Memorandum by PricewaterhouseCoopers
INTRODUCTION
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;
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.
INSIGHTS REGARDING
THE MAJOR
APPLICATIONS OF
E-COMMERCE
Business-to-Business
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.
BUSINESS TO
CONSUMER
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.
PAYMENT ISSUES
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.
COMPETITION, CO-OPERATION
AND ALLIANCE
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.
KEEPING UP
WITH TRENDS
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.
REGULATORY ISSUES
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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