E-business boom or bust?

E-commerce is at its earliest stages of development in the Middle East. With limited internet access, the value of e-commerce is low. A key stumbling block is people’s hesitancy in using their credit cards online due to security concerns. Censored internet traffic is another factor. The question is, will e-commerce ever take off?

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By  Angela Prasad Published  October 31, 2004

|~|karanppw.gif|~|An e-commerce investment should be measured with the revenue gains, says Mashreqbank's Karan Kapur |~|10 years ago, if somebody had said that the then emerging internet would have sufficient bandwidth and quality of service to operate a truly global service-based business, one would have replied that was impossible.

However, that is exactly what is happening today. The world wide web is booming. People are logging on and spending huge amounts of their hard earned cash online. Emerging from the memory of the dot-com boom and its crash four years ago, a quiet technological revolution has been taking place.

Organisations do not talk about ‘early adopters’ any more, it is more about proven business solutions and models and what makes business sense rather than what is new and trendy.

However, the Middle East as a whole has shown lukewarm reaction to the internet revolution, limiting its chances of becoming a strong player in e-commerce. Most corporations in the region, small or big, only have a web page and few of them have portals through which to conduct business. According to

ACN E-business Survey 2004, carried out in association with eCompany, 39% of the 800 respondents saw e-commerce as a value add service, 38% said they had some some sort of e-commerce offerings, 47% thought e-commerce may open up new geographical markets and 63% saw e-commerce as a business-to-business (B2B) and business-to-consumer (B2C) tool and a governmental tool.

These figures shed light on two facts. First, that e-commerce in the Middle East is in its infancy and secondly, the boom is just around the corner. “E-commerce is in its very early stages. It is an evolution that has happened in other global market, but not in the Middle East. However, we are moving in the right direction and I would say e-commerce will take off by early 2006,” says Mohamed Sultan, chief products officer at Linkdotnet.

Madar Research predicts that Saudi Arabia’s B2B revenues will rise by 75% from US$105 billion in 2002 to US$8 billion in 2005. B2C revenues are expected to grow by 40% over the same period from US$170 million to US$470 million.

Governments in the region have ambitious plans for e-commerce. However, it is going to be an uphill battle in an economy that is so diverse.

The benefits and opportunities provided by the internet also provide unique constraints and restrictions. Deregulated telecommunications sector and greater internet access are necessary tools for e-commerce to flourish in the Middle East.

An e-commerce platform is built from individual components such as servers, databases, firewalls and significant amounts of bandwidth and one missing component can be derail the entire project. Broadband is still viewed as a premium commodity with a price tag to match.

The total annual cost of residential asymmetric digital subscriber line (ADSL) services for a 256 Kbps downstream speed in the Arab region ranges from a minimum of US$290 per year (US$24 per month) in Egypt to a maximum of US$1620 per year (US$135 per month) in Syria.

Syria is the most expensive followed by Kuwait, Sudan, Saudi Arabia, Bahrain, Algeria, Jordan, Qatar, UAE, Morocco, Oman and Egypt.

19% of the participants polled by the ACN E-business Survey 2004, carried out in association with eCompany, said the region’s telecommunications infrastructure does not cater to the needs of an e-commerce venture. 21% found constant disconnection to the internet annoying, while 26% were frustrated with failures in critical systems.

Those countries where e-commerce plays a major role see broadband as a ‘must have’ technology. “By opening up the market to competitive providers, the price of broadband will be driven down to a point where almost any household can afford it.

The cheapest broadband offering in the UAE is US$68, which is more than double the price and half the speed of the offerings in US and the UK,” says Julian Lloyd, vice president, corporate development and planning at MENA eSolutions.

“One way for service providers to lower their network costs without hurting margins is to increase their participation in the value-chain of goods and services sold over their network,” says Lloyd.

Etisalat’s e-commerce arm, eCompany, says communications and infrastructure costs will drop over time, provided more e-commerce players enter the market.

The gap between the high internet penetration counties like the UAE and those with limited internet access needs to be bridged.“We are the only one-stop-shop for e-commerce in the region. More regional businesses need to enter the e-commerce space,” says Ahmad Abdulkarim Julfar, general manager of eCompany.

However, the Arab Advisors Group remains confident that the region’s ongoing liberalisation of the Arab datacomm markets by 2005/2006 will enhance infrastructure-based competition.

