2. E-commerce: The economic landscape
This chapter assesses the current state of business-to-consumer (B2C) and consumer-to-consumer (C2C) e-commerce globally, describing: i) the magnitude and scope of online sales, ii) the structure of the industry, iii) how consumers are increasingly using e-commerce to purchase an ever-expanding range of goods and services, and iv) the threat of fake goods being offered online and some of the related key areas.
The development of the Internet has served buyers and sellers of goods and services well, by greatly enhancing the efficiency of markets, via e-commerce.1 Consumers, for example, can access a far broader range of products, from a larger number of suppliers, than was previously the case. And businesses can expand the reach of their operations in a highly cost-effective manner that has proven beneficial to large and smaller entities alike. The increased transparency of markets has at the same time enhanced competition, spurring innovation.
The e-commerce market has three main segments: business to business (B2B), which dominates the market, business to consumer (B2C), which has risen sharply in recent years and consumer to consumer (C2C) which covers the sale of products between individuals that are not treated as businesses.2 In 2019, e-commerce was estimated at USD 26.7 trillion, which accounted for about 30% of world GDP (Table 2.1). The United States, Japan and China were the top 3 economies in terms of e-commerce sales accounting for close to 60% of the world total. The importance of e-commerce across economies varied significantly, ranging from 14% in the case of Germany, to 79% in the case of Korea. As indicated above, B2B transactions dominated the market, accounting for 82% of all e-commerce, including both sales over online market platforms and electronic data interchange transactions.
The B2C market has experienced continued, rapid growth in many economies in recent years. Table 2.2 shows how the situation has changed, with respect to online retail sales, which represent a subset of the B2C sales reported in Table 2.1. The overall increase in online retail sales of 41% between 2018 and 2020 contrasts with the 0,16 % increase in total retail sales. At a country level, all countries listed experienced growth in online sales exceeding 33%, with sales in Canada and Singapore doubling. Total retail sales, on the other hand, declined in five of the seven economies listed, rising by less than 2% in the remaining two. As a result the share of online retail sales to the total rose sharply in all the economies, increasing to more than 20% in three economies.
Of course these changes were also driven by the COVID-19 pandemics. Due to lockdowns, the online environment has become more intensely misused, and cyber law enforcement has reported staggering volumes of various e-crimes, including offerings of counterfeits and other illicit goods. During the pandemic e-commerce has become the main platform for illicit products, including fake and substandard medicines, test kits and other COVID-19-related goods.
The recent rise in online activity is, however, part of a longer-term trend. In the United States, for example, B2C e-commerce shipments rose by 267%, compared to 85% in the case of B2B manufacturing shipments. 3 In the process, the share of e-commerce retail sales to the total rose from 3.6% in 2008 to 9.9% in 2018, and to as high as 15.2% in the fourth quarter of 2020; at the same time the share of B2B manufacturing online activity rose from 40% in 2008, to 67% in 2018. Moreover, in the United Kingdom, B2C retail sales surged during 2020 and into 2021, jumping from 4.9% in 2008, to 28% in 2020 and 33% during January-April 2021.4 By the end of 2021, some 93% of UK Internet users are expected to have engaged in e-commerce (OECD, 2021). Surveys indicate that the shift to online purchases is likely to continue as some 60% of those surveyed expected their online purchases to continue at elevated levels following the pandemic.
The Internet provides an effective mechanism for engaging in B2C cross-border trade, which in 2019 amounted to USD 440 billion (UNCTAD, 2021). As shown in Table 2.3, cross border B2C e-commerce transactions represented 2.3% of world merchandise exports in that year. While their role was relatively small in some economies, it reached 8.2% on the case of the United Kingdom. The share of cross border transactions in total B2C transactions amounted to 9%, exceeding 10% in six of the top 10 merchandise exporters listed.
Goods and services can be sold on the Internet via e-commerce by companies, organisations and individuals, regardless of their size. Individuals, for example, can set up store fronts easily, at low cost, as can small shops. The number of sites engaging in e-commerce is constantly changing as new players enter the market and others exit. There are currently 12 to 24 million e-commerce sites; most are small as less than one million sellers sell more than USD 1,000 per year.5 The larger e-commerce companies are multi-billion dollar enterprises, headquartered principally in China or the United States (Table 2.4). The 13 largest sold goods and services valued at USD 2.9 trillion in 2019, which accounted for close to 60% of total B2C sales in that year.
