Models of Electronic Commerce

Petri Aukia
Nixu Oy


This paper presents an overview to the field of Electronic Commerce. Discussion is limited to the use of electronic commerce in public, unreliable networks. The methods described can be used in between previously unknown buyers and merchants. Concepts necessary to the understanding of electronic commerce will be described. These include the terminology used, the security requirements, online and offline modes of operation and the need for anonymity. A case will also be made against the likelihood of widespread need for pay-per-use sales on the Internet. Keywords: Electronic Commerce, Ecash, money, Networks, Security

Table of Contents

1. Introduction
2. Reasoning
2.1 Why buy and sell electronically ?
2.2 What will be marketed electronically ?
3. Technologies
3.1 Security Requirements
3.2 Online and Offline sales
3.3 Anonymity
3.4 Banks
3.5.Information and tangible goods
3.6 Terminology
4. Taxonomy of Electronic Payment schemes
4.1 Card and Cheque
4.2 Pre-paid Ticket
4.3 Use of Intermediatory
4.4 Electronic Cash
4.5 Real Electronic Cash
5. Discussion
5.1 Advantages
5.2 Changes to conventional businesses
5.3 Problems in Electronic Commerce
6. Acknowledgements ?

1. Introduction

Electronic Commerce - the sale of concrete things and information - is a surprisingly controversial subject. Steven Levy [7] claims in his article that electronic money and commerce are going to be the real "killer application" of the Internet. He sees the lack of secure and widely available payment schemes as the largest problem facing the Internet at the moment.

Roy Davies [2], on the other hand feels that exactly the lack of such systems is the main driving force behind the vast success of the Net. He compares the available voluntary information to the unpaid blood donation services and the old Greek market-places, where all talk was free and often of high quality.

Models of Electronic Commerce is a very broad subject encompassing a large amount of practically unrelated issues. This paper is concerned with the complicated issues behind sales on untrusted networks between customers and merchants with no previous arrangements for payments.

The reasoning behind the interest in electronic commerce will be discussed. Then the paper describes the requirements and methods required for such systems. The paper will also compare some of the available systems.

2. Reasons for Electronic Commerce

2.1 Why buy and sell electronically?

Electronic commerce has recently been a very active field of study. This is not only due to the interesting technical, legal and social problems it raises. A large number of people and organizations are betting that the electronic marketplace of the future will be immense and want to gain as a large a share of it as possible.

Electronic commerce has a number of potential benefits to both the buyers and the sellers. The categories and benefits described here are mostly from [5].

Benefits to sellers

Benefits to buyers

All of the advantages the seller has are also advantages to the buyer. A lighter sales channel can lower prices at the same time it raises the quality of customer service.

Benefits to other parties

2.2 What will be marketed electronically?

It is likely that all kinds of products and services that have been available via telephone or mail order will be sold in the network. In addition to these, multimedia and networks enable some intriguing new possibilities for products, sales and payment. [11] uses the following three categories for electronic commerce.

Information page

The simplest form of commerce is the sale of an information page. The use of information pages has become very popular in the Internet since the birth of the world Wide Web. A vast majority of these pages are free, and with a growing number of them being devoted to advertising, will likely be so in the future too.

Electronic newspapers are a good example of the information page. The information is not tailored to the reader and the incremental costs of readers to the publisher is very small.

This kind of commerce relies almost totally on modern payment schemes. It would be practically impossible to handle the high number of very small international payments via the regular banking system.

Valuable Information

Exchange of valuable pieces of information can be thought of as a different type of commerce. Some practical examples of this are the purchase of a pay-TV or software programmes or a personalized newswire. It is possible to imagine, that future telephony could be done using the same network infrastructure. In that case the telephone calls would fall into this category too.

The value of valuable information enables a lot of different methods of payment between the buyer and the seller. In addition to the regular pay-per-view and monthly billing systems, the payment can be made progressively cheaper, or be based on some other means. An online magazine could for example be free for its advertisers and a small subset of their customers. An interesting option in some methods of payment is the ability to get your money back, if you are not satisfied.

A lot of information providers are anxious to create expensive information services.

Real things

Network based services are as good as or better at sales of real things than mail ordering. The virtual catalogs can be immense in size without the usual costs of printing. Catalogs can contain pictures, text, and even moving images of the products.

