E-commerce problems and what Blockchain can do

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In the early years of e-commerce, the proverbial “analyst consensus” was that the sector would eat the world and change lives in incommensurate ways. While the first assertion is true, e-commerce hasn’t “delivered the goods” on the second, at least not yet: e-commerce is not truly global, not really inclusive and mostly focused on delivering convenience to the highest tier of consumers.

Today, when you buy from any of the global Marketplaces, you are mostly buying from a re-seller in your country, thereby still enabling a stack of intermediation that transfers value downstream rather than substantially creating value.

Some marketplaces are a quasi-monopoly in their core geographies (Alibaba group has 75% of e-commerce in China) and still the overall cost of the platforms remains quite high as a proportion of the transaction

There are many consequences to that. Customers have become very transactional and even high-end products are often commoditized. Platforms have become the broker of trust in cross-border e-commerce and this has pushed seller margins further down (in consumer electronics, gross margins of the seller are at 5% of the retail price)

Furthermore, the customer journey has spread so thin and has mutated into such a convoluted path that no omni-channel truly captures the customer early enough to influence any choice, so price is the main driver even for high willingness-to-pay customers.

If you are skeptical or surprised by the above, it is simply because high-end, convenience-based purchases of services and products are overly broadcasted. These are not related to the Marketplace business model and do not exist in any of the 90% of e-commerce revenue that is not Amazon’s.

Today, probably around 200million sellers (my own rough estimate) are not selling cross-border simply because they are de-facto excluded by the price structure of dominant Marketplaces: 15-20% take rate, before clearing(2-3.5%), Forex (5-10%), shipping(5-15%) and ancillary services.

Given the huge cost of infrastructure (storage and computing), going it alone doesn’t make economic sense for the sellers, as the alternative (e.g.: Shopify, Woocommerce or Magento) is more expensive and deprived of the traffic that the big Marketplaces bring. The second biggest cost is post-transaction support, such as dispute resolution etc.

All these are structural features of marketplaces that haven’t moved an inch over the past 10 years and by and large explain the current statusquo of about 5-6 global actors largely dominating the market without substantially improving on any of the three nemesis of Marketplace e-commerce:

High fees for small sellers, even in efficient markets, High proportion of fake reviews and lack of trust.

While incumbents have no economic incentive in addressing those issues, all other stakeholders do, and many more e-sellers would enter the market if they were.

In the meantime, actual cost of computing and storage has gone dramatically down (not exactly at Moore’s law speed, but still in leaps and bounds), several Blockchain technologies have matured in terms of robustness and there’s a growing population of young, educated holders of crypto currencies with a strong community engagement.

Beyond the boom and gloom of cryptocurrency prices, which do not reflect any level of future outlook of the technology, a number of use cases around transfer of balance and exchange of services have proven to be solid, to the extent that the whole crypto and ICO market operators are accepting volatile cryptocurrencies as optional payment as an alternative to most fiat currencies.

While it is very important to understand that current levels of moral hazard, conflict of interest and downright scams are high, the number and intensity of problems and pain points that Blockchain promises to solve goes way beyond payments.

Despite its level of technical sophistication, Blockchain is not a new technology, it is a combination of existing technologies applied in a new form that can work with simple infrastructure (smart phones, consumer laptops) with unmatched resilience and data integrity, at the expense of performance (processing speed)

This convergence of factors (technology, access to infrastructure and incentive design through Token Economics) has never been so fitting to the e-commerce problems described above. Even the advent of internet and the craze of adoption of the late 1990’s didn’t hold as much potential as today. In particular, 2 factors are huge “equalizers” between Emerging Markets and advanced economies that were totally absent in the early internet era: there is no smart phone gap between them and there’s no knowledge gap either.

Indeed, even unbanked young adults in Emerging Economies have access to smart phones with high level of processing power and as long as there are educated and computer literate, they access the same level of information and the same cryptos their upper-middle class counterparts in the western world.

This means that e-commerce, cross-border or not has only shipping cost as a fixed cost and almost everything else can be a variable cost or at least a small commission-only cost. Even more interesting, with the huge increase in logistics efficiencies, retail shipping does not exceed substantially increase the overall cost stack up, making it much more profitable for small sellers to sell directly to consumers on the other edge of the earth than leave the bulk of the margins and value creation to whole sellers.

The current big challenges to achieve massive adoption of this alternative are two-fold:

  • The volatility of cryptocurrencies is not compatible with the low margins of retail (gross margin around 5-10% of retail price)
  • Conversion from crypto to fiat currencies (sovereign money) is inefficient and costly, mostly happening in Over-The-counter with operators who take about 3%

While these issues will not be resolved until markets mature and behavioral trading receeds a bit, the technology is completely useable to solve e-commerce top three problems: high platform fees, fake reviews and lack of trust between sellers and buyers across borders.

Other aspects such as the overly long time for sellers to receive cleared funds with today’s currencies are completely solved “by-design”.

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