As indicated above, there are various types of B2C e-commerce platforms. Marketplace platforms, such as Alibaba, Amazon or eBay, sell a broad range of products, which are offered for sale from internal stocks or by outside vendors. The platform operator is responsible for attracting potential customers, advertising offers and processing transactions; they may also take responsibility for shipping products to buyers. Retail store platforms are operated by brick-and-mortar businesses; they provide consumers with a means to shop for and purchase products, for pick-up or shipping. They may also offer products from third party vendors, serving, in this case, as a marketplace platform as well. Other types of platforms include those operated by companies that offer virtual products or services, and those operated by manufacturers interested in selling their branded products directly to consumers, such as Apple, Godiva, Gucci, Levi’s, Tiffany and Nike.
In terms of trends, conventional firms and retailers are increasingly experimenting with online distribution channels, alongside their brick-and-mortar operations (OECD, 2020[11]). This includes smaller retailers that are trying to survive during the drop-off of sales in physical stores due to the pandemic. There are challenges however as leveraging the Internet, or other electronic networks, to integrate e-commerce into an existing firm-level business model often requires complementary investments. This can include supply-chain and fulfilment arrangements, as well as consolidated inventory systems. In general, however, e-commerce shows much promise for small and medium enterprises, provided they have the resources needed to establish and maintain their own websites or, alternatively, engage with e-commerce platforms. There is scope for significant expansion; in 2019, e-commerce accounted for 24% of economic turnover in large firms, but only 10% in small firms (OECD, 2020[11]).
Innovation is ongoing in e-commerce markets. For example, marketing on-line has greatly improved thank to the access to large volume of data that businesses can analyze on a day-to-day basis. This phenomenon is called big data (Box 2.1) and offers insights that lead to more effective marketing and, more generally, better strategic decision making Another example it the “click and collect” mechanism, which enables consumers to order and purchase online and then collect purchased items in a local brick-and-mortar store or another location, such as a locker (OECD, 2020[11]). This allows consumers to immediately purchase a good or service at a distance, but to save on shipping costs, delays and the inconveniences that may be associated with delivery. The “click-and-collect” mechanism enables firms to retain their centralized inventory system, while reducing the operational costs associated with physical brick-and-mortar stores. Furthermore, it enables them to acquire useful data about users. To the extent that click-and-collect mechanisms are located in a brick-and-mortar store, they may allow consumers to check quality and assess the colour, style and size of the product within the store itself prior to purchase. In addition, consumers can make returns in-store, which can increase their willingness to purchase online.
The Internet not only provides an effective and efficient vehicle for selling goods and services, but it also provides businesses and consumers with new ways to interact, providing both parties with opportunities to improve market experiences. Consumers, for example, generate enormous amounts of commercial and personal information that can be harvested and used by businesses to focus advertising more effectively, and to tailor products to meet specific consumer needs and interests. On average 12% of businesses in the OECD employed “big data” analytics in 2017, and 33% among large firms (OECD, 2020[11]). Data-intensive technologies such as artificial intelligence (AI) and the Internet of things (IoT) can be used to provide consumers with greater choice and personalization of products. At the same time, widespread use of personal information can pose new risks to safety, privacy and security. Already in 2019, over 80% of OECD countries reported AI and big data analytics as a significant challenge to privacy and personal data protection. In response, governments are implementing policies to raise awareness about privacy and data protection issues; they are also seeking policy solutions to address digital security issues.
Some online businesses in the fashion/clothing sectors are innovating by including offline features to enable the sale of fit-critical goods and services online (OECD, 2020[11]). While an offline distribution channel may increase costs, it can increase the extensive margin of e-commerce by enabling new types of products to be sold online. Firms that sell heterogeneous or customized products like clothing may benefit from consumers’ ability to physically inspect the product before purchase. For example, several online apparel retailers have opened brick-and-mortar stores that allow consumers to try on products before ordering them online.
Other firms are experimenting with online ordering mechanisms within or near brick-and-mortar stores (OECD, 2020[11]). After entering a store via a mobile application, consumers can select the products and then leave the store without a formal checkout.
Internet use, of which e-commerce is but one aspect, has risen sharply (OECD, 2020[11]). In 2019, 70% to 95% of adults used the Internet in OECD countries and smartphones became the favoured device for Internet access. There are, however, disparities within age groups and education level. Some 58% of individuals aged 55-74 used the Internet frequently in 2019, which is up from 30% in 2010. On the other hand, nearly 95% of individuals aged 16-24 were daily Internet users.
Increased Internet use is also reflected in an expanding number of persons engaging in B2C e-commerce. In 2019, some 1.48 billion persons, or close to one quarter of the world’s population aged 15 and older, made purchases online (Table 2.5) ( (UNCTAD, 2021[14])). This represented a 16.5% increase over the 1.27 billion e-consumers in 2017. While consumers bought mostly from domestic vendors, some 360 million made cross-border purchases, a 38.4% increase from 2017. As a result, the share of persons making cross-border purchases rose from 20% in 2017, to 25% in 2019.