Normal mail order catalogs are easier to browse, but ordering is much more difficult. One has to call or mail a coupon. Online catalogs make it very easy to purchase the products seen on the catalog. This ease of buying might compensate for the complexities in browsing even for the very simple items.

The advantages of Networks in the sale of real things lies mainly in the efficient advertising of products, because the sale of tangible goods requires an additional delivery mechanism just as in the mail order business.

It is hard to foresee what the catalogs of the future will look like, but it seems likely that they will be even more entertaining than today even though the technology would also make it easy to create very informative displays of the products.

3. Technologies

There are tens of different projects on different electronic payment mechanisms on the Internet and most likely thousands of pilot sites trying these new methods. Despite the differences in implementation, they are all based on a few important technologies. This chapter will focus on the important technologies and issues behind the choices between them.

3.1 Security Requirements

According to [13] money has to have so called ACID properties. The ACID set of properties stemks from database development. We'll study the ACID properties in a case of buying an ice cream cone. In this transaction money must be:
Either both sides or neither side of the transaction happen. If I give my five markkas, I must get the ice cream cone. If I don't get the cone, I don't lose my money.
After I have given my five markkas to the merchant, he must belive that he has gotten the payment. The money should not get lost in the transaction and it should be available to just one party at a time.
The purchase of the cone and the five markkas shoud not have anything to do with previous or later transactions.
We can back off from the transaction, pick up the money from the ground, so to speak.

Desirable features

[13] describes other desirable features for money.

Transactions should be easy. The monetary system should be scalable to accommodate the necessary amount of users. Different forms of money should be exchangeable, or compatible in a way. Money should be persistent, the cration of money should be controllable. Real money should be distinguishable from forged money. Money should be unforgeable. Money should be saveable. You should be able to put money in a bank or under the pillow and use it after a period of time.

3.2 Online and Offline sales

There are two different modes of operation for electronic commerce, online and offline. Online sales systems check the authenticity of the transaction at the time of sale. Offline transactions on the other hand do not require a contact to the bank in order to make sure that the seller receives the amount of money promised.

Most systems are constructed with online methods that require all merchants to be connected to the network.

Offline systems rely on either tamperproof intelligent cards, that the users carry with them, or account numbers that are given at the time of sale. Account number based methods accomplish catching illicit use by tracking sales after they happen.

3.3 Anonymity

In conventional purchases we have different amounts of anonymity based on the purchase and method of payment. Most of our money is spent in ways, where there is no anonymity whatsoever. Our rent, taxes and electricity bill clearly state the payer to the recipient. A lot of the modern day to day purchases are done with charge cards or credit cards despite the fact that they are not anonymous.

It is still possible to pay for most thing with real cash, if one really wants to do so. Cash is very hard to trace and is practically anonymous, when spent in small amounts. The future of networked payment systems determines whether all of our purchases and preferences can be traced or if we can still keep some of our purchases private.

[8] presents several good arguments both for and against anonymity of the buyer in electronic commerce. If we get an easily traceable electronic currency, there is practically no need to file a tax return. The authorities know our sources of income and our spending habits and can tax us accordingly. A totalitarian regime, on the other hand can react to making a condom purchase, if it wants to. Anonymity is in a way a question of how much we really trust the banks and the government.

Totally untraceable currency would make money laundering instant and irreversible and make it very hard to fight serious crime. It is possible that we get a compromise that makes it possible to trace some transactions in some way, while still keeping most of them away from the prying eyes.

3.4 Banks

All of the current methods of payment require a third party, the so called bank in the transaction. They also require, that both of the active parties have accounts in the banking systems. This is perhaps surprising in the case of electronic money. [12] classifies the different roles of the bank as follows:

3.5 Information and tangible goods

The sale of information and tangible goods, while at first similar require different organizations and can be used as a broad categorization for all of the activities in electronic commerce. The sale of real items is not all that different from mail order and can well be organized in a similar manor. [4] says that the same laws that protect the rights of mail order customers protect the rights of customers in virtual malls.

