Playground Rules Help Lower Risk in International Online Trading

Newswise — Trust and risk are the two biggest challenges for small and medium-sized firms conducting international business online. Neither party trusts the other, and doing business with faraway strangers carries risks.

A range of practical strategies—some of them outgrowths of children's playground behavior—can boost trust and reduce risk. So says Sam Edwards, associate professor of environmental law and public policy at Green Mountain College in Poultney, Vermont. These are outlined in "Doing International Business Online for the Small and Medium Enterprise," a chapter by Edwards in a book edited by Takasi Kubota of Waseda University in Japan and published in December 2007. The book is titled Cyberlaw for Global E-Business: Finance, Payment, and Dispute Resolution, (IGI Global, Hershey, PA).

"International buyers and sellers can do a lot to address the interlinked concerns of trust and risk," says Edwards, an attorney and authority in international negotiation and online dispute resolution involving developing countries. "There are ways for them to protect themselves."

Some methods are similar to playground dealings between children. As he says in his chapter, "Often the simple solutions are the best ones."

Actions for strengthening trust include communication, checking out the other party's reputation, and third-party certification, he says.

Sellers can offer multiple means of online communication, such as text, voice, and video, and should strive to respond quickly to buyer inquiries. Delays can raise red flags. Buyers and sellers can research each other online, and sellers can provide references or customer testimonials. Third-party certification, such as by BBB Online, indicates that sellers meet various business standards.

These, however, cannot provide iron-clad safety, says Edwards. Companies can lie, create false customer feedback, and ignore certification standards. So additional steps should be taken to limit risk.

Simultaneous exchange is one solution. Edwards likens it to the rules children use when trading toys. Kids often maintain a grip on their own items until they also have firm hold of the new items. Then the children release their own items at the same time and take possession of their new treasures.

This works when trading virtual goods such as digital booty collected in online gaming or digital goods in the popular online role-playing world of Second Life. These can be simultaneously swapped on some Web sites.

A better option for tangible goods is escrow, which Edwards compares to children requesting that a trusted older sibling or parent facilitate the transaction. An escrow company receives the buyer's payment and information about the transaction. It doesn't release the payment to the seller until the buyer receives and approves of the goods.

Risks also lie in misunderstanding the terms of a transaction and in not clearly addressing potential problems up front. Each party should make sure they grasp all aspects of the deal, and agree on who pays shipping fees and what will be done if merchandise is lost in transit or arrives damaged, says Edwards.

Payment risks, such as checks or money orders becoming lost, the difficulty of cashing checks and money orders in other countries, and buyers being unprotected if merchandise is damaged or lost, can be circumvented via escrow, online services such as PayPal or Google Checkout, or credit cards.

But when disagreements arise anyway, online services can help. Operations such as PayPal and Google Checkout provide dispute resolution support. And various Web sites offer online dispute negotiation, mediation, and arbitration, Edwards says.

He points out, however, that online dispute resolution carries serious public-policy concerns. That's because it represents a form of private justice outside the sphere of public law.

"There's no good legal foundation to deal with these types of disputes," he says. "International treaties and guidelines are being developed over time based on published cases, but few cases are published because most disputes are decided in private. Many companies may have similar disputes, but they're all handled differently. This is inefficient for society. It would be better to have laws establishing consistent rules for everyone."

"It's very exciting because how often do you get to be in on the ground floor of a new legal area?" he asks. "This field is evolving rapidly, and it is wide open for innovative solutions."

In the meantime, says Green Mountain College's Edwards, buyers and sellers should consider an integrated service such as eBay. This offers a variety of types of buyer/seller communication, customer feedback on sellers, and access to PayPal, and is also associated with SquareTrade, offering third-party certification and online negotiation and mediation.