In the OECD area, B2C e-commerce was more pronounced. Almost 60% of individuals bought products online in 2019, up from 38% in 2010 (OECD, 2020[11]). Within the area, the share of people buying online still varied significantly across countries, as well as across different product categories. Age, education, income and experience all influenced uptake. In Denmark, the Netherlands and the United Kingdom, more than 80% of adults shopped online, while in other countries, the participation level was 25%, or less. In 2018, the items most commonly purchased online were clothing, footwear and sporting goods, and travel products, followed by tickets for events, reading materials, movies and music, photographic, telecommunication and optical equipment, and food and grocery products. The trend towards online shopping is expected to continue, especially in light of the COVID-19 pandemic, with an ever-increasing number of persons buying products using mobile devices (OECD, 2020[11]). Existing evidence suggests that parcel trade during recent lockdowns largely involves ICT goods, medical products, appliances and leisure products such as games and toys (Sorescu, 2021[15]). In addition to purchasing items, consumers are also increasingly selling goods and services online. In 2019, nearly 20% of individuals in the European Union sold goods or services online, which was more than double the 2008 level.
With respect to trends, subscription services provided through e-commerce channels are becoming more popular (OECD, 2020[11]). Such subscriptions are characterized by regular and recurring payments for the repeated provision of a good or service. In the e-commerce context, this can include subscription to streaming digital products, such as movies, as well as subscriptions to products, such as food or cosmetics which deplete with use and require replenishment. Online technologies enable easy ordering of the goods and services, removing associated transaction costs and thus improving convenience for consumers. Firms, on the other hand, benefit from regular and ongoing revenue streams. Interestingly, connected devices that use streams of data through sensors, software and network connections have become linked with physical goods to make continuous or recurring purchases.
The rapid advancements of e-commerce have enhanced consumer choice, and offered businesses new, flexible ways of market access. In fact the existing firm-level evidence shows that digital technologies enable firms (including SMEs), to become exporters (Andrenelli, 2019[16]). At the same time, there were concerns over the potential abuse of e-commerce to facilitate illicit trade in counterfeit goods. Indeed, there is ample evidence that the on-line environment has also attracted bad actors, who have found appealing the ease and low cost of offering not only of counterfeit products, but of all sorts of illicit goods ranging from fake pharmaceuticals and counterfeits to guns and narcotics.
In the context of counterfeit goods, concerns related to abuse of e-commerce, reflect the ease with which criminals can pollute with fakes e-commerce distribution channels. As mentioned above, it is relatively easy to set up e-commerce websites in most jurisdictions, as the large number (12 to 24 million) attests. Fraudsters who are intent on swindling consumers are thus in good position to establish a web presence, through which their fraudulent acts can be committed. Many of the fraudsters who establish sites are active traders of counterfeit and pirated products.
Consequently, the online environment offers great conditions for offering of many types of counterfeits, ranging from goods that pretend to be genuine and can be found on reputed online marketplaces, to poor quality goods, openly marketed as fakes. Put it differently, there are many types of so-called primary and secondary markets for counterfeits that can found online (Box 2.2). In primary markets, described for example in (OECD/EUIPO, 2016[1]) consumers are deceived, and purchase fake good believing they were genuine. These correspond for example to fraudulent sites that deceive consumers selling fake goods for genuine, or deceitful offerings at on-line platforms that mislead consumers and present counterfeit goods as if they were genuine. Secondary markets correspond to on-line offerings, in which consumers gets enough signals that a given good is counterfeit. This includes for example ill- described offers of apparently branded products at a very low price, goods openly described as fakes or offers of goods that are of seemingly good quality, but are still described as non-genuine (for example as “replicas”).
The notion of primary and secondary markets refers to the two market segments targeted by counterfeiters. In primary markets, consumers are deceived and prices of counterfeit goods are expected to be close to those of legitimate products. In secondary markets, consumers knowingly purchase counterfeit goods, and larger price dispersions between genuine and fake are observed. Consumers that knowingly purchase an IP-infringing product may expect to pay a lower price for it than for a genuine product.
The quantitative analysis points that for products that are intensely targeted by counterfeiters (and hence for which large data samples are available), such as footwear, clothing, and leather goods secondary markets might be large. The presence of secondary market is much smaller in sectors, where consumption of counterfeits might cause significant health and safety risk, such as food or pharmaceuticals.
The distinction between primary and secondary markets described is critical to analyse the damages caused by counterfeiting. Every sale of a fake item on a primary market clearly represents a direct loss for industries. In secondary markets, however, only a share of consumers would have deliberately substituted their purchases of counterfeit products for legitimate ones. This is because in secondary markets consumers know what they are buying is fake and they decide to proceed with the purchase for a number of possible reasons.