Sale of information is a different issue altogether, and has some things in common with the publishing industry. It would seem that the customer deserves to be better protected against low quality WWW-publishers then he is now. It is harder or impossible to browse through a commercial WWW-site before paying, then it is to do the same to a conventional newspaper or magazine in a bookstore. A more liberal return-policy would be fair to the information provider, since his incremental costs per reader are near to zero.

3.6 Related terminology

A company with nine or less employees.
Usenet news
A global, hierarchically organized, networked discussion mechanism.

4. A Taxonomy of Models of Electronic Commerce

This chapter classifies the different projects according to the protocol used is payment as in [12].

4.1 Card and Cheque

A Card and cheque can be considered as very similar pieces of payment as monetary transactions. This also applies from the sellers point of view. With such an instrument, the merchant knows that the bank will transfer the required amount of money to his account.

Cards and cheques are very different from the buyers point of view, however. A cheque requires that the buyer has the required amount of money on his account at the time of purchase. Credit cards on the other hand, as their name implies, have a certain amount of credit associated with them.

Most credit cards also have an insurance of sorts for transactions. The buyer is typically covered against unreliable merchants. This feature makes the credit card type schemes very convenient in international purchases from previously unknown sellers in networks as well as from conventional mail order outlets.

Secure Sockets Layer

The Secure Sockets Layer by Netscape is a very low level method of encrypting data streams. The exportable version is based on 40 bit keys and the RSA -algorithm. The encrypted datastreams can be used for a variety of different purposes, including, but not limited to sending credit card numbers.

The system is very similar to giving ones credit card numbers on the telephone in relation to its data security issues. Neither you nor the merchant can really prove the real identity of the buyer.

The 40 bit key used is not long enough to keep the determined hacker away, especially since the data has features that can be easily guessed.

Green Commerce

The Green Commerce model of purchasing from First Virtual is based on a combination of conventional credit cards and a separate account for both merchants and buyers on First Virtual's computer.

Transactions have an interesting twist to them. The buyer first gives his or her account number to the seller unencrypted. The seller gives this number and the amount to be charged to the bank. The bank then checks the transaction from the buyer.

The buyer has three choices when asked to confirm the purchase. He can accept it, deny the value of the purchase and get his money back or claim foul, have his account frozen and the transaction properly investigated. Too many cries of foul or asking your money back will get either the buyers or sellers account revoked.

4.2 Pre-paid Ticket

A Pre-paid ticket is based on the buyer transferring money to the sellers account, getting a ticket for the transaction and demanding service he's already paid for.

The ticket can be signed with the banks private signature in a way that the seller can verify that the right amount of money has actually been transferred to the right account. The pre-paid ticket is ideal for sellers, since the monetary transaction is finished before the customer even asks for service. Thus the Consistency of the transaction is guaranteed.


Solo-maksu by Merita Pankki is an example of a pre-payed ticket. The customer first pays from his normal account to the normal account of the seller. Then he presents an unencrypted "Viitenumero " to the merchant, who can check the transaction using his account and the "Viitenumero".

The user-interface seems complicated and unsuitable for very low payments. The charges associated with such transactions are not sure either. Solo-maksu is well integrated with the normal Finnish banking system, and it will most likely be a huge local success.

4.3 Use of Intermediatory

Use of an intermediatery is based on the customer sending his requests to the merchant through the bank. The merchant can be sure that he gets paid, since he only receives requests from the bank and the client can be sure that he gets what he ordered, as long as the bank also ships the goods.

iNET maksullinen

Telecom Finland International has recently announced its new payment schemes. The client can be charged one to twenty markkas per WWW-page. Clients who call through Telecom Finland's open access lines will be billed on their phone bill. Customers who have signed up for the Pro- service will be billed later. The payment information for the Pro -users is sent via a SSL -encrypted data stream.


Michael Linton has created an innovative payment mechanism that deserves a mention here. The LETSystems are in no way reliant on the networks, but have recently taken their first steps to really use them.

The LETSystems are based on a community currency model. Each willing community member can join a local LETSystem and start trading services in mutually agreed prices. This way a carpenter can sell his services to a private teacher, who sells her services to a tailor, who sells his services bask to the carpenter. The system makes trading services more flexible then basic barter-type trading.

