E-commerce has disrupted the shopping behavior of consumers around the world. Now, blockchain solutions may change the rules of the game and significantly disrupt the e-commerce model.

This is the second of three articles on the evolution of retail.

Previously, we looked at the evolution of retail from family-owned stores to the dominance of e-commerce giants like Alibaba, Amazon and eBay. We suggested that blockchain represents the next step in this evolution.

Why blockchain is the next big innovation for ECommerce

In the third in the series, we investigate start-ups in this space and show how competitive they can be even though they are small.

Breakthrough ideas that will make blockchain start-ups competitive in the world of e-commerce

In this second article we look at the following five ways where blockchain can solve problems being experienced by e-commerce:

1. Cutting the time and cost of cross-border transactions

2. Securing payments

3. Optimizing order fulfillment and reducing transactional risk

4. Protecting personal data

5. Returning customer relationships and IP to vendors

We’ll also discuss why these blockchain solutions change the paradigms, or “rules of the game” and threaten to disrupt the e-commerce model itself.

1. Cutting the time and cost of cross-border transactions

The problem

Cross-border or international payments are problematic. Traditional systems have not kept up with technology trends and are slow, cumbersome and expensive. They are also very hard to track as they move across multiple ledgers, banks and clearing systems.

The blockchain solution

There is a growing opinion that the only way to fully solve this problem is through a global payments network, built on blockchain technology. Some recent comments about crypto assets as “commodity money” are relevant:

“If crypto assets indeed lead to a more prominent role for commodity money in the digital age, the demand for central bank money is likely to decline.

We cannot rule out the possibility that some crypto assets will eventually be more widely adopted and fulfill more of the functions of money in some regions or private e-commerce networks.”

Monetary Policy in the Digital Age. IMF Report, June 2018

The complaint that cryptocurrency transactions are too slow is being addressed by developments to the technology. These include

· The Lightning network to speed up Bitcoin, Litecoin, Vertcoin and others

· New blockchains such as EOS and NEO which promise an almost unlimited number of transactions per second. The EOS White Paper promises “a blockchain architecture that may ultimately scale to millions of transactions per second (and) eliminates user fees”.

· Payment systems such as those introduced by Ripple and Stellar that promise immediate cross-border settlement. Transaction time for Ripple is given at 4 seconds and for Stellar at 2–5 seconds.

· Technologies like InstantSend based on the Dash model of masternodes

Why is this disruptive to e-commerce?

Cryptocurrencies — or “commodity money” — could completely replace fiat currencies as the method of payment on e-commerce sites. Clearinghouses — and their fees — could be closing their doors.

2. Securing payments

The problem

Fraud is an ongoing problem for online payments. People are increasingly concerned about their personal and financial information being compromised.

· The Identity Theft Resource Center (ITRC) in the USA reports that over 14 million credit card numbers and nearly 158 million Social Security numbers were exposed in 2017. Credit card fraud was the most common form of identity theft, and this increased by 23% over 2016. Consumers reported $905 million in fraud losses for the year.

· In a UK report for 2017, a total of 42 837 victims lost £236 million pounds to phishing scams and the theft of data and card details.

· Equally worrying for e-commerce websites is the growing trend for “account takeovers”. The October 2017 Global Fraud Index reports that online retailers in North America, Asia and Europe lost $3.5 billion in 2017.

The blockchain solution

Paying with cryptocurrency is like paying with cash. Payments don’t expose personally identifiable information. Rather than providing credit card details, a buyer authorizes a payment from a personal wallet to the wallet of the recipient. There is no intermediary.

Many wallets have additional layers of security, such as 2-factor authentication and multi-signatures. Provided the buyer keeps his private keys well-secured, there is little risk of theft.

Having said this, it will be important for buyers to check on the payment methodologies set up by e-commerce sites. The more decentralized and P2P the system is, the more secure it will be.

Why is this disruptive to e-commerce?

Blockchain-based payment systems will do away with the need for intermediaries. So companies like PayPal, Skrill, Mastercard and Visa could find themselves sidelined.

It’s little wonder, therefore, that financial institutions themselves are investigating blockchain solutions. Not least is Mastercard, working on a “crypto-free blockchain”.

3. Optimizing order fulfillment and cutting transactional risk

The problem

E-commerce merchants may spend as much time and resource dealing with risk management issues as they do serving their customers. Legal documents, invoices, receipts all take time and money. When customer complaints deteriorate into chargebacks, they have the potential to do real damage to an e-commerce business.

The blockchain solution

· A blockchain will track transactions in chronological order; the record is visible to everyone and it cannot be changed. Transactions include product orders, the dispatch of goods, payments made and received. This removes many supply chain problems and provides the “same truth” for all parties when there is a dispute.

· Smart contracts will replace the need for lawyers, inventory reconciliations and payment protocols. Conditions are set up in advance and actions are automated when the conditions are met. This could include automatic replenishment of stocks when they reach a certain level or automatic release of funds when goods are received.

· Where there is a dispute it is possible to set up an online P2P dispute resolution mechanism, connecting buyers and sellers directly.

Why is this disruptive to e-commerce?

