E-commerce trends report
E-commerce represents a relatively new sector, but it is one that already constitutes a sizeable fraction of global retail sales and that is forecast to double in size from $2 trillion to $4 trillion over the next three years. Large emerging markets, better connectivity and an increase in mobile use are driving this trend, as well as the growth of the B2B and C2C sectors. However, despite offering significant advantages over traditional retail sales, e-commerce in its current form poses problems for both merchants and consumers. The Block will address a number of these, helping to bring about truly frictionless and free trade.
E-commerce has existed for barely 20 years. Although it was possible to buy and sell items online in the early days of the web, this was typically an awkward and sometimes risky process. Rudimentary websites would advertise goods, and purchase would often involve submitting credit card details by email or web form. These would be entered manually into a regular PoS terminal by the merchant – an inefficient workaround that was prone to mistakes and security breaches. It was faster and easier than mail order, but it was only a quantitative improvement. Proper integration of payments into the browsing experience did not occur until the late 1990s, and it took several years to take hold properly.
Amazon.com: a snapshot of the industry
A watershed moment, in hindsight, was the launch of Amazon.com. The company was founded in 1994 and went online in 1995. Founder Jeff Bezon had read a report that suggested online sales could grow by 2,300% per annum, and selected a relatively limited range of products he believed would sell well on the web – starting with books.
Amazon established the viability of the e-commerce sector. Key to its success was the scales and economies at which it could operate. It required no bricks-and-mortar stores, and warehouses could effectively be of unlimited size – since Amazon itself did not initially need to hold large amounts of stock. They simply needed to be able to access the stock held by other publishers.
The company held its IPO in August 1997, almost exactly 20 years ago. Valued at $18 per share (before stock splits), its market cap was then around $400 million. Amazon not only survived but thrived on the dotcom bust. With a business model that did not plan on making profits for five years, it was able to embed itself in the market and position for rapid growth. In the following years, Amazon grew to become a giant of e-commerce and cloud computing, expanding its offering to all kinds of household goods and business services – selling everything from consumer electronics to food, and becoming the largest provider of cloud infrastructure services in the world. It is the fourth largest company by market cap (After Apple, Alphabet and Microsoft) at $423 billion, and boasts annual revenues of $136 billion for 2016 – more than any other internet company.
The growth of Amazon alone over the past 20 years indicates the impact that e-commerce has had on the world. Amazon is the largest e-commerce company, but it is only one company. The sector is vast and, despite its already stellar growth, it is still expanding fast.
E-commerce in the round
The global e-commerce market currently stands at $1.9 trillion – less than 10% of the total global retail volume of $22 trillion. This is still a substantial amount, especially given that e-commerce is not a fully mature market. Around a billion internet users made at least one e-commerce purchase in 2016. Moreover, e-commerce sales still account for just 8% of total retail sales in the US, and 14% in the UK. Together, these figures indicate that there is a long way to go as the majority of commerce still occurs offline. Industry forecasts suggest that strong double-digit growth can be expected through to 2020, even as the growth of the traditional retail market slows. Whilst total retail will hit $27 trillion by 2020, or around 6% growth per annum, e-commerce will have doubled to $4 trillion.
There are the huge global markets that are still emerging. China’s e-commerce sector tops $1 trillion, and is expected to hit $2 trillion by 2019. The trend is driven by a number of factors. Penetration of internet access is extremely high in the West, but there are many countries that are still catching up – bringing a vast new tranche of potential shoppers online in the coming years. In addition, the growth of mobile has fuelled faster and more convenient search and purchases. Only 11% of people access the internet via desktop computer alone. Many shop from not just one but multiple devices – starting their purchase on one and finishing it on another. Mobile browsing has now surpassed traditional browsing, and m-commerce is another accelerating trend.
Finally, whilst B2C sales have been the norm up until now, there is evidence that B2B and C2C will start to catch up in the coming months and years. The sharing economy – an idea that has powered companies like Uber and AirBnB – is a powerful concept, and one that is driving the growth of sales on auction platforms like eBay and smaller sites on which consumers can connect directly with each other. Similarly, businesses are recognising the advantages of sourcing materials and products online, and are moving away from traditional suppliers to online stores as a result.
This is the broad context in which The Block will launch: a $2 trillion global sector, expected to grow at 20-25% per annum in the near term. And yet e-commerce in its current incarnation is far from perfect.
Whilst e-commerce platforms enable direct connection between customers and businesses in all combinations – B2C, B2B and C2C – they are inevitably centralised around the platform and company’s infrastructure. Even if the model of business is peer-to-peer, there are companies that host and control the website and the payments system. This incurs a series of problems and frictions, from censorship over listed items to high fees.
PayPal, one of the best-known online payment services, is integrated into eBay. Customers are not charged to make payments. However, merchants incur a small flat fee plus a 3.4% commission fee on any funds they receive – eating into the profit margin and requiring that they pass these charges on to customers. The fees for using many e-commerce platforms themselves are far higher. ‘Referral fees’ for products sold by third-party merchants on Amazon are typically 10-20%, depending on the category of product. Customers do, of course, have to pay extra when they buy items from overseas. Transferring money from one currency into another is generally a slow and expensive business, due to the monopoly that banks and payment processors hold.
Then there is the problem of chargebacks. When a customer is not satisfied with their purchase, or does not receive it, they can complain and receive their money back. Whilst this constitutes and important protection for consumers, it can be abused, and all to often is. A customer only has to claim that they did not receive an item and, in the absence of proof of delivery, they will receive a refund. If the merchant did ship the item, they will be out of pocket. Sellers are typically at a disadvantage in these circumstances, since e-commerce platforms generally favour the buyer by default and even if the situation is resolved in the merchant’s favour, there can be a long delay before they receive their payment. The e-commerce industry suffered an estimated loss of $6.7 billion in 2016 due to chargebacks, almost $5 billion of which can be considered fraudulent.
The future of e-commerce
Thus the potential market for The Block is vast, and the opportunities to do e-commerce in a fundamentally better and fairer way are clear. Traditional e-commerce has grown extremely quickly, establishing itself as a significant fraction of global retail in the space of just 20 years, with further expansion to come. However, there are problems with the current model, which The Block aims to address.
The use of virtual cash (ETH) as the native currency of The Block immediately offers advantages for customers and merchants. Money is transferred freely across borders and almost instantly, without incurring any additional charges – the small tx fee for the Ethereum network is all that is required. These transfers are irreversible due to the peer-to-peer nature of cryptocurrency, and so merchants are immune to chargebacks. A decentralised reputation system and escrow arrangements protect customers from fraud and ensure that there are measures in place to provide refunds if they are needed.
The Block does not rely on a centralised platform or third-party servers. It is an application that is downloaded by every user, and is run from their personal computer – allowing buyers and sellers to connect directly. Because the IT infrastructure is outsourced to the Ethereum network and replaced by smart contracts, there are no fixed costs for data centres or employees, and so no charges that have to be imposed on users to pay for these.
This approach can be thought of as e-commerce 2.0: low-cost, accessible and fair – free trade at its most free.
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