As discussed below, the largest marketplace platform providers have developed mechanisms to undermine the bad actors who, knowingly or unknowingly, seek to sell counterfeit goods via e-commerce. Governments have also taken measures in this regard, but the challenges are great and remain of keen concern to all stakeholders, with some governments now actively pursuing legislation to address problems. Once detected, governments can act to have rogue websites taken down; the ease of re-establishing such websites using new domain names, however, is problematic.
In addition to national actions, a number of initiatives have been taken at the international level to combat the online sale of counterfeit items. INTERPOL, for example, has coordinated campaigns against the online sale of illicit drugs and medical devices (OECD/EUIPO, 2020[8]). Operation Pangea has been carried out since 2008, with the number of countries participating rising from 8, to a record 123 in 2017. Participating agencies carried out coordinated operational activities against illegal websites during the same week with a view towards identifying the criminal networks behind the trafficking (Table 2.6). During Pangea XI, which was carried out in 2018, police, customs and health regulatory authorities from 116 countries targeted the illicit online sale of medicines and medical products, resulting in 859 arrests worldwide and the seizure of USD 14 million worth of potentially dangerous pharmaceuticals. Almost one million packages were inspected during the week of action, with 500 tonnes of illicit pharmaceuticals seized worldwide. Seizures included anti-inflammatory medication, painkillers, erectile dysfunction pills, hypnotic and sedative agents, anabolic steroids, slimming pills and medicines for treating HIV, Parkinson’s and diabetes. More than 110,000 medical devices including syringes, contact lenses, hearing aids and surgical instruments were also seized.
The speed at which e-commerce expands, and the forms it takes, are being influenced by technological developments and the policy environments governing e-commerce transactions. Much attention is being paid at national and international levels to ensure that markets are competitive, transparent and fair. Importantly, some of this issues refer to abuse of on-line environment in counterfeiting, as they affect, directly or indirectly, the online environment, in which the bad actors, and consumers operate. Some of the key challenges and opportunities affecting markets are discussed below.
Consumer protection
E-commerce will thrive to the extent that manufacturers, sellers and consumers are able to establish and strengthen trust. Consumers, for example, face challenges related to online information disclosure, misleading and unfair commercial practices, confirmation and payment, fraud and identity theft, product safety, and dispute resolution and redress (OECD, 2020[11]).
Certain “dark patterns” have been observed that can undermine consumer interests and weaken trust. These include tactics employed by businesses in websites and apps to steer or deceive consumers into making unintended or potentially harmful decisions (OECD, 2020[11]). Some of these tactics can be also used on sites offering counterfeit goods. Examples include using opt-out check boxes to sneak unwanted items into online shopping carts, and enticing consumers into subscriptions that are easy to start but difficult to cancel. Another challenge concerns the reliability of product evaluations and reviews. An OECD survey on consumer trust in peer-platform marketplaces revealed that 73% of consumers identified the ability to see ratings and reviews as an important trust mechanism; it may be difficult, however, for consumers to distinguish legitimate reviews and evaluations from contrived or fake reviews and evaluations.
Consumers have also been affected by targeted online advertising, which can affect consumer interests in various ways. Developments in AI and machine learning, coupled with online data collection, have enabled cost-effective, targeted advertising on an unprecedented scale (OECD, 2020[11]). Such advertising uses information such as age, gender, location, education level, interests, online shopping behaviour and search history. Complementary technologies track user interaction with online ads to determine the effectiveness of advertising campaigns. They also provide the infrastructure for advertising payments to be tied to specific user outcomes such as “clicks”, webpage visits or purchases. These developments can provide both benefits and risks for consumers. Benefits include more targeted, relevant and timely ads. These could reduce search costs and improve awareness of relevant products and identification of, and access to, better deals. Online advertising also funds a range of nominally free online services, including search services, social networking services and digital news outlets. Risks include longstanding concerns around advertising’s potential to mislead or deceive, as well as new concerns. Emerging issues include: i) consumers’ inability to identify some forms of online advertising, ii) the impacts on consumer trust online, iii) the enhanced ability for online advertising to prey on consumer biases and vulnerabilities, iv) the increased threats from “malvertising”8 and v) the risks associated with increased collection and sharing of personal data.
