Final Thesis Seminar

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SEMINAR IN ECONOMIC POLICY

FINAL THESIS

IS E-COMMERCE A FINANCIALLY VIABLE OPTION IN PAKISTAN?

SUBMITTED TO:

PROF. M. ASHRAF JANJUA

SUBMITTED BY:

ABDUL AHAD (2003-3-14-3307)

DATED:

SEPTEMBER 18,2004

Institute of Business Management



Is E-Commerce a Financially Viable Option in Pakistan Final Thesis

TABLE OF CONTENTS

1. OVERVIEW .................................................................................................. 3

2. HYPOTHESIS ................................................................................................ 4

2.1. HYPOTHESIS STATEMENT...................................................................................... 4

2.2. THEORY BEHIND THE HYPOTHESIS............................................................................. 4

2.2.1. E-Commerce Defined ........................................................................... 4

2.2.2. E-Commerce Categories ........................................................................ 5

3. DATA COLLECTION ........................................................................................ 7

3.1. PRIMARY................................................................................................... 7

3.2. SECONDARY................................................................................................ 8

................................................................................................................. 8

4. ARGUMENTS ................................................................................................ 9

4.1. ARGUMENTS AGAINST THE HYPOTHESIS......................................................................... 9

4.1.1. Electronic Transactions Ordinance, 2003 .................................................... 9

4.1.2. E-Commerce Scope Statistics by PASHA ...................................................... 9

4.1.3. Software Houses Providing E-Commerce Solutions ........................................ 10

4.2. ARGUMENTS FOR THE HYPOTHESIS............................................................................ 11

4.2.1. End User Perspective .......................................................................... 11

4.2.2. E-Solution Provider’s Perspective ........................................................... 12

4.2.3. E-Solution Buyer’s Perspective ............................................................... 13

5. CALCULATIONS ........................................................................................... 18

6. ANALYSIS .................................................................................................. 20

7. CONCLUSION .............................................................................................. 21

8. APPENDIX .................................................................................................. 22

Seminar in Economic Policy 2




1. OVERVIEW

With the tremendous growth of the Internet, businesses are beginning to find

new ways to expand their opportunities. No matter what your business is, it is

not possible to ignore more than 300 million potential customers that are surfing

on the Internet at any given instant. The rapid adoption of the Internet as a

commercial medium has caused companies to experiment with innovative ways

of marketing to consumers in computer-mediated environment. These

developments on the Internet are expanding beyond the utilization of the

Internet as a communication medium.

The past few years have witnessed a sudden explosion of businesses onto the

Internet. But there also seems to be a lot of confusion and fear surrounding

electronic commerce on the Internet. My thesis provides an introduction to e-

commerce and discusses its categories. It then looks at the e-commerce share in

today's Internet economy and explores its potential in future. It also identifies a

number of open issues and looks at the e-commerce status in Pakistan. It then

addresses the hypothesis stated in the next section that is the main argument of

this thesis. In a nutshell, the hypothesis is striving to substantiate that even withthe available facilities and infrastructure for e-commerce in Pakistan,

organizations tend to be apprehensive about being e-commerce enabled.

The thesis also presents the definition of e-commerce in its true technical sense

and then answers the questions relating to it. I would like my reader to be very

clear on the section of definitions so that the crux of the thesis is not lost in a

vague definition of the same.





2. HYPOTHESIS

2.1. H YPOTHESIS STATEMENT

“Pakistani firms do not find e-commerce (online trading)

as a financially viable option”

2.2. T HEORY BEHIND THE H YPOTHESIS

The above mentioned hypothesis is derived from the facts and figures available

that sketch a very clear picture as to why e-commerce has not yet been

successful in Pakistan inspite of the facilities and laws being quite adequate. E-commerce itself has been elaborated in the previous section titled “E-commerce

Defined” with its existence in three forms as mentioned in the subcategories.

I will now make an attempt to prove this hypothesis through various arguments,

facts and figures available in context to e-commerce in Pakistan, which will also

reveal the theory behind the whole idea of e-commerce

2.2.1. E-COMMERCE DEFINED

Let me first define e-commerce to clear out confusions. E-commerce does not

just mean presence on the web by making a web site. It also does not just mean

an online management system that debits and credits entries or inventories in

result of a transaction of goods.