“Allowing for international long distance competition in the region will improve the infrastructure and lower the overall
bandwidth costs, which will allow the internet and datacomm providers to start offering more advanced services at much lower rates,” comments Sami Sunna, research manager at Arab Advisors Group.

Bahrain says its infrastructure is ready for e-commerce. The Bahraini Ministry of Commerce is implementing an e-Investor project, which is a business-to- government (B2G) gateway that will enable businesses to interact with the government through a one-stop-shop approach.

The government believes that by simplifying all interactions between businesses and itself, the e-Investor will attract new businesses into the Kingdom.

“Through this project, the Bahraini Ministry of Commerce is setting an example that the government is taking steps to encourage e-commerce. Bahrain has a very good infrastructure and the resources to adopt e-commerce. Our legal infrastructure is ready and our telecommunications market is being deregulated. Talking about the readiness for e-commerce, we are ready. What we need to do over the coming years is to increase our citizens’ awareness of e-commerce. We want our people to see that the government has the vision, capability and the commitment to change things for the better,” says Ali Ahmed Radhi, asssitant undersecretary for domestic trade affair, vice chairman for Bahrain internet exchange at the Kingdom’s Ministry of Commerce.

Software giant Microsoft, which is working with the Bahraini government on the e-Investor project, remains confident of the Middle East’s e-commerce boom. “There is a keen desire in the region to make things easier for people. It is a bit like the chicken and the egg situation.

You start something, people get excited about it and then others get on the bandwagon.There is a sincere attempt to introduce e-commerce in the Middle East and the governments in the region are taking the leading role, which is a direction in the right step,” says Ali Faramawy, vice president of Microsoft Middle East Africa.

||**|||~||~||~|Another factor that is inhibiting the region’s e-commerce initiatives is the lack of internet literacy, which leads to insufficient information available on e-commerce.

22% of the participants polled by the ACN E-business Survey 2004, carried out in association with eCompany said they did not have enough information on e-commerce solutions.

eCompany strongly believes this is the main reason why e-commerce has not taken off in the Middle East. “Since the regional PC penetration and internet literacy remains low, we can not expect a mushrooming [effect] especially of consumer oriented portals by the private sector. Internet awareness among the general [population] is crucial for e-business. However those e-commerce ventures that have the government backing are doing well,” Julfar says.

Julfar’s comments have some truth. Names like Tejari, Etisalat’s e4Me, eCompany and Oman TradaNet (OTN) are difficult to ignore when it comes to e-commerce in the Middle East, and all these companies have enjoyed government backing in one form or another.

The most recent example is that of Sakhr Software, which has teamed up with the Kuwaiti government to provide Arab language technology to various governmental departments. The Kuwaiti government believes the move will help push the implementation of an e-government.

19% of the ACN E-business Survey 2004, carried out in association with eCompany respondents felt that there was a lack of government regulation. Tejari, which has become one of the fundamental drivers of B2B trading in the Middle East, concedes that regional governments need to play a stronger role.

“It is quite important to have a government backing. Our biggest customer is the Government of Dubai and that has really helped us. Also, governments can help on another level. In order to have a successful e-business you need to have a GCC audience or a Middle East-wide audience, and in order to achieve this, there has to be standard e-commerce laws.This is where regional governments come into play. There has to be standard legislations in order to have a critical mass,” explains Saqib Iqbal, COO of Tejari.

E-businesses have the reputation of being good for global trade by providing an accessible route in which to find foreign investors, but they are also known for recurrent problems in payment security.

However, online security is an implicit expectation of every online customer. 51% of the ACN E-business Survey 2004, carried out in association with eCompany respondents said they wanted a secure e-business solution, while 19% said their customers were more comfortable with traditional business methods. 25% said consumers were fearful of electronic transactions.

According to Visa International, nearly half of all online transactions are still paid for on a ‘cash on delivery’ basis due to security concerns.

However, Grewal says that e-commerce transactions are 15 times more likely to be disputed by the cardholder. 80% of internet transactions are ‘friendly frauds’ where the cardholder denies making a transaction, while 20% are genuine frauds, according to Grewal

Mashreqbank, which launched mashreqonline internet banking system in 2000, says security is not negotiable when it comes to online transactions.

E-commerce merchants should provide a secure environment for their customers. However, the bank believes that customers have to be responsible as well. “It is a two-way thing. Merchants need to educate users about the security and features of the channel highlighting the joint responsibilities of both the user and the provider. Also, it is important for merchants to have response channels for concerns or inquiries that users and prospective customers may have,” says Karan Kapur, vice president of retail banking group at Masreqbank.

