Page 35 - Electronic Commerce

Chapter 1

banks have been using electronic funds transfers (EFTs, also called wire transfers), which
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are electronic transmissions of account exchange information over private
communications’ networks. Initially used to transfer money between business checking
accounts, the use of EFTs gradually expanded to include payroll deposits to employees’
accounts, automatic payment of auto and mortgage loans, and deposit of government
payments to individuals, such as U.S. Social Security System remittances.
Businesses have also used a form of electronic commerce, known as electronic data
interchange, for many years. Electronic data interchange (EDI) occurs when one business
transmits computer-readable data in a standard format to another business. In the 1960s,
businesses realized that many of the documents they exchanged were related to the
shipping of goods; for example, invoices, purchase orders, and bills of lading. These
documents included the same set of information for almost every transaction. Businesses
also realized that they were spending a good deal of time and money entering this data
into their computers, printing paper forms, and then reentering the data on the other side
of the transaction. Although the purchase order, invoice, and bill of lading for each
transaction contained much of the same information—such as item numbers,
descriptions, prices, and quantities—each paper form usually had its own unique format
for presenting the information. By creating a set of standard formats for transmitting the
information electronically, businesses were able to reduce errors, avoid printing and
mailing costs, and eliminate the need to reenter the data.
Businesses that engage in EDI with each other are called trading partners. The
standard formats used in EDI contain the same information that businesses have always
included in their standard paper invoices, purchase orders, and shipping documents.
Firms such as General Electric, Sears, and Walmart were pioneers in using EDI to
improve their purchasing processes and their relationships with suppliers. The U.S.
government, which is one of the largest EDI trading partners in the world, was also
instrumental in bringing businesses into EDI.
One problem that EDI pioneers faced was the high cost of implementation. Until the
late 1990s, doing EDI meant buying expensive computer hardware and software and then
either establishing direct network connections (using leased telephone lines) to all trading
partners or subscribing to a value-added network. A value-added network (VAN) is an
independent firm that offers connection and transaction-forwarding services to buyers and
sellers engaged in EDI. Before the Internet came into existence as we know it today, VANs
provided the connections between most trading partners and were responsible for ensuring
the security of the data transmitted. EDI continues to be a large portion of B2B electronic
commerce and is growing steadily every year in number of transactions and dollar volume.
You will learn more about EDI, VANs, and new B2B transaction technologies in Chapter 5.

The First Wave of Electronic Commerce, 1995–2003
Many researchers have concluded that the development of electronic commerce is a
major change in the way business is conducted and compare it to other historic changes
in economic organization, such as the Industrial Revolution. A growing number of
business scholars have determined that major changes in economic structures do not
occur as single events, but occur as a series of developments, or waves, that occur over an
extended period of time. For example, the Industrial Revolution is no longer studied as a

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