Chapter 3Business and the Internet

Part 1: Data Communications in the Information Age

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Topics Addressed in Chapter 3Internet services leveraged by businessesCommercial uses of the InternetInternet transaction requirementsE-commerce architecturesTypes of e-commerceKey e-business and e-commerce applicationsThe information superhighwayBusiness communities and electronic marketplaces

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Reasons for Business Presence on the Internet

Major reasons why business presence on the Internet is increasing include:

Number of existing or potential customers who use the Internet is increasingNumber of business partners (vendors, suppliers, customers) connected to the Internet is increasingMaturation of e-commerce server and application software has made it easier to develop e-commerce applicationsTelecommunication costs can be lowered by conducting business over the InternetInternet has potential to improve company image, expedite access to information, improve direct or personalized marketing, reduce paper-based transactions, and improve worker productivity

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Internet Services Used by Businesses

Widely used Internet services/applications include:

Internet e-mail (SMTP)File transfer (FTP)World Wide Web USENET or newsgroupsOnline commercial services (including ASPs and online information services)Electronic journalsElectronic governance services

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Commercial Uses of the Internet

Examples of commercial uses of the Internet include:

Intracompany correspondence (e.g. intranets)Intercompany business transactions (e.g. EDI)Advertising and marketing (see Figure 3-1)Selling goods and servicesSelling stocks or other financial instrumentsProviding (or leveraging) online travel servicesProviding reference materials

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Figure 3-1

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Internet Transaction Requirements

Like other business transactions, desirable characteristics of Internet-based transactions include:

A payment systemSecurity and verificationAnonymityAccountability and taxability

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Internet Transaction Payment Systems

A variety of payment systems are used for e-commerce transactions including:

Smart card payment systemsDigital cash (e-cash) Credit card or debit card payments

Micropayment systems are also becoming increasingly common, especially for mobile commerce (m-commerce) applications using smart phones and PDAs

Microcommerce refers to low-value e-commerce transactions for products/services whose prices are too small to be feasibly paid for by credit cardSmart cards and digital cash support micropayments and microcommerce

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Smart CardsSmart cards look like credit cards but have an embedded computer chip that is capable of storing and updating data

The chip is activated by a smart card reader/writer

Smart cards are more widely used outside the U.S. (especially in Europe), but are increasingly in use in the U.S.Credit card/smart card hybrids (such as the American Express Blue Card) are also becoming more commonMost smart cards are issued by banks, financial services companies

Some, designed for particular applications such as for bus and metro systems, are issued by third-party organizations

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Smart Card Payment Processes and Security

Smart card value-loading and cash transfer processes are illustrated in Figure 3-2Because cardholder data can be stored on a smart card, biometric identifiers (fingerprints, retina scans, voice prints, hand or facial geometry) can be stored on the card and used for verification and authentication purposes

Biometric images captured at the point of sale can be compared with stored images to verify cardholder identity and reduce fraudulent smart card use

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Figure 3-2

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Digital CashAnother form of payment for Internet transactions is digital cash (d-cash or e-cash)D-cash alternatives include:

Electronic check equivalentsElectronic money certificates obtained from a bank or another authorized distribution systemElectronic scrip that may be exchanged for services/products at particular Web sites or portalsMicrocommerce scrip whose monetary equivalent is less than one cent

Examples of digital cash systems and providers include NetBill, Millicent, CyberCash, and VeriSignNot all merchants accept digital cash for transactions.