Governments have played a role in addressing concerns, with a view towards protecting consumers from certain harmful practices. One area which has received considerable attention is the use of default settings in an e-commerce setting (OECD, 2020[11]). Behavioural studies suggest that consumers will generally accept defaults, in the form of pre-checked boxes, even though doing so may be contrary to their interest. In negative option marketing, for example, a customer’s failure to take affirmative action to reject or cancel an agreement is taken as consent. Consumers can thus unwittingly opt in for additional goods or services with associated fees or charges. Moreover, pre-checked boxes or other default settings can result in consumers i) automatically signing up for additional goods or services, ii) unwittingly making financial commitments, or iii) disclosing personal data or marketing material that they might otherwise prefer not to share. In the case of the European Union pre-ticked boxes online have been banned under its Consumer Rights Directive. Similarly, UK consumers are not bound by charges for any goods that are sold by way of pre-ticked boxes (Box 2.3). In the United States, under the 2010 Restore Online Shoppers’ Confidence Act, businesses must obtain a consumer’s express consent before charging for any goods or services purchased online. In addition, for online goods or services sold through a negative option feature, businesses must also provide consumers with details of the transaction and a simple means to opt-out of any reoccurring charges.
The EU Consumer Rights Directive, which came into effect on 13 June 2014, is designed to strengthen consumer rights by giving consumers the same rights across the European Union, while striking an appropriate right balance between consumer protection and business competitiveness. A number of provisions concern online transactions.
No more cost-traps on the Internet. Online shoppers need to confirm that they accept paying for something before they are charged. What is included in the price needs to be clearly indicated.
No more pre-ticked boxes. Pre-ticked boxes on websites involving additional payments (such as priority boarding for airline reservations are banned.
Online shoppers will not have to pay for any charges of which they are not clearly informed before they make a purchase.
The period for consumers to pull out of any distance purchase (e.g. something bought online) is extended from a minimum of 7 days, to a uniform 14 days across the European Union; the cancellation can be for any reason. When a seller hasn’t clearly informed the consumer about the right to cancel the purchases, the return period is extended to a year.
Consumers will be allowed to pull out from online auction purchases from professional sellers.
Traders must refund consumers within 14 days of cancellation, including standard delivery costs. Regarding goods, the trader can postpone the reimbursement until the goods are returned by the consumer or the consumer provides evidence that these goods have been sent to the trader.
Consumers will be given a standard EU form to use if they want to cancel their purchases. This will make it easier for them to get out of contracts concluded outside of their home country.
Traders wanting consumers to pay for the return of goods after cancellation must clearly inform them beforehand, and give at least an estimate of the cost for returning bulky goods.
Source: See https://ec.europa.eu/info/sites/default/files/crd_arc_factsheet-consumer_en.pdf.
At the OECD level, the challenges facing consumers were addressed by countries in 2016, through the adoption of a Recommendation of the Council on Consumer Protection in E-commerce, which seeks to safeguard consumers who purchase goods and services online. The recommendation provides specific guidance to governments and other stakeholders aimed at (OECD, 2016b[17]):
Providing transparent and effective protection that is not less than the level of protection afforded in other forms of commerce.
Establishing fair business, advertising and marketing practices.
Ensuring that confirmation processes that are clear and unambiguous.
Establishing payment mechanisms that are easy to use, secure and provide adequate protection.
Providing dispute resolution and redress mechanisms that are fair, easy-to-use, transparent and effective.
Promoting consumer education, awareness and digital competence.
The guidelines provide a blueprint for governments and business for addressing key concerns; successful implementation would help build the trust that is needed to expand e-commerce in the future.
Social media
Businesses have become active on social media platforms,9 which are being used by businesses to deepen interactions with consumers. The pervasiveness of social networks, which are the most popular online activity in most countries, were used by nearly three-quarters of Internet users in the OECD in 2019 (OECD, 2020[11]). Businesses have taken note; more than half in the OECD had a social media presence in 2017, up from one-third in 2013. As in other areas, there is a marked contrast between countries. Usage ranges ranged from over 65% in Iceland, Norway, Brazil, the Netherlands, Ireland and Denmark, to below 30% in Japan, Poland and Mexico. Medium and large enterprises are the predominant users. In 2017, fewer than one in three small firms in the OECD used social media compared to almost three-quarters of large firms. Growth in e-commerce, combined with similar growth in social media usage has encouraged companies to turn to influencer marketing10 and user generated content to promote brand awareness (Phaneuf, 2021[18]).
Businesses primarily use social media for developing the enterprise’s image and marketing products, as well as to obtain or respond to customer opinions, reviews or questions (OECD, 2020[11]). They may also use social media to involve customers in the development or innovation of goods or services. The use of social media for commercial purposes (referred to as “social commerce”) is booming, with US retail social commerce sales forecast to rise by 34.8% in 2021, to $36.1 billion, representing 4.3% of all retail e-commerce sales (Phaneuf, 2021[18]). While fashion categories including apparel and accessories are the largest segment of social commerce, electronics and home decor are also significant. Companies can use influencers, consumer call to actions, and user generated content, to capitalize on the power of social commerce.
