It’s Whom You Trust.
Security risks of long-distance business with unknown people had not necessarily been of interest to end-customers before the widespread advent online trade in the late nineties of last century. But how can you trust a seller who potentially is located several thousand miles away from you ? So let’s have a look at how trust is made possible in online trade today and how the current approaches probably can be improved by including contemporary developments in social media and security technology.
No trust at all is the widely accepted default for doing business over the web.
According to Francis Fukuyama and his famous book TRUST — The Social Virtues and the Creation of Prosperity, we can learn from areas in the world, where developed legal institutions and independent judicary (nowadays considered essential for sustainable business) are considered luxury or simply non-existent, that people turn to do business mainly with their immediate families due to the high risk of fraud or robbery when creating deals with anyone else.
This would of course immediately choke down any successful development in the field of e-commerce. So why does this kind of insecurity fail to hinder the rapid (positive goes without saying…) development of online trade ?
Indeed, the new technology with its still-to-be-evalued possibilities for quite some years seems to have saved average users’ enthusiasm from getting exploited by the more shady kind of web-workers.
But within recent years the frequency of reports on the latest online fraud has shown, that organized crime has "successfully" made it through the online technology adoption cycle as well. And criminals’ methods show, that in some ways, they have obviously been doing better than the average online businesses and customers, when it comes to the more psychological attacks as used with Social Engineering.
Despite credibility votes, product ratings by customers and public evaluation of online offerings had been set up soon, though, as especially the smaller buyers and vendors on portals like eBay had to learn, these turned out to be far from bulletproof as well.
Institutional trust is what keeps the more well-known online businesses running these days.
Strong and trusted international brands like Amazon with registered offices and known service quality rarely seem to have trust issues. But when we look at what this trust consits in, it’s esentially (besides the fact that in between almost everyone knows someone who successfully did business with them) the fact that our experience told us, that most companies large enough will have enough stakes at risk to to attempt avoiding brand-damaging legal conflicts with their customers — or you’d at least have heard of it.
Which gets us back to trusted legal environments and the often missed-out truth, that the "Worldwide" Web actually has been a legal sandbox for users from industrialized countries. This not only affects who you trust as a business partner to deliver either goods or money, but also strongly affects the way you do the transaction to make sure your money goes where you intend and your credit card number won’t have its (digital) bit on the side in the process.
In the developed world, most of today’s online transactions are bank-based one way or the other, with practically all ‘virtual cash’ approaches having failed on the parts of price, ease-of-use and governmental restrictions (incl. lots of lobbying).
And the credit institutes for sure have been loving credit card payments, as they provide much higher interest rates than conventional bank transfer. With the growing market share of charge-cards, being thrown almost for free even at not-so-wealthy European customers lately, the credit institutions can still cash in on vendors’ sales at the same rates as with the corresponding 'credit’ versions, despite taking no risk at all. If you furthermore pair such cards (may it be for security or simply for convenience reasons) with micro-/macropayment providers like Click&Buy or PayPal afterwards, the trade-offs for the vendor are summing up to significant amounts, in return leading to higher prices — often at least 5% per incident up from traditional bank transfer costs.
But what these banks miss out on, is the fact that the non-guarateed nature of debit-cards have reduced the vendors’ trust in the medium significantly and many merchants (including brand names like Deutsche Telekom) already banned this (in their eyes) less appreciable method in favour of in-advance payments; finally shifting the entire transaction risk to the consumer.
The first serious competition in years, however, now arises from bank-independent prepaid value services. Suffering an oppressed success in Europe and North America, where mobile carriers have always been keen on pushing customers into long-binding subscription contracts, calling credit has become a de-facto currency within wide parts of Africa lately, where traditional trust in the liability of credit institutions and the legal system has been barely existing for decades and distances between bank outlets can be really HUGE. Mobile carriers like Vodafone have already responded to the demand by offering comprehensible banking services via their African (ad)venture with Telkom Kenya Safaricom. But this is not about some small-biz in rural Africa.