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Digital Cash Payment Processes

Generally, the digital cash payment process involves:

Customer opens account with digital cash issuerDigital cash certificates are issued to customerWhen used in an Internet payment, digital cash certificates are transferred from customer to merchantMerchant sends digital cash receipt notification to issuerIssuer verifies, authenticates digital cash certificatesMerchant account is credited with monetary value of digital cash received from customer

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Credit Card PaymentsWhen credit cards are used to pay for Internet transactions, the credit card number must be transferred from buyer to seller and then to a credit card authorization centerSeveral protocols have been developed to ensure the security of the data that is transferred; all use encryption:

Secure Sockets Layer (SSL)Secure HTTP (S-HTTP)Secure Electronic Transaction (SET)

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Internet Commerce ArchitecturesThere are several components of e-commerce systems that must interoperate securely and reliably. These include:

A merchant/storefront system that presents buyers with seller’s product catalog and marketing materials, mechanisms for ordering or buying the seller’s products, and access to customer serviceBack-office systems that accept, process, and record sales transactions that originate with the merchant/storefront systemA payment gateway for processing credit card transactions or other types of electronic payments

These components are illustrated in Figure 3-3Merchant/storefront systems are available from multiple vendors (see Table 3-2); the functions these support are summarized in Table 3-3

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Figure 3-3

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Table 3-2

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Table 3-3

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Characteristics of Internet Transactions

A typical Internet transaction includes:Item selection: items are selected from online catalog and placed in shopping cartCheckout and payment: buyer provides shipping information for physical products and pays for selected items using a credit card, debit card, smart card, digital cash, or electronic checkOrder confirmation/notification: this may be via an order confirmation Web page, e-mail notification, or both

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E-commerce vs. E-BusinessE-commerce involves the use of computer networks to complete business transactions

The networks involved include the Internet, intranets, extranets, value-added networks, and private networksTransactions include buying, selling, or exchanging products, services, or information

E-business activities on the Internet include, but go beyond e-commerce

E-business includes using the Internet to improve customer service, coordinate activities with business partners, facilitate communication and knowledge management within organizations, and create electronic marketplaces that serve the collective needs of entire industries

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Drivers of E-Commerce Expansion

Among the major drivers of e-commerce and e-business expansion are:

Declining prices for computing and communication technologies have led to increased IT investments by businessesEmergence of B2B marketplacesIncreases in the number of consumers with Internet access (see Tables 3-5 and 3-6)Continued expansion of size and content of World Wide Web

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Table 3-5

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Table 3-6

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Types of E-CommerceMajor e-commerce categories include:

Business-to-business (B2B) e-commerceBusiness-to-consumer (B2C) e-commerceConsumer-to-consumer (C2C) e-commerceIntrabusiness/intracompany e-commerce

These are illustrated in Figure 3-4 and Table 3-7Other types of e-commerce include:

Consumer-to-business (C2B) e-commerceNon-business e-commerce by non-profit organizationsE-governance applications

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Figure 3-4

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Table 3-7

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B2B E-CommerceB2B transactions account for the lion’s share of commercial activity on the Internet (see Table 3-8)Most B2B e-commerce involves the creation of interorganizational systems (IOS)IOSs encompass a wide-range of B2B activities including EDI, extranets, electronic funds transfers among business partners, integrated messaging, shared databases, electronic procurement systems, and supply chain managementContractual arrangements underlie most B2B e-commerce systems

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Table 3-8

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Electronic Data Interchange (EDI)

EDI was electronic commerce prior to 1990

EDI involves the electronic transmission of business documents from one company to another using a standard set of forms, data elements and messages

EDI documents include purchase orders, invoices, shipping notifications, and remittance notices

EDI documents and data can be exchanged over point-to-point connections, proprietary networks, VANs, and the Internet

Web-based EDI is increasing

X.12 and EDIFACT are the two most widely recognized and used EDI standards

XML will have a dramatic influence on EDI’s evolution and future

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ExtranetsExtranets leverage TCP/IP protocols and applications, especially the Web, to enable business partners to access a company’s computing resourcesWeb-based EDI is an example of an extranetExtranets have numerous potential business benefits including:

Reduced costs and enhanced profits for suppliersReduced inventories in the supply chainReduced prices for customersEnhanced customer service

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Other Important B2B E-Commerce Applications

