How the Onset of Web 2.0 Puts E-Commerce up for Grabs

This article kicks off a six-part series by electronic-payments researcher and consultant Steve Mott that explores how the next generation of e-commerce will be defined by the Web 2.0 phenomenon, leading to dramatic changes in the transactional environment. The final installment of the series will appear in the February issue of Digital Transactions magazine.

We've seen these kinds of new technology explosions occur in the past. All of a sudden, millions of consumers start doing something new, and researchers breathlessly assert that the world as we know it will be transformed. A year or two later, the “epic” change fizzles out, and everyone moves on to the next big thing. Not this time. Web 2.0 isn't just a change in technology use or habits; it's a psychological evolution in how buyers and sellers view and value themselves, and how they seek to monetize that value through a new paradigm of two-way communications. The relationships that will result will have sweeping ramifications for everyone in the payments business. Web 1.0 was good for the industry?while it lasted. Empowering the consumer to obtain unlimited information about products and services that could be bought from virtually anywhere in the world produced unprecedented access and reach. E-commerce became a hot new retail channel, and, in a little more than a decade, generated nearly $300 billion in sales in 2008 while accounting for more than 4% of all retail transactions. But shifting the balance of purchasing power to the buyer had its drawbacks, too. Information tended to flow just one way, to the consumer, and sellers were left with little means to differentiate themselves?except through lower prices. Consumers found e-commerce convenient, but learned they could play fast and loose with their credit card information, knowing they could saddle the retailer with total liability. So profits in e-retailing proved hard to come by under the rules and practices established by the credit card companies. And now, after nearly a decade of 20% or more annual growth, e-commerce volume tailed off to 9% growth in January-October 2008, and?along with the rest of the economy?flattened out completely during the holidays. That's still better performance than at the point-of-sale, but it's clearly a sign that the easy days of e-commerce are coming to an end. There's still plenty of work to be done by online merchants to improve and expand their current online businesses (the subject of next week's article), and there are extensions to their models, such as adding mobile functionality to support location-based shopping and services, that hold significant promise.

But Web 2.0 is something very different. Think here of social networks, where consumers spend their online time interacting with each other, and collaboration models, where customers help design and critique and rate products. This is all about two-way communication. Buyers and sellers will explore new ways to relate to each other, and in so doing will redefine their respective values.

Consumers are already demonstrating a remarkable propensity to offer demographic and personal information about themselves (including intimate information about their preferences and influencers and behaviors) on social-network sites?free of charge. Add in information about what ads they click on and what products and services they buy, and you have a marketer's dream formula for one-to-one pitches.

Merchants can differentiate themselves on social-network sites by offering advertising and promotions that appeal to a highly granular, specifically targeted audience; these consumers can be enticed into revealing more and more detailed information about themselves in return for promotional offers or other rewards, as well as the promise of developing a qualified vendor they're interested in doing business with online.

So it's no surprise that the leading social networks are hard at work designing so-called personalization engines that match buyers and sellers based on two-way exchanges of data. This is enabled by newly emerging “permissioning” utilities that facilitate the consumer's gradual escalation in approvals for intimate exchange.

Of course, such an interactive model will require a new paradigm of remotely invoked trust between buyers and sellers. The good news for the payments business is that it has been the source of electronic trust for decades. The bad news is that new business models for Web 2.0 don't appear to need conventional providers any more.

And the mechanics of handling Web 2.0 transactions?payments, loyalty awards, and other types of transactions (e.g., getting paid to view highly specific types of digital content, advertising, and marketing solicitations)?is likely to get integrated into these new two-way engines of interaction.

Google, for example, makes payments transparent to the paid search and online ad business. Google's YouTube already embeds Amazon and iTunes as preferred providers of digital content, and enables free-lance content developers to attract their own cohorts of advertisers. The company just has to figure out how everyone gets paid fairly when one entity calls all the shots.

PayPal's still working to insinuate itself further into online merchant businesses by digging deeper to attract digital-content providers, and Amazon Payments has joined the fray with similar pricing and embedded positioning; but neither holds the keys to the future?at least not yet.

That leaves the next generation of e-commerce up for grabs. And it's likely to be influenced more than anything by convergence with mobile commerce. Mobile devices?the ultimate two-way communicators?are morphing rapidly into the preferred mechanism for accessing Web 2.0 applications (and everything else!).

At a minimum, the provision of payments will likely fade from front-and-center in PC-based e-commerce to a transparent, embedded manifestation of a consumer's transactional id. No, that's not “ID,” as in identity, but Freud's old concept of the id, or our inner selves. The remainder of this series will explore all the developments and notions presented here, and how we get to our transactional inner selves with Web 2.0.?Steve Mott