Electronic Commerce (e-commerce or EC) is a general term applied to the use of

computer and telecommunications technologies to support trading in goods and

services. It is defined as "any form of business transaction in which the parties

interact electronically rather than by physical exchanges or direct physical

contact". In simple words, it is a term for buying, selling, ordering, or delivering





something (goods, services, etc.) electronically - over the Internet that involves

monetary transactions.

Now if e-commerce had to stay till the limit of just inventory transactions, life

would have been so much easier, but the involvement of money in these

transactions is what makes it so vulnerable. Most people think e-commerce

means online shopping. But the shopping is only a small part of the e-commerce

picture. The term something refers to any form of business operation or

transaction, including online stock and bond transactions, buying services,

buying and downloading software, music, and movies.

2.2.2. E-COMMERCE CATEGORIES

Technology is transforming many aspects of business and market activities. In its

broadest sense, e- commerce refers to the use of electronic means and

technologies to conduct commerce between following interactions:

Business-to-Business (B2B)

Business-to-Consumer (B2C)

Business-within-Business (Intra Company)

These are defined in the next section.

2.2.2.1. B2B DEFINED

The Internet can connect all businesses to each other, regardless of their

location or position in the supply chain. This ability presents a huge threat totraditional intermediaries like wholesalers and brokers. Internet connections

facilitate businesses to bargain directly with a range of suppliers, thereby

eliminating the need for such intermediaries. An example in this category would

be a company that uses a network for ordering from its suppliers, receiving





invoices and making payments. This category of e-commerce has been well

established for several years, over private or Value-Added Networks (VANs).

Business-to-business (B2B) e-commerce is the catalyst behind the rise of the

extranet, an intranet whose boundaries extend beyond internal corporate users

to include external business partners, such as customers and vendors.

In a nutshell, B2B E-commerce involves transactions of large scale between

organizations or companies where exchange of goods takes place in bulk.

2.2.2.2. B2C DEFINED

The business-to-consumer (B2C) e-commerce is focused on the use of a virtual

storefront on the World Wide Web that allows an Internet user to browse and

order goods or services from the storefront's online catalogue.

This category largely equates to electronic retailing. It is clearly modeled on the

real-world shopping experience, with order forms to drop your goods into and

payment processing to settle your bill with a credit card. There are nowshopping malls all over the Internet offering all kinds of consumer goods, from

sweets and cakes to computers and cars.

In a nutshell, B2C E-commerce involves transactions of small scale between the

company and the direct consumer of its product or service offering.





2.2.2.3. INTRA-COMPANY DEFINED

Companies worldwide are embracing the application of web-based technology to

improve and transform internal business communications and processes. The

business-within-business e-commerce takes the intranet beyond its popular role

as a corporate and product information center. Here the e-commerce is strictly

intra-company and payment processing is not an issue. The transfer of funds is

purely an accounting transaction via a charge back or an inter-company billing,

rather than a true payment where details of a credit card or bank account are

being passed over the Internet.

In this scenario the intranet becomes a service center for the exchange of goods

and services among the subsidiaries of a large company. This is a significant new

market opportunity for existing and startup e-commerce application vendors to

exploit.

3. DATA COLLECTION

3.1. P RIMARY

Primary data has been collected to support the arguments for the hypothesis

through personal interview of people leading software houses. I’ve chosen to

interview these people instead of the public because they run the software

houses that provide e-commerce solutions and are in a better position to give an

assessment of their target market. They include:

Zahoor-ul-Islam, Development Manager – Avanza Solutions Pakistan.

Qamber Ali, CTO – 2B Technologies.

Zaheer H. Dodhia, CEO – Right Solution Pakistan.

Asif Qayoom, CEO – ECXS (Pvt) Ltd.

Noman Bashir, CTO – Axact Solutions Pakistan.





3.2. SECONDARY

Secondary data has been collected through the Internet and the PASHA

(PakistanSoftware Houses Association) Annual Directory.





4. ARGUMENTS

4.1. ARGUMENTS AGAINST THE H YPOTHESIS

Following is the secondary data collected for substantiation purposes:

4.1.1. ELECTRONIC TRANSACTIONS ORDINANCE, 2003

President Pervez Musharraf promulgated the Electronic Transactions Ordinance,

providing legal recognition of electronic documents, records, information,

communications and transactions.