Social media are attractive for counterfeiters for a number of reasons. The potential number of users available on social media is immense. For example Facebook alone has well over 2.5 billion users. In addition, recent research suggest that, consumers are already very receptive to the idea of purchasing items from social media.11 Furthermore, social media offer many marketing tools that can be applied to segment audience by gender, location, age etc. Last, social media platforms offer many additional privacy options abused by criminals groups offering counterfeiters, such as closed groups or ephemeral content, which poses additional challenges for law enforcement authorities.
Recently, social media have been frequently abused to distribute counterfeit goods, to support IP infringement through other channels and to provide information on such activities (EUIPO, 2021[19]). Counterfeiters have adapted their tactics depending on the type of site, and learned how to market fakes on these sites in a professional manner, and the abuse of social media platforms by counterfeiters has been confirmed by systemic, empirical studies. For example (EUIPO, 2021[20]) focused on key social media platforms in the EU and identified conversations related to the categories and brands chosen to represent physical products. It found that 11% of these conversation could be possibly related to counterfeits. This finding highlights that that social media platforms are tools for recurrent IPR infringement for both physical products and digital content.
Privacy and data protection
In order to engage in e-commerce, consumers are in many instances required to provide potentially sensitive personal and financial information, the unauthorized sharing or leaking of which could cause serious problems for the individuals concerned. Indeed, public perception studies in the last few years suggest that individuals are increasingly concerned about the use and protection of their personal data (OECD, 2020[11]). Reflecting growing concerns, national governments worldwide are strengthening their data protection frameworks and policies.
One of the most prominent examples is the EU’s General Data Protection Regulation (GDPR) that frames data protection and privacy in the European Union and the European Economic Area (Box 2.4). Following the 2016-adopted regulation, collection and use of personal data of customers located in the EU must be carried out with their full consent. In addition, personal data must be stored securely, and be made available at their request. It has had a clear impact on e-commerce activities, and some studies suggest it reduced to some extent the volume of e-commerce activities in the EU (Goldberg, 2019[21]).
The EU General Data Protection Regulation, which was adopted on 14 April 2016 has two general aims: to augment and clarify peoples’ control over the collection, use and storage of their personal data and to streamline the related regulatory frameworks.
The GDPR is a regulation, and it is directly binding in the EEA countries (EU countries plus Iceland, Liechtenstein and Norway). It became enforceable on 25 May 2018.
The GDPR provides regulations to entities that collect, store and process personal data of people located in the EEA. Importantly, GDPR applies to any enterprise — not only those located in the EEA – that process personal information of people inside the EEA.
The GDPR frames a number of specific aspects, including, rights of the data subject, duties of data controllers or processors, potential transfers of personal data to third countries, supervisory authorities, cooperation among member states, remedies, liability or penalties for breach of rights, etc.
Following the introduction of GDPR, many economies have also introduced similar provision, being inspired by the EU Regulation. It included some OECD Countries as Chile, Japan, Korea and Turkey.
Sources: See https://gdpr-info.eu/ and https://ec.europa.eu/info/sites/default/files/data-protection-factsheet-sme-obligations_en.pdf.
Of note is also the California Consumer Privacy Act (CCPA), which came into force on 1 January 2020. It creates new consumer rights for the collection, processing, retention and sharing of personal data, and represents a fundamental re-thinking of privacy rights in the United States, which does not have comprehensive or overarching federal privacy law (OECD, 2020[11]). Businesses subject to the CCPA are obliged to provide notice to consumers at or before data collection, respond to consumer requests, disclose financial incentives offered in exchange for personal information and maintain detailed records.
Phishing and pharming
Phishing, the practice whereby attackers disguise themselves as a trustworthy entity with a view towards tricking parties into providing sensitive personal information, is a growing problem that, if unchecked could significantly affect the willingness of consumers to engage in some types of e-commerce. Phishing messages often include links to malicious sites that are increasingly difficult for end-users to detect without using some type of automated protection (OECD, 2020[11]). Broad untargeted phishing campaigns aim to collect information by directing users to fake e-commerce or financial websites. More sophisticated emails target specific individuals to plant malware in an organization’s information system (spear-phishing).
Pharming is a risk related to phishing. It is an offensive action carried out by criminals to redirect on-line traffic from a legitimate website to another site, usually offering illicit goods or content, including counterfeit goods.
In the European Union, surveys indicate that an average of 30% of EU Internet users were victims of phishing in 2019, while about 15% were victims of pharming (OECD, 2020[11]).12 Norway, also included in the survey, registered the highest levels of both phishing (60%) and pharming (30%). In some countries, the levels were less than 15%. Various factors might contribute to explain the differences, including lack of awareness/understanding of phishing attempts and/or the inability to identify them.
