Prospects in The E-Commerce Sector
It is estimated that the global sales growth in the E-commerce sector worldwide would be around 12.7 per cent in 2022, a 4.1 percentage point dip from 2021. This will fall to 11.2 per cent in 2023, 9.8 per cent in 2024, and 9.0 per cent in 2025 with benefits such as cost-effectiveness, quick comparison shopping, better customer service, information saving and knowledge market development.
The E-commerce sector is projected to be one of the leading industries in the upcoming years. It has changed the business of transactions by creating generous new opportunities and creating new challenges. It makes traditional businesses into a modern competitive world, and will likely make them run out of their business.
However, the E-commerce sector is not without its challenges, which are mainly as a result of the growing global reliance on the use of technological innovations, like the internet for the conduct of business transactions, such as business to business, business to consumer, business to government, and consumer to consumer transactions. Some of these challenges which affect the E-commerce sector are examined as follows:
A. Trans-National Issues:
Whilst it is a recognisable fact that E-commerce could also be a domestic transaction, the e-commerce sector is undoubtedly also thriving globally as it presents consumers with the opportunity of comparing products online and making informed purchase decisions. More so, due to the advancements in technology, it is easier now for consumers to look for the best deal, even outside their countries. And this, along with the global e-commerce’s predicted growth of over $800 billion by 2022, is what makes cross-border e-commerce business appealing to consumers.
Understandably, when it comes to cross-border E-commerce solutions, there are no one-size-fits-all. Different businesses have entirely different solutions for different countries and markets, and while these variations may seem unremarkable, they can have profound implications for customer satisfaction, retention and purchase price. With E-commerce becoming more dominant, and cross-border purchases set to become a more commonplace part of consumers’ lives, these are challenges that will need to be tackled in ensuring better operations of online marketplaces.
B. Cross-Border Taxation:
While E-commerce presents a tremendous opportunity for economic growth, it poses significant challenges to existing tax law and regulatory mechanisms due to the inherently non-territorial nature of its digital transactions which are hard to trace and could potentially lead to tax revenue losses at sub-national, national and international levels. This revenue loss is particularly worrying to governments, that rely heavily on tax revenue as a source of funding for their fiscal programs. To address these issues, the Organization for Economic Corporation and Development (OECD) has taken the lead role in establishing the guiding principles and tax rules, to govern the tax treatment of international E-commerce transactions, by engaging member countries to come up with the Ottawa Taxation Framework (OTF).
Before the OTF, there were diverse opinions on how E-commerce taxation issues should be addressed, in light of which the source rules and the permanent-establishment rule were established. The “source-based” taxation, or territorial jurisdiction rule, proposed that “the country with the primary right to tax the profits of an enterprise, is the country in which the enterprise earns the income”. While the permanent-establishment rule proposed that the second basis for tax jurisdiction, is permanent establishment or residence, according to which the enterprise’s country of residence or permanent establishment has primary taxing jurisdiction, over the income generated.
Confronting the taxation challenges arising from the digitalization of the economy, has been a leading priority of the Base Erosion Profit Shifting (BEPS) project of the Organization for Economic Cooperation and Development (OECD)/G-20 Inclusive Framework (IF) since 2015. Studies have shown that the major causes of E-commerce taxation complexities, most often than not include but is not limited to borderless commerce models and digital convergence. The OTF in harmonising the existing tax policies in the jurisdictions of member countries, established a two-pillar solution (Nexus and profit allocation rule, and the Global Minimum Tax Rule), to address the tax challenges arising from the digitalisation of the economy on the principles of neutrality, efficiency, certainty and simplicity, effectiveness and fairness, and flexibility, as the basis for taxation in the E-commerce sector.
C. Foreign Exchange Risk
The International Monetary Fund (IMF) defines exchange rate risk as the possible direct loss (as a result of an unhedged exposure), or indirect loss in cash flows, assets and liabilities, net profit and, in turn, its stock market value from an exchange rate move.
With cross-border E-commerce becoming increasingly prevalent, it has been indicated by industry analysts that about 51% of online shoppers worldwide are purchasing from online retailers. Consequently, as businesses pivot to the E-commerce sector, setting up a localised experience for international shoppers on the various trading platforms, in mitigating related foreign exchange trading risk, becomes a matter of importance.
Foreign exchange (FX) risk exists because the exchange rates represent a volatile market that is subject to daily changes. It is often horizontal risk, meaning it occurs between two different currencies.
The fluctuations do not only exist between two fiat currencies (such as the dollar and the Naira), but may also affect a non-fiat currency. They can be caused by the appreciation or depreciation of both the home currency and foreign currency – either independently or together.
Consumers, on the E-commerce platforms, are usually faced with exchange rate risks, and the problems associated with computing the exchange rate values, especially in cases where the currency acceptable on the platform fluctuates, in comparison to the currency applicable to the user. However, for businesses, in the E-commerce sector, the challenges are quite broad, as they operate direct to customer’s model (D2C) and sometimes fail to offer multi-currency pricing options that cater to the buyer’s preferences, resulting in lower checkout conversion for international sales. This is supported by a PayPal survey, which indicates that 76% of online shoppers prefer to have the option of paying in their local currency, and over 60% of survey respondents check currency conversion rates, before paying in foreign currencies.
In light of the above challenge, settlement models have been developed in cross-border E-commerce transactions one of which is the “settlement currencies”. The settlement currencies, give businesses on the E-commerce platforms, the option to receive sales proceeds from their Payment Service Provider in a small number of settlement currencies, which in turn is made to match the functional currencies of their business. This implies that foreign exchange related choices managed by Payment Service Providers (PSP), would effectively curb the FX inefficiencies, that arise from settlement workflows.
D. Data Privacy Threats to E-Commerce
It is a fact that in recent times, most transactions are conducted online, involving the transmission of personal data such as shipping addresses, billing information amongst others, it is no news that the data of consumers are exposed to highly prevalent threats, that can adversely impact the personal information of an E-commerce site visitor, such as phishing attacks, identity theft and unlawful data processing among a host of others.