Select Committee on European Union Written Evidence

Memorandum by PricewaterhouseCoopers


1.  PricewaterhouseCoopers welcomes the opportunity to submit evidence to Sub-Committee B's inquiry into the development and co-ordination of policy in the European Union as it relates to e-commerce. PricewaterhouseCoopers is one of the largest e-commerce consulting firms. Together with IBM and Andersen Consulting, it constitutes the top tier of e-commerce consultants. Our work in this area involves:

    —  Management consulting across the full range of services in:

-—  strategy;

-—  process improvement;

-—  technology implementation;

    —  Security consulting

    —  Tax consulting

  2.  The firm's clients are concentrated at the top end of the business world. We focus our attention on global accounts and major domestic companies.

  3.  PricewaterhouseCoopers operates in 150 countries around the world, including all of the Member States of the European Union. The firm's management consulting practice, which generates the bulk of its fees in e-commerce, consists of 35,000 practitioners, while the entire firm has a staff of around 150,000.

  4.  The firm's e-commerce practice has grown over the last three years from relatively small revenues derived from consulting on traditional "e-business" issues (such as payment systems and electronic data interchange in manufacturing and retailing), to a significant portion of its income—estimated to be at least US$1bn globally in the financial year 1999-2000 from an overall US$6bn in Management Consulting. The firm expects that at least one quarter income of this will be generated within the EU. The vast majority of the rest will come from the USA, with significant amounts from Canada, Australia and Japan.

  5.  In this memorandum we offer some insights as leading advisers to business and governments into the applications of e-commerce and examine some of the strategic issues on which the Sub-Committee has asked for views.



6.  The scale of PricewaterhouseCoopers operations around the world gives us some insight into the speed at which e-commerce is developing and the focus of the main activities.

  7.  In most parts of the world, a major initial focus has been e-procurement. This is a significant aspect of business-to-business ("B2B") e-commerce, and involves a company using electronic catalogues and marketplaces operating on the Internet to source the goods it needs to run its business. Often it is the incidental requirements that are procured this way, rather than the main production raw materials (which are frequently obtained via large, direct draw down contracts). The incidental requirements—everything from computer systems to paperclips or maintenance to consultancy—are often costly to purchase, because of complex purchasing systems which do not distinguish in their processes between small and large cost items. Hence a company may incur £60-100 in purchasing costs to procure a personal computer, and the same costs to acquire a box of pencils. Obtaining these kinds of goods through a disciplined process mediated through the Internet has three benefits on cash flow and overall costs:

    —  the purchase process is quicker and cheaper;

    —  buyers can be disciplined only to use approved suppliers and items;

    —  better deals can be done with preferred suppliers.

  The second benefit listed above (purchasing discipline) can account for 80 per cent of the benefits in many cases.

  8.  e-Procurement systems provide a straightforward and highly beneficial entry point to e-commerce for many businesses—and they can release cash which can be ploughed back into further e-commerce investments. We believe this will be an important aspect of growth in confidence in e-commerce and will stimulate its expansion. Furthermore, increasing focus on electronic procurement methods will create a situation where all businesses will want to offer their goods and services in this way and thus increase the saturation of Internet coverage among small and medium as well as large businesses.

  9.  The major benefits of e-procurement probably do not require direct promotion by the EU, but assistance (in terms of information or even tax benefits and funding) to smaller businesses setting up catalogues and joining in to larger e-procurement networks could merit consideration.

  10.  Another important aspect of B2B e-commerce is sales and order processing systems. These allow the customer to configure their order on-line (eg for personal computers) and then submit the order. This is very powerful for large companies that, for example, buy high tech equipment or vehicles in large quantities and for those companies that sell them. Again the benefits in terms of time saved, ability to handle volume without increasing staff and reduced error rates, are large and self-evident. This approach is necessary for survival now in high tech businesses. We do not consider that intervention by the EU would be necessary since the competitiveness of the marketplace and the sensitivity of customers to quality and responsiveness is driving the evolution of services to the right direction.


  11  It is in business-to-consumer ("B2C") sales that the Internet is most visible. Almost every significant organisation that sells to the consumer now has a web site and a substantial proportion of these businesses actually sell goods through the site, even if only via an order-taking process rather than using real-time payment.

