"U.S. Perspectives on Consumer Protection in the Global Electronic Marketplace Comment, P994312"
March 26, 1999
Consumer Alert(1) appreciates the opportunity to comment on issues relating to a public workshop to be held June 8-9, 1999, that will examine U.S. perspectives on consumer protection in the global electronic marketplace.
As a consumer group, we appreciate the enormous consumer benefits that access to Internet services brings for example, the ability to communicate with relatives, friends and acquaintances across the globe, to reach others who may have similar health problems and share information about resources available, to access information sources in countless subject areas at the click of a mouse, to comparison shop in one's home for a multitude of goods and services offered around the world and to immediately order those that meet one's needs.
Such services are unique for one medium to offer, and the very uniqueness and complexity of the Internet causes great support on the one hand and great fear on the other. Consumer Alert would caution regulators not to bow to those who would constrain the future growth and expansion of this medium in the name of "protecting consumers." Consumers already benefit greatly and stand to see an increase in those benefits if the global electronic marketplace is allowed to develop to its full potential without rigid strictures imposed on this still nascent technology.
The Growth of E-Commerce
Increasingly, consumers with access to the Internet are finding that on-line shopping offers numerous benefits for them. While not yet a "mainstream" source of purchasing, Internet shopping continues on a strong growth curve. A survey of e-commerce shoppers done by Ernst & Young in September 1998 showed that, of the U.S. households participating in the survey, the percent of those who have purchased on-line rose from 7 percent in 1997 to 10 percent in 1998. Leading the list of products purchased through e-commerce were books, music, computers, clothes, gifts and consumer electronics.
A post-holiday survey in 1999 conducted by Jupiter Communications/NFO showed that in just one year there has been a three-fold increase in on-line sales, which rose from $3 billion in 1997 to $9 billion in 1998.
It is clear that an increasing number of consumers value the Internet for ease and convenience of shopping and the wide selections available, ranging from the mundane to the highly specialized. No matter what one's shopping interests are 1940s toasters to high performance computers Internet vendors are there.
Electronic commerce is not a national but a global phenomenon. It offers people across the globe significant increases in consumer choice and competition, which have the potential to significantly lower costs including transaction costs -- for consumers.
The Complexities of Global Electronic Commerce
The Administration's "Framework for Global Electronic Commerce" provides important principles that help clarify the issues and point to the importance of private sector leadership in overseeing this dynamic marketplace.
The "Framework" cautions that "governments should refrain from imposing new and unnecessary regulations, bureaucratic procedures, or taxes and tariffs on commercial activities that take place via the Internet."
Consumer Alert would also urge governments both here and abroad to recognize the uniqueness and potential of electronic commerce in providing broad consumer benefits and not stifle these developments through top-down regulation. The growth and development of the Internet and its commercial activities is a remarkable story of vibrant entrepreneurship, where protocols, standards, and conventions have been developed and modified at a swift pace. Those developments, integral to the nature of the Internet, should be encouraged, not shackled.
Consumers and Electronic Commerce
In engaging in electronic commerce, consumers want a high level of certainty about the security of their financial transactions, confidence that the product or service provided is as advertised or described, and assurance that if there are problems with products purchased electronically, those can be resolved.
Consumer Alert would urge the U.S. to follow the precedent of treaties that establish a rule of law by which parties can be assured that contractual arrangements are met, that disputes can be settled, and that liability issues can be resolved. We would, however, caution that such agreements should not deal with cultural differences that may exist among countries that may act as non-tariff trade barriers and stifle the global development of the Internet.
In terms of security of consumers' financial transactions on the Internet, credit cards, stored-value cards or services, and electronic "cash" are available, with numerous intermediaries formed to ensure the security of the information flows. Strong encryption technology and its ability to be exported is essential in protecting consumers from fraud and theft in Internet transactions.
While the U.S. government has loosened its restrictions on the export of high-level encryption by providing certain exceptions to allow encryption stronger than 56 bits, the role of the government in requiring key-recovery is a cause for consumer concern.
While recognizing that law enforcement officials desire the ability to "read" encrypted data through access to and use of those keys, the presumption that consumers and businesses are suspects forms the basis for government-prescribed key recovery. The recent history of the banking regulators' "Know Your Customers" proposals should provide a key lesson. The proposed rule was built on the same premise that law-abiding citizens were presumed to be suspicious until they could prove otherwise. The private citizen outcry against those proposals over 200,000 comments were received by regulators -- caused the banking agencies to withdraw those proposals.