Payment mechanisms
Payment mechanisms used in e-commerce are characterized by a high degree of protection, thereby providing the consumers with the security that they need to engage in transactions with sellers with whom they may have little experience. The protection is offered on a competitive basis by charge card providers, with the level of protection varying by card type. Credit cards, for example, generally provide a far higher level of protection than debit cards. Additional protection provided by platform operators serve to further boost consumer confidence, helping to create a low-risk trading environment which focuses on maximizing consumer satisfaction.
The means of payment have expanded in recent years, providing consumers with considerable choice in how they can pay for their purchases. The relatively new forms of payment include digital wallets, mobile money and cryptocurrencies (OECD, 2020[11]). Digital wallets act as an intermediary that manages payment information on both sides of a transaction, without disclosing the payment details to either party. Some wallets, like PayPal, directly process payments, transferring money between buyers and sellers; others, like Google Wallet, transfer financial details between the payment processors of the parties involved in a transaction. Mobile wallets are a sub-type of digital wallets, with mobile-specific features and services which can be used to make purchases online. However, they are also increasingly used in point-of-sale transactions, by, for example, street vendors and brick-and-mortar stores, using connected devices.
Mobile payments, or mobile money are payments that are made using via mobile communication networks; they do not necessarily require that a party have a relationship with a financial services provider and are therefore particularly useful for persons who do not have bank accounts (OECD, 2020[11]). The mobile money is mediated by mobile network operators, who use a system of agents to accept cash from persons. The value of the cash is then stored in a digital wallet, which can then be used for digital payments to others. Mobile money is typically associated with a mobile phone number and often uses two-factor authentication through a personal identification number issued at the point of registration.
Distributed ledger technologies, also known as cryptocurrencies (like bitcoin), operate through a distributed database which is independent from traditional financial institutions (OECD, 2020[11]). They provide a means for making anonymous, validated transfers of financial value. Online companies accepting Bitcoin as payment include a number of multi-billion-dollar firms, such as NewEgg (which is a consumer electronics firm), Overstock (which primarily sells furniture) and Shopify (which is a major e-commerce platform). Moreover, extensions of blockchain-enabled payments may hold more potential for e-commerce. These include use of “smart contracts”, which are self-executing and deterministic software protocols that only transfer value after particular conditions are met. Such contracts could hold particular promise for e-commerce when combined with connected devices. For example, a blockchain-enabled, connected washing machine could initiate an e-commerce transaction through a smart contract when it detects that it is out of detergent. Blockchain technology could therefore enable e-commerce transactions between connected devices rather than simply between individuals and firms.
Suppliers of counterfeits online are benefiting from the move away from a cash economy, and actively leverage potential payment options. Online sales of counterfeits are illicit operations that require accessible and reliable payment processing to transfer money from customer to merchant. Brand owners and payment system providers have been engaging in a number of co-operative efforts, and some successes in this area have been reported. Restricting the ability for criminals to receive payment for their online sales through mainstream online payment system deters potential consumers, and reduces the profitability of the business. However, brand owner highlight that improvement is needed, including development of clear policies. (INTA, 2020[22])
On the other hand counterfeiters adapt their tactics to respond to these actions. For example, as report in a study by (Tian, 2018[23]), online counterfeit luxury goods merchants use criminal payment facilitators, called bullet-proof credit card processors, that are offering online credit card processing services that are tailored to accept payments for counterfeits purchased online. The bullet-proof processors rely on established shell companies that appear to sell online regular goods. These sites are not functional and do not accept payments; they are used only to facilitate payments made for counterfeits through the processors.
Small Parcels
E-commerce has given certain distribution channels a big boost, providing a means for businesses to bypass retail outlets and ship small quantities of items directly to individual consumers in a cost-effective manner. The success of this business strategy is borne out by the profitability and growth of the largest e-commerce market platforms. The distribution channels that have been most favourably affected are the post and local and international delivery services such as Fedex, UPS and DHL. In the case of the post, traffic in domestic and international letters has declined sharply over time, falling by close to one third from 2001 to 2019 (Table 2.7). On the other hand, fuelled by e-commerce, the volume of parcel traffic, both domestic and international more than quadrupled during the same time period, rising to 21.3 billion items in 2019.13 In the five-year period 2015-2019 alone, parcel traffic rose by more than 70%.
While data are not yet available for 2020 and 2021, the impact of COVID-19 could well have accelerated growth in parcel trade. In the United States, for example, mail volumes declined precipitously in FY202014 as marketers restrained from spending and adapted to changes in consumer behaviour (USPS, 2020/21[24]). Package volumes, on the other hand, rose by 19% from FY2019 to FY2020, to 7.3 billion pieces as people minimized in-person shopping and ordered goods delivered to their homes.
