Are Our E-Commerce Platforms Safe and Sustainable?

Since the birth of the commercial internet in the mid 90s, e-commerce platforms have radically transformed the ways we transact and consume, with significant impacts on the economy and on all affected industries. Between 2018 to 2020, major economies saw a 41% rise in online retail sales. This is currently forecasted to grow to $7.5 trillion, which would account for around 24.5% of total retail sales. However, much like with other corners of the online world, not all impact has been positive. While online trade volume massively increased, so did the trade of illegal products online. This creates safety and sustainability risks both for the overall economy and the online platforms themselves.

Figure: E-commerce as % of total retail sales worldwide – Source: Statista

Illegal Products “Flourish” on e-Commerce Platforms

According to a study in 2019, trade in counterfeit and illegal goods stood at 3.3% of the multi-trillion global trade and represented 6.8% of imports from non-EU to EU countries – with a significant part of this activity happening online. Covid-19 lockdowns further boosted the number of “risky sellers” on e-commerce markets who offer illicit goods that may even be a threat to public health, such as substandard medicine, unreliable test kits, and other Covid PPE related goods that may be of lower quality. These underline the gravity of the risks e-commerce platforms may create for both society and the economy, but also their own business.  

As demonstrated by a recent OECD study online sales represent 60% of global seizures of dangerous products destined for the EU. Consider, for example, public health risks. One can buy plenty of ineffective prescription pills, unsafe materials, or substandard ingredients in lipsticks and baby formula on the internet – all of which can jeopardise consumers’ health and safety. 

The most commonly traded category of dangerous fakes includes perfumery and cosmetics, followed by clothing, toys, automotive spare parts, and pharmaceuticals. Counterfeits in electrical goods can also be dangerous as they are not put through the same safety checks as legitimate items. Aside from harm to consumer health, consumers also risk compromising their personal data on websites selling harmful goods and may be more susceptible to scams

Counterfeits Cause Significant Value Destruction for the Economy and Online Platforms

Illegal and “unsafe e-commerce” can create significant value destruction for the economy and online platforms. Furthermore, it creates a market of lemons that is known to significantly hurt economic activity as it erodes the trust of people transacting on these online platforms. For marketplaces and e-commerce platforms, product recalls, potential liability claims, consumer confusion, and brand dilution present substantial costs and concerns. Almost 75% of brands have lost money due to counterfeit goods being sold online, with 42% losing up to 10% of their sales. Buyers may leave when it becomes harder to verify the credibility of vendors and the authenticity of products. The high prevalence of counterfeits also makes platforms less attractive for legitimate sellers. The end result is a loss of trust and eventually the loss of sales.

Indeed, consumers, vendors, and online marketplaces have varying stakes in curbing the growth of counterfeit products. As noted, online marketplaces are particularly susceptible to adverse selection due to information asymmetry between buyers and sellers, an important issue which is not currently well mitigated. Consumers are often lured to fakes due to low prices, which perpetuates the growth of counterfeits. Moreover, its dangers have created a problem of trust and its prevalence has wider negative socioeconomic impacts such as the displacement of jobs and of legitimate economic activity. Ensuring the safety and legitimacy of e-commerce platforms is therefore not only a social and moral imperative but also a significant economic one for both the global economy and the online platforms themselves.

Online Platforms under Increasing Regulatory Scrutiny

This is why, almost a quarter of a century after the birth of the commercial internet, regulators are working on new laws with significant implications for e-commerce platforms and impact on how we trade and consume. These include regulations such as the upcoming EU Digital Services Act (see side box) and the EU General Product Safety Regulation, the Canada Consumer Product Safety Act (2011), the UK Consumer Rights Act (2015), and the voluntary Internet Charger to fight counterfeit in France. 

What are the DSA requirements for e-commerce platforms? 

The EU Digital Services Act is a comprehensive legislation that aims to create a safe, trustworthy, and transparent environment for all the actors present on digital platforms. It builds on the e-Commerce Directive (2000), laying out more detailed obligations proportional to the size of different digital services, and defines online marketplaces as platforms that allow consumers to conclude distance contracts with traders. To comply with the DSA:

– Do you collect and store/Can you provide essential information about your traders upon regulatory request?
– Is all your information on traders verified and updated? Do you have KYBC capabilities?
– Do the algorithms driving advertisements on your platform risk subverting your customers’ choices in unfair or other illegal ways?
– Do you let your consumers know of illegal or counterfeit products they may have purchased as well as give them information about the trader they purchased from?
– Do you have a notice mechanism for illegal or counterfeit products on your platform? 

Upcoming Regulatory Requirements for Online Platforms

These regulations, along with the rising demands on online consumers and civil society, will have profound implications for online marketplaces, aiming at “fixing e-commerce” to ensure that the internet remains true to its original mission: to create enormous value for society and businesses without raising new significant risks. Online platforms will need to put in place new processes and systems to comply with these regulations, including complex case management systems designed in line with the new regulatory requirements, connectivity with potentially hundreds of newly formed Trusted Flagger organizations across multiple countries, KYBC/KYC systems, transparency reporting capabilities, and many others.

Once the DSA comes into force, online marketplaces will need to comply with certain obligations that intend to protect consumers, traders, and platforms in this new environment. With respect to platform design, providers will no longer be able to rely on “dark patterns”. This refers to design techniques that nudge consumers toward decisions such as features that make it difficult to sign out from the marketplace or default settings that are difficult to change. In short, any element that subverts and impairs autonomy, decision making, and choice cannot be included in the platform interface. 

Another obligation focuses on the traceability of traders on the platforms. Platforms will need to implement KYBC systems and processes. Traders that wish to sell their products on the platform must provide essential information – such as name, where they are registered, copy of ID, etc. – to the platform, which will then be stored for a reasonable period of time in case of liability risks. This information will need to be verified by the platform and if the trader fails to provide updated or more accurate information upon request, the platform can suspend the provision of the trader’s services. 

Furthermore, when the platform becomes aware of any illegal products or services, it needs to inform the consumers who purchased illegal products or services of their illegality as well as the identity of the traders and any means of redress. If the consumers cannot be contacted, the information needs to be made publicly available and easily accessible. 

By putting such obligations of transparency, traceability, and verifiability in place, the regulation prioritizes consumers and aims to protect different actors and stakeholders in the e-commerce ecosystem. Platforms that comply can expect a positive impact on their brand value and to protect, retain, and grow their user base. To adapt to this new e-commerce world and comply with varying regulations, platforms and online service providers will need to put retroactive processes in place and incorporate trust by design. 

Towards E-Commerce Sustainability

Today, consumers expect safe and reliable e-commerce platforms, businesses seek to reduce costs that ‘markets of lemons’ create, and regulators prepare new laws to counter the plethora of harms on the digital space. As we move forward, raising the level of trust in how online marketplaces operate is fundamental and will increasingly be translated into business value. To this extent, future regulations, along with voluntary actions, are an important step towards securing consumer trust and mitigating business and socioeconomic risks. Building a ‘next generation’ online commercial space will require investments and changes by all actors involved. It is only by making these necessary changes that we will be able to ensure the sustainable growth of e-commerce and the survival of a healthy and competitive online industry.

For more information about the new regulatory requirements, you can contact us at info@tremau.com

Tremau Policy Research Team

Building a safe and compliant digital world

info@tremau.com

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