Posts Tagged ‘cash for clunkers’

Ecommerce could feel effects of current financial market crunch

Thursday, August 27th, 2009

The bail-out of the banking system in the United States was necessary for the economy. However, the Obama administration stopped short of providing the stimulus to restart the struggling economy in the United States. Economics 101 shows that a market economy is driven by supply and demand from the consumer sector. The banking system is not the sector to stimulate the economy.

The banking system lends money to businesses and consumers. Interest rates and availability of funds to businesses and consumers are based upon the Risk-Reward Ratio. The banking system is regulated by the federal government, but conduct business as a private entity. If the economy is still shrinking and people are being laid-off, why should the banks take the risk of lending money? Can borrowers afford the interest rates determined by the Risk-Reward Ratio?

A vast majority of e-commerce is conducted on a credit basis. When a consumer purchases a product online, he or she will use a credit card. Businesses will use a line-of-credit to make purchases. Banks have been raising interest rates to the point it is no longer advantageous for consumers and businesses to tap these lines-of-credit. This will drastically impact e-commerce over the next few years.

Possible solution: Provide an economic stimulus to the consumer. Cash-for-clunkers was just a stimulus for the automobile manufactures. The consumer was lulled into thinking that $4,500 was an incentive to them to trade-in gas guzzling automobiles. In actuality the program was designed to move cars off the automobile sales lots while the consumer acquired an additional +$10,000 in debt.

Give every household $30,000. The grant would be used to purchase goods and pay off debt. Either way the banking system would have received the money, while stimulating spending and productivity in the economy. Yes, there is the risk of inflation. However, the FED Chairman does not understand the principles of economics anyway.

The consumer stimulus would have created jobs and provided a better Risk-Reward Ratio for the banking industry. The better ratio would have kept interest rates low and restarted the economy. E-commerce would also have been stimulated as consumers continued to increase his or her online purchases using credit cards. Instead, e-commerce is going to have to accept other methods of payment.

PayPal is one of the alternatives. I can actually see cash-on-deliver (COD) coming back after a long time absence from the consumer sector. Paper billing will also need to start coming back again. However, now the business needs to consider the Risk-Reward Ratio when setting online prices. Consumers will have to reconcile with decreasing online purchase discounts.

I hope this provides food-for-thought on e-commerce in the current economy. This is not a doom-and-gloom scenario, but it does represent a setback for online transactions. A setback that will be rapidly filled with alternatives to how e-commerce is conducted. Maybe a larger “under ground economy?”

Thoughts and or Comments?

Mike Kniaziewicz, MIS