Monetary & Financial Statistics: June 2000

E-commerce and financial statistics: a report of a halfday meeting of the Financial Statistics Users Group
By Graham Clark (Bank of England) Tel 020 7601 5356 Email:Graham.Clark@bankofengland.co.uk
The following is a summary of a meeting hosted by Barclays Bank plc on 9 May 2000. The meeting
was chaired by Colin Jameson of Barclays and included speakers from IBM, the Office for National
Statistics (ONS), the Association of British Insurers (ABI) and the on-line bank Egg. The views
expressed within the FSUGs meetings, and recorded here, are those of the speakers and do not
necessarily represent the views of their organisations or the Bank of England.
2005, a third company thought there would then be fewer
users than this (301mn), whilst a fourth suggested that
one-sixth of the worlds population (1bn) would be online.

Understanding e-commerce
The first speaker was Keith Telford, an economist at
IBM Global Services. He began by referring to a report
on the IT industry commissioned a decade ago by the
Economic and Social Research Council from Professor
Ian Miles of Manchester University. This concentrated
on official statistics and concluded that whilst their
integrity and comprehensiveness provided a basic
framework, they lacked the detail on companies, products
and future developments which business requires.
Indeed, classifications used today have not kept up with
the rapid pace of change in the industry over the
intervening ten years.

In conclusion, Keith suggested ways in which the best of

both official and non-official statistics could be
combined.
First, he commended work recently
undertaken by Goldman Sachs and (independently)
Cambridge Econometrics to forecast growth in ecommerce using dynamic input-output models, thereby
more closely reflecting the methodology used in
compiling official statistics. Second, he urged market
researchers to be more forthcoming about their
methodologies. At present a typical 2-300 page report
may include as little as half a page on this, and a recent
example described its central assumption as big
companies have big budgets and therefore spend more on
IT than small companies Third, forecasts of the
supplier industry in the UK, which is largely selfcontained with modest net exports, should recognise that
the principal limitation to growth is the skills base.

By contrast, private sources offered extensive analysis

but were generally flawed in several ways. First, there
were definitional variations from one source to another.
Second, sampling and grossing methodologies were often
weak. A principal reason for this was the very low
concentration of the UK software services industry in
which the top 40 companies accounted for only 20% of
aggregate turnover, and the total number of companies
had expanded rapidly from 4,000 in 1980 to 85,000 in
1998 and perhaps more than 120,000 today. There was
much less scope for error in estimating the size of the
hardware industry, in which the top 20 companies
accounted for 75% of aggregate turnover, and private
estimates rarely differed by more than 30% from the
official ones.

Measurement of e-commerce in official

statistics
Robert Hay of the ONS, whose responsibilities within the
Business and Prices Group include developing a strategy
to measure e-commerce in business statistics, then spoke
about both business and social official data. He began by
explaining that in September 1999 the Performance and
Innovation Unit of the Cabinet Office had published a
report E-commerce @its.best.uk as a follow-up to the
Competitiveness White Paper. This had included a
chapter on monitoring and evaluation, with
recommendations for a number of investigations into the
provision of statistics which were being taken forward
under the auspices of a Government Statistical Service
(GSS) inter-departmental group chaired by the
Department of Trade and Industry (DTI). Roberts talk
drew extensively on the E-Commerce @the.ONS.UK
article published in the April 2000 edition of Economic
Trends.

Third, forecasts of the growth of the IT industry and ecommerce frequently ignored inflation, the business
cycle and one-off events. Indeed, when IBM approached
a number of market researchers to assess the scale of
opportunities afforded by Y2K, several were unaware of
the latter. Yet it had been identified in the USA some 18
months earlier and been the subject of rolling public
education programmes there, and some of these
researchers had published forecasts beyond the end of
1999.
These methodological flaws led to wide variations in
private statistics, of which Keith cited two examples.
First, the official estimate of the turnover of the UK
software services industry in 1998 was 30bn, an
increase of 31% on the previous year, but two principal
non-official sources estimated it to be around half this
and annual growth as low as 13%. Second, a US
company which produces estimates by synthesising other
companies research suggested there were 130mn
internet users worldwide in 1999, whilst another
company claimed 313mn. In projecting numbers for

ONSs role was essentially to develop business and

social surveys to ensure that e-commerce was adequately
covered in macro-economic indicators, and the national
and balance of payments accounts, and that the needs of
customers such as the Treasury and Bank of England for
information on the impact of the internet were met.
In order to fulfil this role it was first necessary to agree
internationally how to define e-commerce. Discussions
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Monetary & Financial Statistics: June 2000

contracted a consultant to undertake a benchmarking

study in the G7 countries, comprising a telephone survey
of inter alia the level of ownership of personal computers
and internet access, and the understanding and use of the
internet for business activity. And whilst the Australians
have surveyed internet service providers (ISPs), and the
Dutch carried out some pilot studies, only the USA has
begun to publish macro-economic aggregates,
commencing with an estimate of retail sales via the
internet in Q4 1999.

initiated by the Organisation for Economic Co-operation

and Development (OECD) had produced a framework
sufficient to allow data collection to go ahead.
In the Business and Prices area a number of assessments
of the impact of e-commerce were currently underway.
First, of how the Business Register, from which
populations and samples were drawn, reflected both ecommerce divisions of existing companies and new
standalone dot-com businesses. Second, of how price
indices were affected by differentials between the
internet and other channels the prices of books and toys
purchased on-line were now being systematically
surveyed to determine the data collection issues, though
sales were currently too small to warrant inclusion in the
Retail Prices Index (RPI). Third, of the scale of activity,
such as buying direct from overseas-based internet
businesses, for which no data collection mechanism
exists at present. And fourth of the effect of changes in
business practices on stockbuilding, capital expenditure,
etc.