Responsible companies -- those that plan on being around over the long term -- have a real interest in meeting their customers' wants and needs, including those relating to privacy. They know that running roughshod over consumer preferences is not a way to gain customers and earn profits. Thus, companies are extremely sensitive to real consumer concerns about privacy and about information use, especially relating to children. Those companies, not the "bad apples," are the ones that will survive and thrive.
Self-regulation is not just a way to avoid government regulation -- it is a better way to ensure that consumers' varied needs are being addressed. Market solutions to concerns also respond to rapid changes, such as those taking place in cyberspace. And the market is better able to respond with technological innovations than can government with statutory regulations.
There is a long history of effective private standards-setting organizations in the U.S. and in the international arena. In connection with the Internet, the very development of this phenomenon is partly attributable to the success of private standards groups.
Private standards-setting is critical to the continued evolution of the Internet in serving consumers' needs in electronic commerce. The development of organizations serving those needs has been robust, and consumers receive "protection" in their transactions with businesses from a variety of sources, with new types of approaches on the horizon:
Consumer Alert would suggest that credit card systems and other network operations for electronic commerce already require that vendor information be provided. Since the card issuers would bear the costs for scam e-commerce sales using credit card numbers (if they are notified in a timely fashion by the card-holder), it is in their interests to take a leadership role in vendor verification.
These and other developing programs generally offer "seals" to firms that agree to their standards, monitor and review the firms for compliance with the standards, operate dispute resolution and enforcement programs, and help educate consumers about the importance of dealing with reputable companies.
The concept of consumer "agents" is not new, but the application of the concept to the Internet is still in its fledgling stages. The most common example of widespread consumer use of intermediaries in their financial dealings is real estate agents. Traditionally, those agents have represented both buyer and seller. More recently, some agents have targeted their services as representing only buyers in real estate transactions.
One can easily envision how the "customer agency" concept can develop in similar ways not only for consumer products and services, but also for negotiating consumer preferences. The consultant John Hagel III has coined the term "infomediaries" to describe a likely development on the Internet in which consumers provide preference information to the automated intermediaries, who then "shop" the Internet to match the customer preferences with the commercial enterprises.
In the privacy arena, this could have important implications for the expansion of private programs rather than government regulation in addressing consumers' privacy concerns. On the Internet and elsewhere, privacy is a value-laden term -- it means different things to different people. Government attempts to define privacy in a certain way, with certain dimensions, often doesn't recognize the fact that privacy for one person may mean complete anonymity, while for another it may mean ensuring that his or her financial transactions are secure.
Also, in many instances, privacy regulations fail to recognize the trade-offs many consumers take for granted in the compilation and use of personal information by the private sector. In many commercial transactions in the real world, consumers may provide information in exchange for some benefit the supermarket frequent shopper's card provides a good example. Information about consumers' buying habits is compiled, and in return consumers receive significant discounts on many supermarket items.
Hagel's idea is that the new type of infomediary will act on consumers' behalf by negotiating for some customer benefit in return for the provision of personal information. In his view such approaches or similar ones are on the horizon and would provide consumers with important tools for greater ease of shopping and for deciding for themselves how much privacy protection they want to preserve.
From a consumer viewpoint, there is likely to be some confusion initially about which standards-setting groups to rely on. However, in the real world, consumers over time have learned to trust certain "seals," such as the Underwriters' Laboratories' UL label on electrical appliances. On the Internet, where consumer ratings and information exchange about almost every subject develop with astounding speed, there undoubtedly will be a "quest for the best" that will weed out the weak groups. The media, also, play an important role in providing such consumer information about the quality of the standards-setting groups through articles, guides, and checklists.
Private standards-setting also has an important advantage over regulatory regimes in that standards can be revised and updated rapidly. That attribute is particularly critical in relation to Internet standards because of the rapid pace of change. Government regulations quickly become outmoded and easily ossified in such an environment, and can do more harm than good.