A brief extract from the law states that no document, record, information

communication or transaction will be denied legal recognition, admissibility,

validity, proof or enforceability on the ground that it is in electronic form and

has not been attested by any witness. The law also legalizes the use of Merchant

Accounts for online transactions.

4.1.2. E-COMMERCE SCOPE STATISTICS BY PASHA

In statistics revealed by Pakistan Software Houses Association (PASHA) to assess

the future of e-commerce in Pakistan, the following are presented for reference:

Web presence of firms %

Yes 91

No 9

Scope of E-commerce %

Tremendous 17

Limited 54

No Scope 29

Firms planning on E-commerce %

Yes 64





No 21

Maybe 15

4.1.3. SOFTWARE

HOUSES

PROVIDING

E-COMMERCE

SOLUTIONS

Below is a list of software houses that I personally know that are offering e-

commerce solutions apart from the many unlisted.

RightSolution

www.rightsolution.net

ThreeSixtyDegreez Pakistan (PVT) Ltd.

www.threesixtydegreez.com

EC-XS PVT Ltd

www.ecxs.net

Progressive Systems Limited.

www.prosys.com.pk

Avanza Solutions, Pakistan (PVT) Ltd.

www.avanzasolutions.com

Kalia Software Services.

www.kalsoft.com.pk

Emmaculate Solutions (PVT) Ltd.

www.emmaculate.com

Verticity LLC – Pakistan

www.verticity.com

Axact Solutions – Pakistan

www.axact.com

Software Houses*

Registered 350

Offering E-commerce Solutions 170


http://www.rightsolution.net./

http://www.threesixtydegreez.com/

http://www.ecxs.net/

http://www.prosys.com.pk/

http://www.avanzasolutions.com/


http://www.emmaculate.com/

http://www.verticity.com/

http://www.axact.com/

http://www.rightsolution.net./

http://www.threesixtydegreez.com/

http://www.ecxs.net/

http://www.prosys.com.pk/



http://www.emmaculate.com/

http://www.verticity.com/

http://www.axact.com/




*Figures by PASHA, Published “PASHA Annual Directory of Software Houses 2003-04”

4.2. ARGUMENTS F OR THE H YPOTHESIS

Following data is collected through primary means as discussed in the previous

section.

4.2.1. END USER PERSPECTIVE

4.2.1.1. IS THE CONSUMER AWARE OF E-COMMERCE?

In response to this question, the answer was a major YES as consumers in

Pakistan have transacted online on the Internet. “Considering the increasing

number of ISPs and its users day by day, awareness for the Internet and its

related fascinations is not an issue anymore”, said Zaheer H. Dodhia of

RightSolution. Another argument from PASHA Annual Directory of Software

Houses 2003-04 is “ Around 1000 cities, towns and villages (covering 80% of

Pakistan’s population) have access to Internet facility as of December 2003,

while another 200 are expected to be brought into the net by next year.”

4.2.1.2. IS E-COMMERCE A SAFE WAY OF TRANSACTING?

“E-commerce is a safe way of transacting, but it involves more fear than joy

when being executed within Pakistan with a Pakistani company”, said Zahoor-ul-

Islam of Avanza Solutions. None of the answers to this question agreed on the

issue of the consumer being comfortable with transacting online, at least in

Pakistan, due its reputation in frauds in cases of monetary transactions. This

same fear has translated onto the Internet as well.

4.2.1.3. R EASONS FOR NOT CHOOSING E-COMMERCE?

The major reasons as indicated by my primary sources are listed below:





Some people are simply NOT comfortable with purchasing online and

associate no concrete reason.

Some people consider it a security issue and fear loss of their money with the

reputation of Pakistani firms, even though they have transacted online with

foreign sites.

Some people have just never thought of transacting online.

Some people find it too time consuming a task to shop online and wait for

deliveries to reach.

Some people are ready to shop online but are apprehensive about the level of

service available for such an activity.

4.2.2. E-SOLUTION PROVIDER ’S PERSPECTIVE

4.2.2.1. IS PAKISTAN LACKING A TECHNICAL INFRASTRUCTURE FOR E-COMMERCE SOLUTIONS?

In response to this question, the answer was negative. Pakistan has a very strong

infrastructure of technology as far as the Internet is concerned. With over a

hundred ISPs (Internet Service Providers) Nation-wide and PTCL backing up with

the bandwidth and reduced rates, the infrastructure stands ready. Software

houses also have the capability to produce robust e-commerce solutions as they

have been for the foreign-based firms and organizations.

