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Understanding e-Commerce in the Philippines

The Basics

E-commerce Defined

E-commerce, simply defined, is commerce conducted through electronic means. However, throughout the decades the way we define, appreciate, and use the word “electronic” has evolved heavily due to technological advancements. Consequently, we have developed different definitions, measures, and scope of “e-commerce”.

Various definitions of E-commerce are recognized by different organizations, but for this roadmap, the PSA’s definition , adopted from the OECD , is used:

“The sale of purchase of goods and services, whether between businesses, households, individuals, governments, and other public or private organizations, conducted over computer-mediated networks. The goods and services are ordered over those networks, but the payment and the ultimate delivery of the good or service may be conducted on or offline.”

This definition is likewise consistent with the broader definition of the World Trade Organization:

“the production, distribution, marketing, sale, or delivery of goods and services via electronic means, including internet retail, digital media, online travel, ride-hailing, and digital financial services.

Implicit in numerous descriptions of e-commerce is the importance of network and interconnectivity. As an enabler, it encompasses, affects, and is affected by a multiplicity of industries, forming an ecosystem within which these interact.

Economics of e-Commerce

Without being perfectly efficient, e-commerce is noticeably faster and cheaper than traditional economic transactions, as it lowers friction by reducing the cost of exchanging information. The reduction of information asymmetry and creation of mutual value then depends on the level of collaboration, complementarity, connectivity, and, ultimately, the ability of e-commerce participants to exchange and make use of information available in the ecosystem.

Lowering Barriers for MSMEs

E-commerce provides massive opportunities for businesses, as it reduces the capital and fixed expenses needed to participate as a merchant. Marketing, logistics, and other overhead expenses are replaced by internet and platform fees. In exchange for platform fees, online merchants gain access to a larger market, without being limited by store hours and physical distance to the customer.

e-Commerce Architecture and Stakeholders

E-commerce development starts with having the proper infrastructure in place. Infrastructure, such as telecommunications systems, other hardware and software, and skilled workers, is critical for the proliferation of platforms.

With platforms, such as marketplaces and online retailers, buyers, and sellers of goods and services are more easily connected.

Similar to how offline businesses outsource specific aspects of their business, platforms that focus on connecting buyers and sellers need enablers to provide a more efficient and complete solution to their users. These enablers include providers of:

  • Access who direct traffic to the platforms
  • Payment & credit who facilitate digital money transactions
  • Logistics who deliver goods quickly and reliably
  • Training who help nurture the ecosystem

The wellbeing of the e-commerce community is then safeguarded by regulators who create and enforce appropriate regulations for consumer/data protection, trade, taxation, and labor. Together, all these components contribute to help sellers and buyers meet, without unnecessary constraints.

The Ecosystem

E-commerce is a great equalizer as it erodes the barrier of physical distance, allowing buyers and sellers to transact with the help of intermediaries and digital platforms. It mirrors the traditional marketplace, where payment and logistics services are sometimes outsourced.

The government plays a critical role in identifying existing and possible e-commerce chokepoints and coming up with policies to prevent and address these.

Platforms

Platforms Ecosystems

Platforms are strategic actors that function beyond creating markets towards designing these – by controlling the information available, case of search, and cost of access for users. By providing users the ability to access a greater variety of information at a lower cost, protracted haggling is avoided and the velocity of transactions is made faster.

Despite this control, platforms’ value hinge on (1) their ability to create and maintain networks of buyers and sellers, preserving a virtuous circle of benefits among various users, (2) their capacity to increase/induce trust by building reputation systems with strong feedback incentives, (3) their level of integration with payment and logistics systems to complete business transactions, and (4) their capability to gather, manage, and exchange information with other platforms and service providers.

Payment

Payment Ecosystem

With the rise of e-commerce comes a transformation in the way money is exchanged, prompting the development of a vibrant digital payment ecosystem.

Growth in B2C markets and digital SMEs require payment systems that cater to huge volumes of micropayments at low cost, necessitating a dematerialization of money, presently made possible through electronic/digital banking and digital payment systems. While these systems are in place, providing payment options that cater to the unbanked, underbanked, and less digital-savvy individuals is key to making e-commerce more inclusive. At the forefront are e-wallet and OTC/COD payment providers that allow even the unbanked to participate in e-commerce by owning wallets with no minimum deposit and paying with cash. From the seller side, there are online payment aggregators and payment gateways that allow small merchants to process and receive online payment, without owning bank accounts.

Banks also play a critical role, especially with the digitization of B2B transactions. Some innovative banks are moving towards using open banking systems that allow them to work directly with platforms and third-party developers, paving the way towards a more collaborative approach to financial innovation.

Logistics

Logistics System

Supply chain management is an important back-end component of e-commerce, with multiple merchants relying on third-party logistics providers to store and ship their products. Oftentimes, online marketplaces invest in warehouses, distribution centers, and sophisticated supply chain and logistics processes to satisfy the increasingly competitive demands of consumers.

Technology also plays an important role in improving logistics efficiency while giving customers more control over the delivery process. With it, marketplaces can:

  1. Synchronize the front and back-end of online retail,
  2. Reduce process redundancies through automation software and real-time data sharing, and
  3. Provide multiple shipping options for last-mile deliveries with the help of transport-focused platforms.

With further integration and collaboration between different platforms, logistics innovators can take advantage of data on customer purchase trends and preferences to be more strategic in resource allocation.

Intermediaries

Intermediaries are providers of internet-related products and services that provide platforms with ancillary tools to better connect to users. These include email companies, digital marketing firms, and similar providers.

Government