Internet commerce: right now
In recent weeks, a great deal of concern has been expressed about the legal and infrastructural impediments to Internet commerce in India.
To understand the issues, let us take three steps away from a simple transaction such as a customer placing an order with a stock broker. This can be done in five distinct ways:
- At the simplest, customers like to visit the office of the broker, see prices in realtime on the NSE screen, and place orders personally. In this, concerns about authentication are addressed by the broker recognising the customer. If a mistake is made in this, the broker has to adopt the full financial responsibility with respect to the NSCC.
- Instead, the customer can place orders using a telephone. In this, concerns about authentication are addressed by the broker recognising the customer's voice. If a mistake is made in this, the broker has to adopt the full financial responsibility with respect to the NSCC.
- Further, an order can come in by fax. This is a very common mode of order placement in India since there is a lesser risk of making a mistake in hearing the customer, and there is a smaller chance of the customer denying he ever placed the order. The physical fax serves as a part of the records of the broker. Authentication here is based on the signature seen on the fax - the broker has to visually verify that this signature is sound. This process if fraught with dangers: signatures are easy to forge, and faxes are extremely easy to forge. Yet, if a mistake is made, the broker has to adopt the full financial responsibility with respect to NSCC.
- An order can come in over the Internet by email. This is insecure for customers because email can be read by snoopers. This is insecure because email (like fax) can be forged, and brokers rarely have the skills to study the email headers and detect even obvious signs of forgery. If a mistake is made, the broker has to adopt the full financial responsibility with respect to NSCC.
- Finally, this email can be done with a greater degree of security. Customers could enjoy greater privacy since the message can be encrypted. Brokers could enjoy greater safety since a forger would not be able to produce the same encrypted message. The broker would assign a password to the customer, and the customer would be responsible for all orders sent using his password. Obviously, the relationship between the broker and NSCC would be unchanged: the broker would have to adopt full financial responsibility for all activities.
What is interesting about this progression is in the way that technology has crept into the order placement process in various different ways. The Internet is simply one additional wrinkle in the basic communications problem: how does a customer place an order with a broker? This communications problem can be solved by physical presence, telephone, fax, vanilla Internet email, or `Internet broking'. In this problem, the Internet commerce approach is not genuinely new: it is merely a way of accomplishing traditional transactions through a new, low--cost medium. The onset of the Internet, in this problem, is comparable with the onset of fax. (It is actually much less problematic than fax from the broker's point of view, since undetectable forgery with faxes is far easier than forgery with Internet broking.)
Is there a role for the State in this? As long as the broker is 100% responsible to NSCC for all trades on NSE, and as long as NSCC performs `novation', insulating counterparties from the consequences of broker failure, there are no regulatory concerns in the Internet commerce approach. If faxes are acceptable, then Internet broking is acceptable.
There is a role for the State in a host of other aspects to the Internet in securities markets. Planting stories in the media is an important part of market manipulation in India (this helps explain the close ties between manipulative individuals/firms on the stock market and the media). The Internet is the next frontier for planting rumours and harnessing ignorant investors in manipulative efforts. Internet exchanges are a problem, where the question arises about how the existing regulations for exchanges should be modified for an exchange which lives purely on the Internet. Individual companies can bypass the traditional IPO and secondary market by having primary issuance and trading from their web site - this will require appropriate regulation. Hence, the Internet does throw up fresh concerns for securities market regulation. But the classic E commerce application -- Internet broking -- is not one of them.
Similarly, Internet banking represents the culmination of a logical progression of communications alternatives. At the simplest, a person walks up to a bank branch to find out his bank balance. This can done on an ATM. This can be done over telephone or over fax--back. Finally, this can be done over the Internet. There isn't anything to be afraid of in the Internet version. Indeed, numerous Indian banks already have Internet banking, and the RBI is rightly comfortable with it.
The ``fear/uncertainty/doubt'' -- that the media treatment of E commerce in recent weeks has encouraged -- will have performed a major disservice if it has slowed down the development of E commerce at any of India's firms. The Internet is a revolutionary way to rethink business, and every CEO today should be devoting great attention to thinking how to organise production, sales and distribution differently in the age of the Internet.
As with much of modern technology, fully understanding what the Internet can do is going to take a while. Hence, properly optimised E commerce activities will not come about immediately. However, the learning process should begin sooner rather than later, for two reasons: (a) because learning takes time, and the sooner a firm begins, the sooner it will reach the goal, and (b) because there is a risk that a competitor can decisively alter the landscape by harnessing technology first.
The advent of electronics into financial transactions is the source of much concern among lawyers, who see serious problems with using electronic records as evidence. These problems are not unique to the Internet: everyone who uses telephones, faxes and computers faces them. I am an economist and not a lawyer, so I clearly don't understand the legal issues adequately. But I suspect that in 1993, all these concerns could have been raised with a vengeance about the science fiction that was then being proposed: to use satellite communications with anonymous computerised order matching to make a new stock exchange. The fact is that we have NSE today, even though there has not been any serious progress on legislative reforms.
This gives me grounds for optimism for the extent to which enforceability can be obtained without legal reforms; and for the extent to which Internet commerce can come about in India. As long as reliable and low-cost telecom is available, firms can start building E commerce systems, right now.
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