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

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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 with
the 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.

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2. HYPOTHESIS

2.1. HYPOTHESIS STATEMENT

“Pakistani firms do not find e-commerce (online trading)
as a financially viable option”

2.2. THEORY BEHIND THE HYPOTHESIS

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

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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 to
traditional 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

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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 now
shopping 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.

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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. PRIMARY
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.

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3.2. SECONDARY
Secondary data has been collected through the Internet and the PASHA (Pakistan
Software Houses Association) Annual Directory.

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4. ARGUMENTS
4.1. ARGUMENTS AGAINST THE HYPOTHESIS
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

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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

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

4.2. ARGUMENTS FOR THE HYPOTHESIS

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. REASONS FOR NOT CHOOSING E-COMMERCE?

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

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 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.

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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

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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).

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 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 RUNNING 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)

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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.

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4.2.3.6. CAN AN E-COMMERCE WEB SITE BE INSURED?

Addressing one of the main questions in assessing the feasibility of an e-
commerce solution in financial terms, insurance plays a vital role in any
institutions establishment and fallback capability.

Presently there is not a single insurance company that provides an insurance

package in case of a fraudulent transaction or financial loss in the business. The
loss, if occurs, falls on either the end-user or the organization itself or the bank
involved in the transaction and none is in its true sense responsible. “It is just a
game of shifting burdens and pointing fingers”, said Asim Zafar of
ThreeSixtyDegreez.

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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

Store front 100,000
Domain name 6,000
Merchant bank account 20,000
Initial Cost of Solution Web hosting 100,000
Digital Certificates 10,000
Shopping cart software 300,000
Total 536,000

Yearly Cost of Solution Web server maintenance 100,000

Logistics cost for deliveries 300,000
Customer support 400,000
Total 800,000

Per transaction cost yearly

Variable Cost of Solution 100,000
(20 / transaction assuming 5000 transactions)

TOTAL COST 1,436,000

Initial Calculation Break-Up Rupees

Actual Transactions Per Year 2000 x 20 40,000
2.5% of Transaction Amount
Per transaction Percentage 75,000
(Assuming 3,000,000 of sales)
TOTAL REVENUE PER YEAR 115,000

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Projected Calculations Transaction Cost Revenue % Total

nd
20% increase in 2 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 64,000 120,000 184,000
Total 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 %

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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.

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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 of
individuals 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.

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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

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