  12.  The important new developments here over the next few years will involve both a huge expansion of sales and the migration of much of this business to Internet services mediated by interactive television and mobile phones, rather than through PCs. This will make the Internet much more ubiquitous and accessible, and it will increase trading volumes hugely. Under these circumstances, a number of concerns arise. One is the need for more robust and suitable payment mechanisms (discussed at paras 13-17, below). Another is the need for standardisation of basic services across the EU in order that mobiles users, for example, can be assured of the same services and service levels wherever they are in the EU. This may be less easy to achieve with interactive TV, but it would be good to know that the Internet services a consumer can access from, say, the ITV system in a hotel in Portugal or Denmark could provide the same assurance of payment security and information privacy as the consumer could expect from his or her home service in Greece or Germany, for example. Related issues cover product liability, online dispute settlement and delivery and quality guarantees.


  13.  Most payment transactions on the Internet are currently carried out using credit cards. This is not an entirely satisfactory position. Credit cards are adequate for medium size payments but are not good for either very small payments, as may be necessary for information services on the web, nor are they satisfactory for very large consumer payments, such as buying an expensive electronic item or a car. For large payments credit limits are often insufficient and consumers are uncomfortable about the immediacy of the transaction. Although corporate procurement credit cards have had some success, business purchases, particularly major ones, are not generally conducted by credit card. This is often because the seller does not accept card payment, which may be because of the large merchant service fees levied by the banks. These are usually ad valorem amounts around 1.5 per cent-2.5 per cent.

  14.  The security of credit card transactions on the Internet, despite concerns which have been expressed, should not be a serious problem, provided that merchants use one of the security mechanisms available. The danger arises from merchants that do not, or have not, implemented security properly. Card schemes do have rules about this and a merchant who fails to maintain a secure payment system could well be "terminated" by his bank as a card accepting merchant; but a consumer may have suffered a loss in the meantime. This may not be easy for a consumer to see. It is hard to imagine how this can be overcome, since a global rule enforced in all jurisdictions would be necessary in order to impel all Internet sales to take place via secure mechanisms.

  15.  In our view, therefore, the payments industry—the banks and service providers—should consider better ways to pay over the Internet. There are numerous developments in this direction, which could perhaps benefit from EU encouragement and definitely from standardisation across the EU. One major possibility is the introduction of online debit card transaction secured using digital certificates. This will become readily possible in the UK as smart cards are rolled out to replace conventional credit and debit cards over the next couple of years. Smart cards can be used to contain and manage the digital certificates. Digital certificates are issued via a secure mechanism by "Certification Authorities", which are discussed further below.

  16.  Another mechanism with significant potential in Europe is the introduction of secure online account to account credit payment services, equivalent to Giro credit. Europe leads the world in Giro payment and in our opinion systems be developed reasonably easily across the EU to support this kind of payment approach, again supported by a digital certificate regime. This would be a powerful instrument for business payment and further facilitate B2B e-commerce. The EuroGiro system could form a basis, or even the Target cross-border Real Time Gross Settlement system being implemented to facilitate real-time clearing between Central Banks across Europe. These developments could well benefit from EU encouragement, since the products created could be saleable elsewhere.

  17.  A third emerging mechanism is stored value, and in particular the use of smart cards as "electronic purses" or "electronic wallets" for stored value, sometimes known as e-cash. In a stored value transaction on the Internet, a smart card is first stocked up with value through an ATM or on-line telephone connection with a bank involved in the scheme. When the purchase transaction is carried out a card is inserted into a reader attached to a computer accessing the Internet and value units are transferred across the Internet to the seller's purse via a secure mechanism. This has the advantage that all the "real money" aspects occur outside the net, and for the consumer point of view, the transaction can be anonymous (although some e-cash schemes do maintain an audit trail of transactions). Central banks have already considered the implications regarding money laundering for example. There are significant security advantages in the separation between actual bank accounts and Internet value transfer, which could be of value for Government payments and the control of expenditure. The EU could consider the use of this kind of mechanism, in a standard form, for internal payment activity on the net.


  18.  e-Commerce activities often require a range of alliances to be formed among service providers at different levels in the value chain, for example between hardware vendors, Internet service providers, software houses, content providers and systems integrators like PricewaterhouseCoopers. This is likely to become increasingly important, and will involve cross-industry partnerships between Telcos and banks, retailers and utilities amongst others. It may well be that some of these alliances are very powerful indeed and begin to create situations in which barriers to entry for competitors become progressively larger. The present fiercely competitive situation in the market at all levels is likely to become less so as consolidation of major players and absorption of smaller ones gains pace. We are likely to see the creation of vertical organisations that are capable of developing and delivering content via the full range of consumer and business channels.