This is about nothing less but an upcoming revolution in payment services. Think of it as the online equivalent of traditional letters of credit or guarateed cheques — but with new players on board. The risks of pre-payment are being shared equally in favour of a trustworthy business outcome. That said, pre-payment, combined with peer-based guaranteeing and realtime transaction confirmations is going to be a major driver of how trusted online payment is going to work tomorrow.
Other than the quite generally targeted, but limitedly spread PaySafeCard in Germany or Austria, with these developments abroad, prepayment is currently making a huge leap forward against the competition. It literally enables everyone to become a payment agent right on her own and furthermore shows that on this basis it is possible to build completely bank-independent transaction systems from scratch in almost no time (compared to the corporate history of many credit institutes). It has also become proven that companies from others than the financial sector can indeed take over the roles of failing established institutions if they can provide a credible brand, along with a comprehensive (read: transparent) and reasonable offering. While succeeding to put these approaches to work may not always amuse fiscal authorities, it creates a stiff breeze of fresh air blowing right into the snobbish financial sector industries who, often with serious governmental support, have successfully managed to resist most any 'legal' attempts to undermine their business model, power and influence on how and by whom money is being transferred from one entity to another.
Peer based trust probably is, after all, the most native and intutive kind of trust humans know. Like in: "Yes, I trust you."
With online business the only chance to identify your business partner at all, usually is via third parties. If this identification fails, it may also be very hard, in case of disagreement, to get back one’s money or delivered goods — the practical non-refundability of granted services goes without saying.
A possible solution may be similar to how American stores revolutionized consumer payment habits forever during the fifties of last century by issuing ‘credit cards’ to their loyal customers. As discussed more than a year ago in my post on how to secure cashflow for web 2.0 companies, being their own bank over the years has worked very well for companies, such as trading platforms or even offline providers of combined products and services, like contract vendors offering included maintainance with new car purchases or holiday clubs cashing in up front for a certain volume of drinks or leisure activities. And the success of transaction systems like the Hawala peer-to-peer banking as shown that the priciple indeed can be scaled from western countries even to the more rural parts of the world.
How is the trust generated with these methods ? Well, first of all, the number of transaction partners is reduced. You don’t pre-pay to someone you do not know, but to a trusted provider who you know will only release your payment to the recipient under certain negotiated conditions. Second, like in the Safaricom expamle, you are free to choose the service you trust most for a particular transaction; which is where the "institutional trust" argument from above comes in as well. Finally (and third): Don’t trust the banks ? Then use your mobile carrier instead. The entire economy gets in trouble and you need some additional cash fast ? There will be alternatives now. While increasingly getting recognized by political authorities and celebrated by economists P2P systems for both payment and financing are making their way from the "only suitable for money laundering" to recognized instrumnents of the international payment arena as a fallback to traditional systems.
Furthermore in many parts of the world this process is expected to be spurred by Islamic (Sharia compliant) financing options, which may not have made it into online offerings for western regions, but as these services are becoming increasingly popular with Muslims all over the world (also abroad from Arabic and Asian countries), they are considered to have significant impact on how online trade is going to be conducted in the future. In essence, we will get more transparent financing options, with risks more equally spread between seller and buyer, where interest rates are being converted into higher sales prices then payed by the buyer over time, thus preventing collateral damage to third parties in case the buyer cannot keep up with the payments.
So where’s the beef in here ?
Most of the tools to make all of this possible are already in place: While you may want to use a professional lending portal like Smava or Zopa to re-furbish your home, you may just choose some cross-subsidized offering to get a "FREE" extra to a cinema visit or a special event added to you next vacation trip. In addition you can always check the business options you have against your self-maintaining address-book on XING or LinkedIN to see if there isn’t a not-so-remote acquaintance being able to act as the trust factor between you and you business partner. And independent institutions like Trusted Shops, TÜV and others are working to make such diverse market of payment options secure enough for you and me to try out one of the new offerings with our next purchase.
Creating comparisons with how MP3 file-sharing disrupted the music industry are out of this article’s scope and not necessarily intended, as the financial industry indeed is a completely different business, with by far bigger impact e.g. on political decision-making.
But technology enabled, simple citizen-to-citizen services to be potentially more appealing to customers than the corporation-owned "walled gardens", may be an insight, which could turn out to be hard to reverse.