Robert completed his presentation by flagging the Office

of the e-Envoys next report in July 2000 which will
include a progress report on developments in official
statistics.

E-commerce shaping an industry

John Kemble of the ABI echoed the previous speakers
remarks about the importance of establishing a common
definition of e-commerce for measurement purposes, and
quoted that submitted by the DTI to OECD -

ONS have also taken an interest in a study commissioned

by the Office of the e-Envoy from De Montfort
University of the availability and quality of market
research data on e-commerce, and the extent to which
this meets business needs. The study listed no fewer than
115 indicators of activity that might be measured. (It was
suggested during the panel session towards the close of
the seminar that ONS should also comment on the value
of market research data, but a DTI member of the GSS
inter-departmental group present suggested that the
researchers might be unwilling for critical observations to
be published.)

The exchange of information across

electronic networks, at any stage in the
supply chain, whether within an
organisation, between businesses,
between businesses and consumers, or
between the public and private sectors,
whether paid or unpaid.
Thus e-commerce embraced such technologies as
Electronic Data Interchange (which has been used in the
insurance market for some 20 years), e-mail, the World
Wide Web, Computer Telephony Integration (which will
develop further with the advent of Wireless Application
Protocol mobile telephone technology), public terminals
in banks, shopping malls, etc, and smart cards.

In the immediate future, ONS propose to obtain

inexpensive and comprehensive but highly aggregated
information on internet usage from the service providers,
and to identify the largest business users of e-commerce
through publicly available information. In the next 12
months or so they intend to undertake detailed case
studies of those industries which use the internet heavily.
Longer-term aims include the integration of e-commerce
into existing business inquiries with separate questions
on for example turnover and capital expenditure sourced
from the internet, and a pilot survey of the enablers of ecommerce, such as software providers, in conjunction
with the Computer and Software Services Association.

To demonstrate that e-commerce would continue to

expand, John quoted figures compiled by a market
research company about a year ago. These showed that
whilst only 6% of UK internet users had bought financial
services on-line, 20% had browsed for information on
them, and 37% of those who had made any purchases
electronically expected to buy financial products in the
same way in the future. It appeared that the experience
of ordering computer software, books and music/videos
via the internet (between 27% and 40% of users had done
this) generated confidence to purchase other goods and
services on-line. (In the panel session both John and the
final speaker Mark Pearson asserted that there was a
growing conviction that the internet was a relatively
secure transactions medium, and that it was safer for
credit card details to be transmitted electronically with
the benefit of 28 point encryption than for the card itself
to be out of sight of the holder for several minutes as
often occurred when settling a restaurant bill. There was
no evidence of credit card numbers being intercepted in
transmission; rather fraudsters obtained them by hacking
into retailers, etc databases, which contained numbers
supplied via all media including over the telephone and
by post.)

In contrast to business surveys, social ones are already

gathering information on the impact of the internet.
Since 1998 the Family Expenditure Survey has been
collecting data on households access to the internet figures for 1999/2000 will be available later this summer.
In April this survey was extended to cover information
on goods and services purchased on-line, which in time
will influence the basket used to measure the RPI, and
questions on internet usage, distinguishing browsing for
goods and services from purchases, were added to the
Time Use Survey the first data will be available in the
second half of 2001. In addition, a fundamental revision
of the Standard Occupational Classification to provide
more detail on employment linked to e-commerce has
been implemented the first results from the Labour
Force and New Earnings surveys will be available next
year and from the Census in 2002.

The growth of e-commerce reflects its twin roles as an

enabler and a driver. For example, over the past 30 years
supermarkets have steadily been extending their opening
hours and the number of lines they stock in response to
consumer demand. E-commerce not only enables even

Internationally, few data are currently available from

official sources.
The DTI has for several years
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Monetary & Financial Statistics: June 2000

share could be increased (by offering services geared to

stated key intentions such as going on holiday, database
triggers such as change of address, etc), and the strength
and depth of the customers relationship with Egg
(recency, frequency and value of interactions, etc). One
particularly useful piece of information was a customers
ISP as this was a powerful predictor of behaviour for
example one providers customers had an average
savings balance of 13,600 whilst anothers averaged
only 8,000. (Though it was suggested in the panel
session that free internet access offered by many ISPs
had encouraged users to subscribe to several providers,
thereby creating increasing overlap between the latters
customer bases.) The customer database was a potent
tool for segmenting and pricing products.