“We have been using our online facilities for sometime now and our customer adoption rate stands at 35%. By providing a secure online environment and lowering operational costs through customer self-service, we are able to offer more to our online customers at a lower price,” he adds.

MetaGroup says internet security is vital for e-commerce and businesses need to pay close attention to online security. The research house says it has spotted a number of pitfalls globally and across the region in the deployment of security frameworks.

“Security is viewed as an IT initiative that can be easily addressed through hardware and software solution. There are no clear policies and procedures to control business transactions, information confidentiality and third-party relationships. For instance, in traditional commerce, large value transactions are carefully examined, while online large value transactions are processed normally. This can lead to e-commerce and credit card fraud,” says Azzam Al-Dari, director of consulting services at MetGroup Middle East.

“For security to work effectively, it has to be aligned to the e-commerce business model being implemented,” Al-Dari explains.

Merchants like Visa International are taking steps to provide a secure online transaction environment. Visa’s e-security solution —Verified by Visa (VbV) is the latest solution for online shoppers that ensures cardholder authentication through verification of a password held by customers, which becomes their online ‘signature’ for web purchases.

“VbV helps stamp out the vast majority of fraud which occurs on the web, taking a step closer to make the internet a ‘fear-free’ zone for shoppers,” says Tribah Grewal, head of e-commerce and technology development at Visa International CEMEA.

National Bank of Abu Dhabi’s (NBAD) e-commerce platform is VbV verified. The bank introduced the security initiative two years ago because it believes e-commerce has a strong future in the region and wants to be at the forefront of every e-technology initiatitve.

“National Bank of Abu Dhabi is extremely proactive when it comes to e-commerce and we know that in order to have a successful e-commerce venture it is crucial to have a secure transaction environment. This is why we adopted VbV,” says Khalid Deemas, head of retail banking at NBAD.

“When it comes to security we are not stopping at VbV. We have also implemented a secure ID token, which is another form of enhancement,” he adds.

An internet business is entirely doable if businesses focus on the right things. However, developing a successful online presence requires an investment of money, time, effort and experience.

E-commerce is not easily fulfilled utilising rigid template driven by shopping cart software that allow little flexibility with their ‘one size fits all’ credo.

The ACN E-business Survey 2004, carried out in association with eCompany, reveals that 33% of the respondents have not invested in an e-commerce solution, while 22% have invested less than US$50,000.

The cost of running a dotcom business during the first two to three years is heavy and investment has to be made accordingly. Businesses have to understand that it takes money to make money.

“An e-commerce investment should be [measured] with the revenue gains or cost savings that the company can realise. Depending on the nature of the business and the competitive advantage that the inititiave can provide, a one to three year horizon for return on investment (ROI) is common. In some incidents, ROI can take up to five years,” explains Mashreqbank’s Kapur.

Dubai Islamic Bank (DIB), which will open eight electronic branches by the end of 2006, says businesses should have a reason to invest in their e-commerce initiatives. “It should not be done just for the sake of it because then there is a danger of not doing it right.

First, organisations have to identify if there is a need for such a service. Once that is complete, they need to do a feasibility study and make the appropriate investment,” says Musabbah Mohammed Ali Al Qaizi, vice president, IT division at DIB.

“However, in our case, we did not have to do a feasibility study because the demand for electronic braches of DIB was huge. Our customers were asking for an easier channel of banking, so we decided to make significant investment in our electronic branches. Iam unable to disclose the exact amount except that we have made a significant financial investment in this project,” Al Qaizi adds.

Ease of use is another important aspect of e-commerce, according to the survey. 73% of those polled by the ACN E-business Survey 2004, carried out in association with eCompany, thought it was important to have a user-friendly offering.

“It is important to have a simple workable e-commerce site. Too many functionalities and questions confuse customers. People shop online because they do not want to be disturbed or asked too many questions and as soon as you start doing that you are in danger of losing your customers. The rule is to keep it simple and easy,” Linkdotnet’s Sultan enthuses.

While it seems obvious that B2B and B2C business models are well and alive in the Middle East, these portals are seen as ‘value add’ e-commerce solutions for existing customers.

The real challenge facing the region is how to tap into global e-commerce markets and realise new revenue streams. Faster, more reliable broadband at affordable prices will help. However, it appears that more needs to be done to convince the region’s public about the security aspect of e-commerce.

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