Consumer Benefits of Internet and the Free Flow of Information
The Internet is a dynamic and evolving medium that is still in its infancy. It is also a medium that is used for a variety of purposes: for communication, entertainment, education, research, and purchasing. Most of all, it is an interactive medium, with individuals, institutions, corporations, and government playing both the roles of distributing information and receiving information, commonly referred to as "speaker" and "listener," or "publisher" and "reader." And the information available is so diverse that it almost defies categorization. People exchange information and opinions about politics, food, home repair, authors, movies and television shows, diseases, weather, ad infinitum.
Many groups, including non-profit groups, collect information about users who access their materials. Commercial and non-profit organizations may collect user information for a variety of reasons: to discover more about users so that they will be able to tailor or improve their offerings; to survey for research or polling purposes consumer preferences, attitudes, or habits; to offer products or services to those most likely to be interested in them; and so on.
Many discussions on Internet privacy focus on perceived hazards of information collection and not the benefits -- the enormous consumer benefits that are made possible through such information compilation. Information collected and maintained by organizations whose purpose is to gain profits by providing valuable services and products to willing consumers poses no danger to privacy. The point of such information is not to violate rights, but to provide goods and services more effectively, at lower cost, and to those who desire them.
People who don't want to consider an offer can protect themselves by the "opt out" option; they can decide to reveal information only on the condition that it won't be shared with others. This allows those who seek to secure complete privacy or anonymity to do so by exercise of their rights, and with relatively low transaction costs overall, in contrast to restricting the rights of others. Proposals to reverse this principle, and to require that individuals actively "opt in" by means of some legal instrument before any information about them can be shared, would create enormous barriers to the free flow of beneficial information.
Numerous groups that use Web sites to collect information voluntarily disclose how that information will be used and if it is to be sold. Adults accessing Web sites can make decisions for themselves about whether they want to access sites without disclosures. They can also make their individual decisions about whether to disclose the information requested through surveys, questionnaires, etc.
One important issue is the fact that people on the Internet are not homogeneous -- Internet users include diverse individuals with many different preferences, including preferences regarding privacy. Yet the tenor of much of the privacy discussions is that standards or regulations that reflect an extreme view of privacy are needed to protect all users. Such "one size fits all" standardization would run roughshod over consumers' own preferences and values.
Consumer Alert urges policymakers to consider the importance of the information industries in extending benefits to consumers and how consumers may suffer individually if useful and benign information is bottled up by ill-conceived regulations.
Self-regulatory guidelines established by industry groups and new technological approaches to allow Internet users to choose their own levels of privacy are able to adapt much more rapidly to concerns that arise. Consumers can also deal with many of their own privacy concerns though the use of technology -- anonymity, for example.
Children and the Internet
Consumer Alert recommends more rigorous enforcement of existing laws designed to protect children from those who would prey on them, whether in person or in cyberspace. However, in protecting children from material that a child accesses in the home through books, magazines, TV, videotape, and computer, the parents, as the protectors of their children, hold responsibility.
Parents can purchase software or use many online services to limit their children's access to what they consider to be unsuitable sites. And they have tools to do so. A vast array of technology is available for parents to screen materials on the Internet and to block objectionable material.
This very point of parental responsibility was addressed eloquently in the decision on the constitutionality of the Communications Decency Act of 1996 by the U.S. District Court for the Eastern District of Pennsylvania (June 11, 1996) . In addressing the issue of offensive material on the Internet in relation to minors, Judge Dalzell, in his opinion, stated his point forcefully:
"Parents, too, have options available to them. As we learned at the hearing, parents can install blocking software on their home computers, or they can subscribe to commercial online services that provide parental controls. It is quite clear that powerful market forces are at work to expand parental options to deal with these legitimate concerns. More fundamentally, parents can supervise their children's use of the Internet or deny their children the opportunity to participate in the medium until they reach an appropriate age." (p. 178)
The technological and institutional changes that are occurring as the global electronic marketplace becomes more widely used are certainly substantial. Consumer Alert views these changes not as threatening but as providing new opportunities to advance consumer interests, specifically those consumers least well served in today's world. This confidence is based on the fact that Internet will reduce the cost of information as well as the cost of transactions and thus will make it possible to serve an ever greater proportion of the consumer population.
Restricting the evolution of this phenomenon will thus be a disservice to consumers.
1. 1Consumer Alert, founded in 1977, is a non-profit, non-partisan consumer group with individual members in all 50 states. Consumer Alert also organized and coordinates the National Consumer Coalition an on-going coalition of 27 non-profit groups in the U.S. whose combined membership totals 4 million people.