  19.  This development will raise marketplace issues comparable to those arising from consolidation of the financial services industry in recent years. As banks and insurers have joined forces to provide a full range of financial products, two issues have arisen. One is how to ensure that adequate competition is maintained as the market consolidates, in order to protect customer interests. The other is to avoid huge spend by rival conglomerates on the development of duplicate infrastructure in which there is no competitive advantage. ATM and EFTPOS networks are a good example. It is in the interests of consumers to have fully interoperable systems for card payment rather than a number of separate ones. Overall industry costs and thus prices are then minimised.

  20.  In the same way, it may be preferable for various parts of the infrastructure for e-commerce across Europe, if not globally, to be jointly owned by a wide range of Internet players rather than controlled by major proprietary interests. This is the way the Internet has grown up—a co-operative infrastructure with rules and standards agreed on by a large group of interested parties. But it grew in this way largely to provide a means of information exchange rather than to act as a vehicle for financial transaction.

  21.  We think that the EU should consider whether some elements of the infrastructure for e-commerce would best be controlled co-operatively by non-commercial bodies, particularly elements which will become commodities—like catalogue mechanisms, security systems, certification systems and payment mechanisms.

  22.  A major area of concern here is the proliferation of privately owned and run digital certification authorities. These bodies provide the security tokens which enable users to authenticate one another as bona fide counterparties in transactions. It seems to us that it is undesirable for large numbers of these bodies to exist, as it needs to be clear to the consumer and businesses that a certification authority really has the authority to issue certificates. Only a well-known and trusted body can properly qualify. If main certification authorities were run by the EU, even if their actual operation was outsourced, this could perhaps provide a mechanism to generate more confidence than could be created by a proliferation of small, unknown private bodies, however, good they may be.


  23.  It is very difficult for large institutions to keep up with the pace of change as e-business takes hold. For example, we are seeing large numbers of "incubator" bodies establishing themselves, whose aim is to promote and fund Internet-based ventures in the expectation of a large return on an initial public offering (IPO). It may be that the EU should play a role in this area, to ensure that such bodies act with appropriate integrity towards their clients, or indeed to apply a standard approach across the EU for the support of small start-ups which could one day become major EU employers. This demands new skills and the kind agility which it is generally hard for public sector bodies to muster.

  24.  In our opinion, the biggest challenge to the EU authorities, however, must be the financial implications of the e-business boom. Those of us inside the industry find it impossible to predict where the enormous capitalisations of some e-business companies are going We do not know whether these market values are sustainable and in what way they will adjust as the market cools downs—if and when it does. We think that the EU should consider the possible impact of a sudden collapse in e-business market values, or of a longer term cooling off in the market. Clearly, much of the current activity is driven by the expectation of large returns in the capital markets, rather than by operational profit. This must be unsustainable in the long term and if people lose money they are bound to seek someone to blame. An examination of how to limit damage in various possible scenarios should be undertaken.


  25.  There is a clear need to establish global standards regarding product liability, fraud control, intermediary liability, intellectual property rights, privacy of information for sensitive commercial or personal data and security for payment transactions regarding Internet transactions. However, generally speaking, we do not see a need for further regulation in business-to-business e-commerce at the European level. There is a fear that over-regulation can damage business opportunities.

  26.  Nevertheless we have also seen examples where prompt action by regulators has enabled a new market to develop safely and this has encouraged growth. A good example is the regulation of Internet gaming in Australia. Australia is one of the first countries to establish (at State level) a regulatory regime for gaming sites. This has encouraged various domestic and international gaming companies to set up in Australia, because they consider there is greater certainty about the continuity of business within a properly regulated environment.

  27.  The EU could position itself well in cross-border investment management, banking and insurance, for example, by being quick to establish a regime with clear rules, including cross-border tax and liability provisions, that sweep away the complexities and uncertainties of the present situation. The current patchwork of arrangements for regulating the tax treatment of e-business transactions that exists within the EU, notably in relation to VAT, is undoubtedly a source of concern to business. This is not only because of the time and costs involved but also because of the competitive distortions that can occur within the EU and between the EU and the US, for example. The European e-commerce Tax Group (a cross-sector group of companies which is supported by Pricewaterhouse Coopers) has made recommendations to the European Commission and Member State tax authorities for practical and fair solutions to the indirect tax treatment of e-business transactions. These include recommendations on EU-wide invoicing requirements that could help to build confidence and sustain the development of the new e-economy in Europe.

29 February 2000

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