4.4 Electronic Cash


Digicash is an interesting electronic currency created by David Chaum and recently being offered by Mark Twain Bankshares. Ecash is based on blind signatures and guarantees total anonymity to honest users, but almost certain catching of forgeries.

5. Discussion

You can't have the cake and eat it too.

Electronic commerce has a lot of potential, but it is not going to be the digital Nirvana some have imagined. Some of the original advantages of the Internet will be lost with the new commercialization.

Many unique features of the Internet were not really based on the technology, but on the original community of people participating in the experiment. When the Internet was mainly an academic network, the users were for the most part in their twenties, technologically savvy and tried to make a good impression on their peers. This has changed now that the Internet has gone mainstream.

The Internet has become less of a community and more of a framework upon which different cultures and communities build and evolve their totally unrelated forums of discussion.

It is possible that most Internet users are not going to pay for the information they browse on a day to day basis. At the same time it seems likely that there will be plenty of business users for different professional WWW-services. Perhaps the future of Electronic Commerce is in the slightly boring financial sector instead of the glorious multimedia-video-industry.

5.1 Advantages

These advantages are for the most part from [6] and [10].

5.2 Changes to conventional businesses

The largest change to conventional businesses has for now been the enormous potential for responsive advertising the Internet provides. In [1] Teppo Kurki of Tietopolku Oy told about the response to their advertising of IndexE, a small tool for programmers. Out of the two hundred potential users fifty have already contacted them via email or WWW, while only two have sent them faxes. Clearly the Internet is the dominating method of marketing in for some products.

Actually most commercial activities on the World Wide Web are based on publishing. Internet levels the playing field in a lot of ways. A small company can make as good as a set of pages as a larger one. The larger one can not rely on having more stores, as previously, instead it must find new methods of differentiating from the crowd. [11] argues that there will be large changes in what people are going to pay for. An advertiser might sponsor a whole electronic magazine, pay a percentage of sales created from the advertisements in the magazine or perhaps pay for the regular viewing of a single user as long as he is willing to go through the advertisers sales material.

5.3 Problems in Electronic Commerce

New services will be based on the values of the new users that always make up the majority of the exponentially growing population. A lot of the new services are more passive than the ones we've seen previously. [10] quotes different studies on what normal households really want and what they are willing to pay for it. According to the studies, people for the most part want a service surprisingly close to conventional cable TV. They didn't think that over fifty channels would really be an advantage, they didn't really want to interact with their entertainment and they didn't want to pay substantially more for the new services. Of course the studies would have to be examined more carefully, in order to make real conclusions.

In a way it would seem that the people designing these new services are more or less out of touch with their consumers. Perhaps they are the same people that predicted a few years back that graphic artists, accountants and programmers would open up email based kiosk-oriented shops for passers by.

It is possible that these services would really cater to the interests of young urban programmers, who would like to order pay-TV movies and pizzas on the Internet.

Technical Problems

There are also technical problems. [11] describes how most of the current systems force the customers to trust the merchants or the bank. They are receiver safe, so that the bank or merchant know that you are who you claim to be, but they don't give you a ticket to show as a proof of purchase so that you could later on make sure that the service you ordered will actually be delivered to you. Turtiainen and Salonen go as far as to say that the only way to make a business transaction is to use an independent notary service. The wide variety of services and methods of pricing are a problem, too. None of the current implementations work well for the beginner in electronic purchasing. You can not buy a fractional denominations worth of web -pages weekly without paying a large overhead.

The marketplace is so cluttered with different cards, cheques and cash, that it would be very hard to choose a real winner at this point. This makes the growth of the industry slower, too. It seems that a lot of people are just waiting for a real winner in electronic commerce.


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Dr. Phillip M. Hallam-Baker. Electronic Payment Schemes, 1995
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Kleiner, Kurt. Banking on electronic money, New Scientist. 146, 1972, p 26., 1995. A good introduction to the main themes in ecash.
Linton, Michael. LETSystems - New Money, 1995
Ravi Kalakota. Introduction to Electronic Commerce, 1995
Turtiainen, Esa, Saikkonen Heikki. Billing Internet Services, 1995
Turtiainen, Esa. Sähköinen kaupankäynti, 1995
XIWT - Cross-Industry Working Team. Electronic Payment in the NII, 1994

Annotated links in the field of Electronic Commerce