Entire supply chain and accounting systems, costs and staffing will be changed, and in many cases replaced, by technology.

Ten companies, including Walmart, Unilever, Kroger, Nestle and Berkshire Hathaway’s McLane Co are working with IBM to set up a blockchain ecosystem to track food supply chains. What is interesting about this is not just that these companies are recognizing the power of blockchain. It is also that setting up a blockchain ecosystem is requiring collaboration across companies that are usually in competition with each other. This need for transparency is part of what makes blockchain so disruptive.

4. Protecting personal data

The problem

E-Commerce sites are having to deal with a variety of problems here:

· E-commerce sites typically store information about suppliers and buyers in centralized databases and servers, which can be compromised.

· The need for these sites to tighten up their systems has become even more urgent following the introduction of the GDPR (General Data Protection Regulations) for the EU and UK. These regulations to protect personal information apply to anyone across the world who is in any way interacting with people in the EU and UK, via suppliers, sellers and buyers.

· Buyers may be at the mercy of scam sites and counterfeit products.

The blockchain solution

Blockchain has a variety of solutions.

· At the most fundamental is decentralization. There is no single point of failure or a single place to hack into. It is virtually impossible to hack all the nodes on a blockchain-based platform, so customer data is considered to be relatively safe.

· As regulations about blockchain and cryptocurrencies become clearer across the world, most blockchain-based systems also have established anti-money-laundering (AML) and Know Your Customer (KYC) protocols.

· Because paying with cryptocurrencies is anonymous, most personal information is not required at all. Where it is required, blockchain-based systems can protect it through encryption. Some platforms offer advanced encryption options and tiered networks to ensure privacy. Others are using technology like Dash’s PrivateSend.

Why is this disruptive to e-commerce?

There is growing dissatisfaction about how private data is being monetized by online giants like Amazon and Google. Individuals are becoming increasingly uncomfortable about receiving “personalized” advertisements and content. These demonstrate how invasive technology has become and how it creates echo chambers where diverse opinions are not heard.

Blockchain allows individuals to own their own data and identities and to choose what and where to share. This will force e-commerce companies to rethink their business models.

5. Returning customer relationships and IP to vendors

The problem

Ownership of the customer relationship is becoming blurred on e-commerce sites. If you have bought something through Amazon, for example, are you an Amazon customer or the supplier’s customer? The vendor of products and services often has little opportunity to develop customer relationships and loyalty.

major customer trend, especially among millennials, is the need for interaction and engagement with brands. But traditional e-commerce platforms do not incentivize customers to leave reviews or reward them for sales that happen as a result. If they do, this is open to abuse, resulting in multiple fake reviews.

A further problem for manufacturers and sellers is that they spend huge amounts of money on photos, product videos and product descriptions. Yet ownership of these digital assets often resides with the platform, and it is difficult to track who actually owns what.

In addition, it is increasingly difficult for a vendor to ensure that the most updated information about his/her products is available on every platform where they are displayed.

The blockchain solution

Fundamental to blockchain technology is its peer-to-peer architecture. Blockchain-based e-commerce platforms may facilitate the meeting between seller and buyer, but the actual dealings and relationships are directly between the parties (B2B, B2C and even C2C).

In addition, buyer status can be authenticated to prevent fake reviews. And, if there are referral systems, users will be rewarded if their posts lead to sales because it is possible to track all transactions.

Blockchain also allows for the tokenization of digital assets. This means that ownership of photos, videos, etc of products can be recorded on the blockchain and the owner can sell, rent or otherwise trade them. For example, if someone wanted to use the images for comparisons with other products, the owner can negotiate a fee for doing this. This is important in a platform ecosystem which combines and coordinates intellectual and digital property from a variety of stakeholders.

Blockchain technology can also keep track of product images and descriptions and share updates to your online store, other e-commerce sites, suppliers, and content creators.

Why is this disruptive to e-commerce?

Companies like Amazon have built their empires on ownership of the customer. This has allowed them to branch out into ever-increasing product lines and different areas of business because they have taken this customer base with them. Removing customer ownership will severely disrupt their business model.

6. Blockchain: disrupting the paradigm for e-commerce

Blockchain represents a paradigm shift — the “rules” of retail and e-commerce are changing.

Probably the biggest blockchain disruption to the e-commerce model is that power and ownership are given back to individuals, whether they are buyers or sellers.

Some of the benefits that will be experienced include:

· Privacy: Your payments are private and untraceable

· Security: Encryption, protected wallets, multiple-tiered networks all

ensure that neither your money nor your data can be stolen

· Decentralization: Peer-to-peer (P2P) architecture removes the need for

intermediaries, whether these are banks, clearing houses or sales agents

· Speed: Cross-border and cross-currency payments can be immediate

· Low fees: Fees from intermediaries can be eliminated, and platform fees

are usually very low

In 1989, the futurist Joel Barker released a video showing how people shoot down good ideas because they think that the future is just an extension of the past. They live within old sets of rules or paradigms about how things work.

He made this insightful comment that 30 years later, could serve as a warning to e-commerce companies, no matter how big they might be:

“When the paradigm shifts, everyone reverts to zero.”