Postal services are keen on strengthening their participation in e-commerce. The USPS, for example, has focused on growing e-commerce and implementing marketing campaigns to increase business by offering day-specific delivery, improved tracking, text alerts and up to USD 100 of free insurance included on most Priority Mail packages. At the international level, the UPU updated its e-commerce guide (originally published in 2014), in 2020, to include new and expanded information on recent trends, business models, e-commerce key elements, strategies and UPU enablers to facilitate e-commerce (UPU, 2020[25]).
As noted, the ability of suppliers to furnish consumers with goods in a cost-effective manner via the post and related delivery services has been highly beneficial for the parties concerned. It has, however, provided an opening for those involved in illicit trade to carry out their operations with little risk of detection as the quantities of merchandise shipped in individual parcels and letter packets tend to be small and the shipments are intermingled with billions of legitimately traded items. The problem is a significant one that commands considerable attention from enforcement authorities.15 Trade in counterfeits via parcels is an important vehicle for facilitating the illicit trade, which is reflected in seizures by border officials. In 2019, some 77% of seizures involved items shipped by post or courier services (OECD/EUIPO, 2021[4]). Most of the seizures involved a small number of items, with mail accounting for only 12.1% of the total number of items seized.16 The challenges in combatting the counterfeits are ongoing as the criminal networks involved are constantly adapting their techniques to evade the efforts of enforcement authorities to intercept the illicit products (OECD/EUIPO, 2020[8]).
COVID-19
The COVID-19 crisis turns the attention to the online environment. Law enforcement officials have reported a huge shift to cybercrime (fraud, phishing, etc.) while criminals take advantage of people working at home with less secure infrastructure. According to law enforcement authorities, in the EU e-commerce is a predominant medium to send fraudulent COVID-19 related products. Under the confinement, consumers also turn to online markets to fulfil their needs. This has sparked a marked uptick in cyber-related offenses.
For example, since March 2020, at least 100 000 new domain names containing COVID-19 related words (e.g., Covid, corona or virus) were registered to sell related medical items. The Dark Net is also playing a role in the rapid spread of falsified medicines, as COVID-19 is part of the Dark Net’s keywords.
In the US, the challenge is to ensure a safe and lawful e-commerce for businesses, consumers and intellectual rights holders. Following the e-commerce boom, the huge number of small packages, with a declared value of under USD 800, poses data constraints since only minimal data are required when sending them. In this context, relevant data are essential to identify bad actors and oblige them to free up the trade line through the debarment and suspension process (which makes the bad actors list publicly known). In this framework, the Anti-Counterfeiting Consortium to Identify Online Nefarious Actors (ACTION) Plan was created.
Online platforms tend to be aware of these risks. For example, during the pandemic, Amazon detected price gouging and ill-described (including counterfeit) goods. Amazon reacted quickly and has worked closely with legal and communication teams, and collaborated with EU law enforcement to share information related to fraudulent goods related to COVID-19 pandemics.
References
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Notes
← 1. The OECD defines e-commerce transactions as those involving the sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders. The goods or services are ordered by those methods, but the payment and the ultimate delivery of the goods or services do not have to be conducted online. An e-commerce transaction can be between enterprises, households, individuals, governments, and other public or private organisations. To be included are orders made over the web, extranet or electronic data interchange. The type is defined by the method of placing the order. To be excluded are orders made by telephone calls, facsimile or manually typed e-mail. See https://stats.oecd.org/glossary/detail.asp?ID=4721
← 2. Other segments include consumer to business (C2B), consumer to government and (C2G) and business to government (B2G).
← 3. See www.census.gov/retail/index.html.
← 4. See www.ons.gov.uk/businessindustryandtrade/retailindustry/timeseries/j4mc/drsi .
← 5. See https://wpforms.com/ecommerce-statistics/.
← 6. See www.europol.europa.eu/newsroom/news/millions-of-medicines-seized-in-largest-operation-against-illicit-online-pharmacies.
← 7. See www.interpol.int/en/News-and-Events/News/2018/Illicit-online-pharmaceuticals-500-tonnes-seized-in-global-operation.
← 8. The use of advertising to spread malware.
← 9. Facebook, Instagram, Pinterest, TikTok and WeChat are examples of social media platforms.
← 10. Influencers are people who have the ability to influence others' beliefs, opinions or in the case of e-commerce, purchasing decisions.
← 11. See https://www.redpoints.com/blog/the-growth-of-fake-products-on-social-media/.
← 12. Pharming involves an Internet user being redirected to fake websites that ask for personal information.
← 13. The data on parcels does not include the considerable number of items that are sent in letter packets, data on which are not readily available.
← 14. The year ending on 30 September 2020.
← 15. See https://www.oecd.org/newsroom/trade-in-fake-goods-is-now-33-of-world-trade-and-rising.htm.
← 16. The number of seaborne seizures was far lower, but the number of items seized was considerably higher as the counterfeits tend to be shipped in bulk.