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E-business Watch
Tracking the
online media to bring you the key e-business trends
June
14, 2000
Online Consumer
Auctions: The Good, the Bad, and the Opportunities
Online consumer auctions have emerged as a mainstay of
e-commerce. According to the Internet Auction List,
there are approximately 2,300 online auction sites on the Internet. Forrester
Research expects revenues to grow to $19 billion in
2003, up from $1.4 billion in 1998.
EBay alone has 12.6 million
registered users, lists more than four million items for sale at any one time,
and facilitated over $1.1 billion in sales for the first three months of 2000.
Cumbersome payment methods and
fraud, however, are
threatening this growth. Although consumers have been quick to embrace online
auctions, payment systems have been slower to follow. Since people cannot pay
with cash online, and most sellers are not able to accept credit cards,
millions of dollars in cheques and money orders are sent by ‘snail mail’ each
day.
Not surprisingly, the widespread use of cheques and money
orders, combined with the rapidly increasing average value of goods posted for
auction, has resulted in a dramatic increase in fraudulent activities. Indeed,
auction fraud accounts for nearly nine in every 10 Internet-related complaints
filed with the National Consumer
League’s National Fraud Information Center. The average loss per
consumer of $293 illustrates
the difficulties of establishing trust in the anonymous online marketplace.
Auction fraud typically takes one of the following
forms:
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Shilling – the practice in which sellers bid on
their own offerings to drive up prices. In April, a painting that initially
listed for 25 cents shot up to $135,805 before eBay voided the sale and
suspended the seller over allegations he had bid on his own item. A
subsequent investigation by the New York Times revealed that the price
had actually been pushed up by a sophisticated group of shill-bidders working
in collaboration with the painting’s seller
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Failure to deliver – this happens when buyers do
not receive the items they paid for, or when the items they do receive are not
what they were expecting. Last year the National Consumer League received more
than 9,000
complaints – up 78% from the prior year – from auction winners who sent
in cash and never received their goods or received fake or broken items.
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Payment fraud
– this occurs when sellers do not get paid for the items they have
shipped, mainly because the cheque or money order they receive are invalid.
Opportunities
These problems are generating new solutions and business
opportunities as companies find innovative ways to build trust in their
marketplaces. EBay, for example, offers free insurance on purchases up to $200 (less a $25
deductible). Escrow.com
and i-Escrow hold payment from the
buyer in trust until the seller sends the merchandise.
Some of the most exciting
developments, however, are in
emerging person-to-person payment systems. These systems make it easier for
individuals to accept credit card payments, effectively becoming a direct
conduit between individuals and performing the credit card transactions on
their behalf. Unlike digital cash, these systems are not designed to displace
credit cards; in fact, they are built around credit cards.
PayPal, a free service
of Internet bank X.com, is the fastest growing
of the person-to-person payment firms. According to the Wall Street Journal, PayPal
signs 9,000 new users daily (a compound growth rate of 3 percent to 5 percent per
day), confirming PayPal as one of the fastest growing Internet models since
Hotmail and Napster. The service works like this: you
use an on-line form on PayPal’s site to enter a cash transfer to anyone with an
email address. PayPal takes the money from your credit card and transfers it
first into the your PayPal account, then into the recipient’s PayPal account.
To receive the cash, the recipient must sign up with PayPal. This guarantees
that PayPal’s use will spread through “viral marketing”, since few people will
refuse receipt of a payment. PayPal makes money from the “float” – the interest
that accrues on the cash in people’s accounts. PayPal is currently used by 31%
of eBay’s auction sellers.
BillPoint, a joint
venture between eBay and Wells Fargo & Co., works in a similar way, and is
being promoted by eBay as the preferred payment option on its site. Currently,
the number of users of BillPoint trails those of PayPal. In a recent
article, The Industry Standard counted 300,000 items on eBay for
sale using the PayPal system, while only 3,780 items were using BillPoint’s
service.
ProPay is the latest
player to enter the game, and its system works like PayPal’s, with one subtle
difference. PayPal is not a credit card processing company; they break each
transaction into two, charging the buyer’s credit card, then paying the
seller. Because the buyer does not technically make a transaction with the
seller, the credit card companies do not offer their dispute resolution if the
buyer is defrauded. ProPay, on the other hand, is a credit card processing
company, so all transactions using its systems retain normal credit card
protections -- federal law protects credit card users if they do not get what
they were promised or if unauthorized charges are made on their accounts.
ProPay, in effect, charges the user 3.5% of the transaction value, plus a flat
fee of 35 cents per transaction for this insurance.
For online
auctions to retain their position as a cornerstone of e-commerce, it is crucial
that they are able to build trust among the buyers and sellers in their
marketplaces. Accomplishing this task
will increasingly depend on the anti-fraud and payment tools that make it as
easy to receive and pay for goods, as it is to bid
on them.
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