4.2.2.2. WHY AREN’T FIRMS PROVIDING E-COMMERCE SOLUTIONS?

As mentioned in the previous section, a lot of software houses are providing e-

commerce solutions. But as indicated by my primary sources, their solutions are

basically for the foreign-based companies that approach them for customized

and low cost development.

Asif Qayoom of ECXS, however, was of both the views as his company pioneered

the launch of CitiBank’s E-Card 2 years back in Pakistan.





4.2.3. E-SOLUTION BUYER ’S PERSPECTIVE

4.2.3.1. FIXED COST OF AN E-COMMERCE SOLUTION

An e-commerce solutions involves at least the following:

Storefront

The "storefront" or content for a business may be simple or sophisticated and

may contain a few pages with description of business, a few product pictures,

prices and contact information for potential customers.

Cost: A normal development of a storefront can range from Rs: 50,000 to Rs:

200,000

Domain Name Choosing a domain name that is easy to remember is particularly important for

customers who may want to return to the site quickly without going through a

search engine. The domain name must be registered before it can be accessed.

Cost: Registration of domain name costs around Rs: 4000 per year and an

additional Rs: 2000 of appended with “.pk”

Internet Merchant Bank Account Merchant Bank Account is an industry term meaning a banking relationship that

allows a business to accept credit cards. In order to be able to accept credit

cards over the Internet, a business must apply to a bank for an Internet Merchant

Bank Account.

Cost: Usually several costs associated with setting up a merchant account; for

example, a setup cost, a monthly fee and per-transaction fees. As an idea of





what to expect, a very good arrangement would be $100 setup, $10 per month

and 30 cents + 2.5% transaction fee.

Web Hosting

Once the Internet storefront is complete, the site can be published to any server

the business customer prefers. There are quite a number of hosting options such

as Shared Hosting, Dedicated Hosting and Co-location.

Cost: Hosting packages can range from anywhere between Rs: 80,000 per year to

Rs: 100,000 per year for e-commerce enabled web servers.

Online Transaction Provider

To accept credit card orders, a merchant will need a "transaction server".

Deciding on a provider's package that fits the merchant's need is perhaps the

most important aspect in creating an e-commerce web site.

Cost: The cost of the application server is covered in the package above.

Digital Certificate

If a merchant intends to accept payments through his web site, he must obtain a

Digital Certificate. A digital certificate, also known as Secure Socket Layer (SSL)

server certificate, allows a merchant to use a secure server and SSL which gives

its customers a confidence that the merchant is actually who he claims to be.

Cost: A certificate costs about $125.00 and can be obtained from a Certification

Authority (CA) such as Verisign, Inc. (http://www.verisign.com).


http://www.verisign.com/

http://www.verisign.com/




Shopping Cart Software A merchant needs an order form for his web site so that he can get the orders

from his customers. Transaction Providers will have shopping cart software that

comes with their service, but it can often be very expensive.

Cost: Anywhere from Rs: 300,000 – 800,000

Back-End Processing of Orders A merchant needs a methodology of tracking his orders. The actual techniques

for doing this vary greatly on the type of his on-line business and the kinds of his

order fulfillment and accounting systems.

Cost: The cost of building this solution is built-in with the shopping cart.

4.2.3.2. VARIABLE COST OF R UNNING AN E-COMMERCE PORTAL

This cost includes a lot of overheads such as:

Per transaction costs

Web server maintenance cost

Logistics cost for deliveries

Human resource cost for customer support

Variable expenses are at least Rs: 200,000 – Rs: 400,000 depending upon the

number of transactions per month.

4.2.3.3. TOTAL COST OF A BASIC E-COMMERCE SOLUTION

Total cost of a simple e-commerce solution can fall anywhere around Rs: 600,000

to Rs: 1,500,000 as an initial investment. (*figures courtesy of RightSolution)





4.2.3.4. IS E-COMMERCE A “SAFE” CHOICE?

“One of the biggest obstacles for realizing the full potential of the Internet has

been the issue of security”, said Asif of ECXS. Fears of corporate sabotage, theft

of personal identities and credit, lack of privacy in correspondence, and

potential access to confidential records have led to a cautious approach in online

transactions.

