-trust comes in two flavors: trust in the trade and trust in the trader. Increasing trust in the trade requires that we replicate what customers experience when they walk into stores. To do that, Web sites need the following features:

- Security and privacy. A customer's credit card information is no more secure on the street than on a Web site, but because of various online security breaches, the perception is that the Internet has no regard for privacy or security. We know the solution to this problem. The necessary privacy and security measures are well defined; we just need to implement them.

- Ease of access and personalization. When customers can easily find what they're looking for, they feel welcome and comfortable, and they're more likely to hang around to buy something. Think of user personalization and user friendliness as the Web equivalents of the greeters at your local shops who are there to direct you toward what you need.

- Order status. The shops have an advantage. When you buy something, you usually take it with you. The entire trade is completed in minutes. E-commerce sites must compensate for delayed delivery with status updates. For example, Canada-based online retailer sends e-mails not only to confirm that an order was placed, but also to inform customers that shipments have left the warehouse. uses the Internet to let customers check the status of shipments at any point in its delivery process. In both cases, e-trust is increased via the flow of trade information.

- No charges until shipped. All e-commerce sites could improve customer service and trust by delaying credit card charges until the order has shipped. These are simple approaches to e-trust, but the real issue isn't the trades that go well, but the trades that go astray. How is the customer treated when a problem occurs?

Maybe we need something like the pizza delivery strategy: Thirty minutes, or it's free! Would consumers embrace e-commerce more strongly if a delay in shipping was compensated by a 5 percent to 10 percent reduction in the sale price?

What happens when the goods delivered weren't what was ordered or were damaged in transit, or when an item was back-ordered and never delivered? None of these problems is uncommon. The easier it is for consumers to gain satisfaction from an organization, the higher their level of trust in it. This is as true for e-commerce as it is for a traditional retailer.

Dispute Resolution

Given the nature of the Internet, in particular the distance between buyer and seller, as well as the prohibitive cost of legal action across jurisdictional boundaries, how does your e-commerce site resolve disputes? Does the customer always lose? Or do you provide some form of alternative dispute resolution (ADR)?

The primary reason it's difficult to get people to trust the Internet is because it's, to use a tired cliche, like the Wild West. When things go horribly wrong, consumers are on their own; they have no safety net. They know this. Any site that recognizes this inherent weakness of e-commerce and goes out of its way to provide consumer support via a dispute resolution process by a neutral third party will inevitably build consumer confidence.

Of course, there's another way to increase trust in your e-commerce activities -- become a brand recognizable by everyone. That leads us to the real problem of e-trust: How can we trust those we don't know? How can we protect ourselves from a trader with no desire to trade fairly, or convince a potential customer that we're not a scam artist?

Escrow and Honesty

Escrow is a partial solution. In escrow, a neutral third party holds funds until the goods are received and verified. Then the buyer authorizes the payment. Escrow arrangements, such as those made through, are fairly effective, take relatively little time to implement and may cost 0.85 percent to 6 percent of the value of the transaction.

As with all third-party services, there are minimum costs. charges at least US$15 per transaction. Therefore, transactions of $100 or less suffer at least a 15 percent surcharge. This is enough to preclude many casual traders from taking advantage of the added security.

The real problem with escrow is that it can provide only an asymmetrical assurance of honesty. Obviously, no seller with the intent to defraud a buyer will enter into an escrow agreement. Do dishonest buyers avoid escrow?

Consider the following situation: If a company wished to guarantee 100 percent e-trust in all transactions, it could attach escrow to every sale, allowing customers to pay only if they're satisfied. Internet sales would skyrocket.

However, buyers might take advantage of the asymmetry of escrow. It's all too easy to accept a shipment, even sign for it, and then claim it wasn't received and withhold payment. The seller, even though it has signed receipt of goods, must now take expensive legal action to force payment. Any bets on how many times this might happen?

Escrow fails because it compels the seller and not the buyer to trade fairly. We require a tactic that forces both parties into honesty.

Kings' Bail

Such an arrangement has existed for thousands of years, dating from the days when kings would voluntarily exchange hostages to enforce a deal. We call it "kings' bail."

We typically think of a hostage as someone who is taken by force and held until a ransom is paid. Sometimes the ransom is financial, or it may be a demand that another, usually more powerful, party take a specific action, such as releasing prisoners or removing troops from a disputed territory.

However, kings would also voluntarily exchange hostages, usually sons and daughters, in order to force future compliance of a contract or treaty. Since both parties had placed something of great value at risk, both were motivated to honor the agreement.

Casual traders on the Internet could easily enter into such an arrangement. Consider a buyer and a seller wishing to enforce complete honesty in the purchase of a toner cartridge worth $50. Both parties deposit $500 into a computer-controlled, neutral kings' bail account. The "hostage" is worth more than the trade. The seller now sends the cartridge; the buyer sends the check.

If either party fails to receive what it expected, it can instruct the kings' bail service to send both $500 hostages to a randomly chosen charity. (And neither party will receive the charitable receipt for this forced donation.) If both parties are sufficiently satisfied with the transaction, they instruct the kings' bail service to return the hostages.

The advantage of kings' bail over the traditional escrow service is that because financial hostages are taken from both sides, neither party can cheat.

Why would anyone in his right mind, especially the buyer, enter into such an arrangement? For the same reason kings were willing to place their children into hostage situations: They wanted to create an honest contract. The exchange of hostages provided a fully symmetrical assurance of future compliance.

Another fair question is, Why would anyone voluntarily accept an additional $500 loss? The honest answer is that no one would, but it's the threat that someone can do this that keeps everyone honest. Kings' bail places both buyer and seller in a situation where it's in their best interests to successfully complete the transaction.

E-commerce involves trading among geographically distant partners, usually well beyond the reach of the legal system. As such, it poses a unique challenge if the objective is to trade without risk of loss. Instilling e-trust by doing little things, like building user-friendly, secure, private, interactive and pleasant sites, is a good first step. But there's a pressing need to strike at the heart of the e-trust issue. We're dealing with strangers. We must find innovative ways to force them to trade honestly.

Applying 'Kings' Bail' to B2B

Kings' bail can secure any transaction, including business-to-business e-commerce. The central idea is to construct a purely financial exchange that's worth more than the final exchange of goods and that will be completed if either party fails to comply with the original deal.

For example, if a seller is exporting $500,000 worth of goods to a buyer it has never done business with, then both parties will deposit $1 million into a neutral kings' bail account. When this mutual deposit is 100 percent confirmed, it's safe for the seller to ship the pig iron, truck parts, chemicals or pork bellies.

The seller knows that its trading partner will pay for the $500,000 shipment, because if it doesn't, the buyer will lose its $1 million. For the same reason, the buyer knows the seller will ship the goods.

Kings' bail doesn't really create trust; it merely holds people to their word, which in e-commerce is a good enough substitute.

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