Buy-side B2B e-commerce applications automate and facilitate business procurement and purchasing processesSell-side B2B e-commerce applications include software systems that make it easier for companies to sell their products to other businessesElectronic marketplaces have emerged in virtually all major industries. These provide an online forum for buyers and sellers, facilitate innovative pricing schemes, and enable complex transactions involving multiple business partners

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Business-to-Consumer (B2C) E-Commerce

Like B2B e-commerce, B2C e-commerce is expandingTable 3-5 summarizes items commonly purchased by consumersB2C e-commerce is helping consumers be more informed and price-sensitive buyers, both online and offlineConsumers are also benefiting from health care, employment, and consumer-oriented e-governance Web sitesNet-savvy consumers are stimulating businesses to develop new business models

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Table 3-5

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Intrabusiness/Intracompany E-commerce

Intrabusiness/intracompany e-commerce includes the online exchange of goods, services, and information within an organization often over an intranetAn intranet is a private network that uses Internet technologies to facilitate data and information exchange among employeesIntranet building blocks include Web servers, Web publishing tools, browsers, databases, and TCP/IP networks

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IntranetsOrganizations are leveraging intranets to:

Facilitate internal exchange of goods and servicesEnhance customer serviceImprove product development processesFacilitate knowledge sharing and knowledge managementFacilitate work team collaborationEmpower workers via access to informationEnhance project managementReduce need for paper-based information deliveryCreate/deliver Web-based training and development programs

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Major E-Business Applications

Important e-commerce and e-business applications include:

Supply chain management (SCM)E-procurementInternet marketingCustomer relationship management systems (CRM)

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Supply Chain ManagementSCM involves the coordination of material, information, and financial flows between and among business partners in a supply chain (see Figure 3-5)It supports cooperative arrangements among business partners that enable them to reduce inventories, facilitate order fulfillment, and support JIT and pull manufacturingTrend is toward Internet-coordinated SCM including Web-enabled collaborative planning processes

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Figure 3-5

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Internet Marketing and CRMInternet is widely used for advertising and marketingIt is sometimes used as a direct marketing channel (Dell does this)Infomediaries and online aggregrators help organizations market products and services via portals and cybermallsOrganizations are increasingly using the Web for personalized direct market including personalized e-mail marketingCustomer relationship management (CRM) systems are being used to increase customer retention rates, improve customer service, and to facilitate up-selling and cross-selling opportunities

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Internet Banking and Financial Services

Electronic funds transfer (EFT) has been used to transfer money from one bank account to another since the 1970s (see Figure 3-6)Internet banking services are supported by most banks and the number of customers using them is increasingOnline lending companies (such as DiTech.com) and online brokers such as E*Trade continue to see increasing use of their services

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Figure 3-6

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The Information SuperhighwayNational and regional data communications infrastructure initiatives are underway in many parts of the worldIn the U.S., the new information highway system is called the National Information Infrastructure (NII)The federal government has established the Information Infrastructure Task force (IITF) to oversee the development of the information superhighwayFigure 3-7 provides an example of how the NII might be implemented

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Figure 3-7

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Information Superhighway UsesPotential information superhighway uses include:

Videoconferencing applicationsSoftware distributionOn-demand publishing/printingPersonalized information servicesEnhancements of all types of electronic commerceMovies/games/music on demandHigh-bandwidth education and training programsRemote health care delivery (including telesurgery)Enhanced wireless communication servicesMechanisms to address social issues such as the digital divide

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Internet2Internet2 is a high-speed network for government, academic and research useWhile not part of the public Internet, it provides the testing ground for high-bandwidth technologies and applications that may one day migrate to the InternetInternet2 is part of the Next Generation Internet (NGI) project and is administered by UCAID (University Corporation for Advanced Internet DevelopmentInternet2 leverages existing networks such as NSF’s vBNS and Abilene

Chapter 3Business and the Internet

Part 1: Data Communications in the Information Age