While payment security usually means protecting sensitive information from

theft, a secure transaction has a broader set of requirements as follows:

Non-repudiation - The parties in a transaction cannot deny it after the fact

Authentication - The ability to verify the identity of persons involved in

transactions

Integrity - The data transferred should not be modified in transit or in storage

Privacy - The transaction is only between participants

The emerging services and security technologies like advanced encryption,

digital certification, and digital signatures, have dramatically addressed these

issues. But the biggest hurdle still remains user confidence, of both the buyer

and the seller to exercise their will in such a solution.

4.2.3.5. DOES THE GOVERNMENT OF PAKISTAN BACK YOU UP WITH COLLATERAL?

The Government of Pakistan does not impose any restriction on implementing e-

commerce solution, infact it provides guidelines to do the same after the

Electronic Transactions Ordinance. But at the same time, there is no collateral

from the Government and any policies or legal laws in place if a fraud occurs.This uncertainty of the execution environment and zero back up by the

Government is causing to be the biggest factor in the minds of an organization

providing e-commerce facilities.





5. CALCULATIONS

I will now calculate the feasibility of an e-commerce solution based in Pakistan

together with the cost and frequency of transactions that take place through the

web site.

Specification Break-Up Rupees

Initial Cost of Solution

Store front 100,000

Domain name 6,000

Merchant bank account 20,000

Web hosting 100,000

Digital Certificates 10,000

Shopping cart software 300,000Total 536,000

Yearly Cost of Solution Web server maintenance 100,000

Logistics cost for deliveries 300,000

Customer support 400,000

Total 800,000

Variable Cost of SolutionPer transaction cost yearly

(20 / transaction assuming 5000 transactions)100,000

TOTAL COST 1,436,000

Initial Calculation Break-Up Rupees

Actual Transactions Per Year 2000 x 20 40,000

Per transaction Percentage2.5% of Transaction Amount

(Assuming 3,000,000 of sales)75,000

TOTAL R EVENUE PER YEAR 115,000





Projected Calculations Transaction Cost Revenue % Total

20% increase in 2nd year 48,000 90,000 138,000

30% increase in 3rd year 52,000 97,500 149,500

50% increase in 4th year 60,000 112,500 172,500

60% increase in 5th year 64,000 120,000 184,000Total 644,000

Adding the revenues for 5 years

115,000 + 644,000 = 759,000

Cost recovered after 5 years

759,000 / 1,436,000 = 52.2 %





6. ANALYSIS

The result of the calculation clearly reveals that even after 5 years only 52.2

% of cost would have been recovered.

Add to this the uncertainty of occurrence of fraud and no insurance package

for backup.

Plus, the number of people who would actually be willing to transact online is

not increasing multiple folds.

All these factors are contributing towards a very slow, if not negative, financial

gain in investments in the e-commerce solution.





7. CONCLUSION

It can be concluded that from the literature and arguments presented for the

hypothesis that an Internet user is aware of e-commerce and so are the firms

that are presently web enabled. Why are the firms not opting for e-commerce

solution has multiple reasons backing them up. Cost of the e-commerce solution,

the technology to enable it, the cost of the infrastructure acquisition,

uncertainty of fraudulent transactions, low transaction frequency, low turnovers

and huge risks of system failures. All these reasons contribute to the financial

unfeasibility of opting for an e-commerce solution.

These reasons don’t end here. The zero presence of a collateral by the

Government and no packages by the insurance companies add to the frustration

of the consumer, the solution buyer and the solution provider alike.

E-commerce is not a futuristic dream. It is happening now and it is happening

fast, with many well-established success stories and examples around the world.

E-commerce is essentially global in both concept and realization. Millions ofindividuals and companies, around the world, are already buying, selling,

bidding, advertising, brokering and collaborating on daily basis. But for these

illusions to become reality in Pakistan, its going to take sometime, more laws,

more provisions, more policies that clearly dictate the paths and future action

plans for a successful and hitch free implementation of e-commerce in Pakistan.





8. APPENDIX

Reference material used:

An article on Information Technology in Pakistan

http://www.dawn.com/events/infotech/index.htm

A Guide to Law Online

http://www.loc.gov/law/guide/pakistan.html

BCST Gazette

http://www.geocities.com/bcstgazette/departmentsprofile.htm

ASOCIO Annual Report

PASHA Pakistan Software Houses Association

Software Houses Directory 2003-2004

General Information: http://www.pasha.org




http://www.pasha.org/




http://www.pasha.org/

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