wider access and choice, but also drives expectations of

the levels of service, such as home delivery, and volume
of product information that can be provided. And as the
internet has enabled greater access to overseas suppliers
of goods and services, regulators have been driven to
create increasingly level playing fields for trade, which
has not only enabled more international business to be
done electronically in turn but also via other channels.
In the insurance industry, e-commerce is enabling
fragmentation of broker roles and disintermediation, and
the resulting efficiencies are driving further use of this
channel. Traditionally, customers have sought general
advice, obtained detailed and customised product
information, and then made their purchase from one
broker. The internet encourages buyers to shop around
for both information and prices, and perhaps ultimately to
buy direct from the insurance company itself. And new
technologies will further aid this process for example
XML (Extended Mark-up Language) will permit
personal details (and other data) to be labelled such that
they can automatically be downloaded to several sites
rather than having to be typed into each one.

The final source of information was continuous feedback

from customers. Whilst in the run-up to a product launch
desk research was vital in for example sizing the market,
shortcomings and inconsistencies in this research led to
more reliance being placed post-launch on customer
feedback. Indeed, between 1 January and 9 May 2000
(the date of the seminar) no fewer than 32 customer
research projects had been carried out in addition to the
brief satisfaction survey that can be completed each time
a customer goes on-line. A significant trend in this
research was the fall in expectations of what the internet
can deliver in particular the speed of access and
response to service requests.

There are also efficiencies to be gained post-sale. For

example, customers can change their name and address
details on-line rather than posting a form which then has
to be input by the insurer. Or by completing an
electronic claim form, they can receive information on
mitigating the claim together with details of the nearest
approved vehicle repairer, roofing contractor, etc, and in
time perhaps a copy of the form could be sent
automatically to the police where this was appropriate.

The challenge was to bring all these sources of

sometimes conflicting information together and to extract
the main stories quickly.

John concluded his talk by outlining two statistical

challenges and one opportunity. First, the ABI had yet to
adapt its sales channel based data collection mechanisms
to measure the contribution of the internet, as the latter
might be used for only one or two of the three elements
of a sale (general advice, detailed information, the
transaction). Second, as the pace of change quickened, it
would become increasingly difficult to compare present
and historical data on a like for like basis. On the other
hand, XML raised the possibility of internet transactions
being labelled in such a way that they could be identified
and aggregated for statistical purposes.

Developing an e-commerce product strategy

The final speaker was Mark Pearson, head of customer
voice at Egg, who had recently assumed responsibility
for desk research also. He identified five sources of
information used in his companys product formulation
strategies. First, traditional ones such as the ONS,
Council of Mortgage Lenders, British Bankers
Association and ABI. Second, desk research on for
example market size and growth. Because none of this
was dynamic and its quality varied, it was necessary to
pick and mix sources rather than rely on one
continuously.
Third, desk research on the social
implications of new technologies.

Mark Pearson from Egg.

The key difference in developing a traditional and on-line
product respectively was the need continuously to obtain
and analyse information on the latter and to make
improvements in the light of this. This was vital as
markets changed more rapidly and brand loyalties
diminished. For example, the latest customer research
survey had been drafted on a Wednesday, distributed the
next day by e-mail, and achieved a 40% response rate by
the following Monday. The results would be considered
and necessary actions agreed at the next weekly
development meeting.

Fourth, Eggs own customer databases. These revealed

who the nearly 1 million customers were (name, age,
gender, etc), where they were (e-mail and postal
addresses and telephone numbers), their technology
literacy (based on how they used the internet), size of
their wallets and Eggs share of those wallets, how Eggs
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Turning specifically to the launch of Egg Card, Mark

explained that his company had begun to size the
potential market in April 1999 using market research data
showing that 22% of adults in Great Britain had internet
access and 5% (of which half were on-line) were likely to
purchase their first or an additional credit card during the
year from these the current market for e-credit cards
was estimated as 1.1 million. To this was added an
allowance for predicted annual growth in internet access
of 35%, 1 million adults already buying on-line, and 2.5
million considering doing so, to produce a top-end
estimate for e-credit card demand in mid-2000 of almost
5 million.
Many of the principles underlying the launch of an eproduct such as Egg Card are similar to those for a
traditional product. Opportunities and threats must be
assessed in this Egg were comforted by the continued
growth of their savings account after access was switched
from the telephone to the internet. So too must cost
dynamics an example from Marks own area of
responsibility of how different these are for on-line
products is that at the beginning of 1999 postal customer
satisfaction surveys for the then telephone-based savings
account were costing 20,000 per month, whilst on-line
surveys now cost just 2,500 per month representing
mainly the development of the website to accommodate
these as data are returned at the customers expense. And
marketing must be undertaken this was partly via clickthroughs from banners on other sites to help distinguish
Egg Card from traditional credit cards.
However, in the same way that the rapidly changing
internet market-place requires continuous data collection
and product improvement in the light of this, so it also
drives a shortening of the time in which e-products are
brought to market initially.
Indeed, Egg became
involved in a race to launch the first e-credit card, and
winning this race has undoubtedly helped it to remain
ahead of the competition.