ANALYSIS ON THE e-commerce SITUATION IN THE REPUBLIC OF MACEDONIA

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ANALYSIS ON

THE e-COMMERCE SITUATION IN

THE REPUBLIC OF MACEDONIA

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GLOSSARY

Given the fact that in the electronic commerce quite a new terminology is used that not always has an appropriate and above all unified translation in Macedonian language, the explanations of key concepts and commonly used terms in this analysis is given below. Terms used in the analysis do not mean that they are the most appropriate.

Internet merchant - natural or legal person who deals with electronic commerce, or through an electronic store offers available online and sell products and services (eg, Amazon.com). In the analysis the term “online trader” is used as well.

Bank - commercial bank that handles multiple operations that are essential to electronic commerce, such as opening and serving the account of the Internet merchant and issuing of payment cards for which it has been licensed from international payment card organizations (eg, UNI Bank).

Payments Processor - a company that provides technical support to banks for payment via the Internet and is the link between bank of the internet merchant and the bank of the consumer (for example, CaSys). In the analysis the terms “payment gateway” and “payment processing center” are used as well.

Payment card - an instrument that allows non-cash payment, including online payment. Usually, payment cards are credit and debit.

International cards organization - a company that offers solutions for non-cash payment at a global level, which creates a network of banks through which credit cards are issued to end users - holders of cards (eg, Master Card).

Consumer - natural or legal person that uses the shopping cart of the online merchant to order and purchase products and services. In the analysis the terms “buyer” and “client” are used as well.

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EXECUTIVE SUMMARY

Findings

The existing legislation is not a problem for establishment and initial operation of an Internet merchant, because it does not imply specific requirements and conditions for this activity. Moreover, certain conditions which an offline store must meet do not imply to online store, such as minimum technical requirements and standards of the premises, certain number of employees and fiscal bills and equipment. The mandatory adoption and publishing of privacy policy, shipping policy and refund policy which guarantee the security of the consumers is imposed by banks and international card organizations.

The procurement of software for e-commerce (shopping cart) is one of the larger initial investments for online merchants, which unofficially costs from 3,000 EUR to 20,000 EUR. Many Internet merchants in Macedonia minimize this amount by customizing existing software or the online merchant itself is a software developer. It is not common for the online merchants to connect their software with the software for financial and material operations of the traders they work with (and often there are no such systems), which may be a problem when transactions will become more frequent. Related problem is the lack of products data in digital form. So far there were no practical problems in establishing interoperability between e-commerce software and the payment gateway. Financial and administrative costs and problems that the potential Internet merchants may have related to the purchase, installation and maintenance of software, as well as with the logistics, payments and marketing are overcome with the concept of Internet shopping mall.

The number of payment cards in circulation in the RoM is around 1.4 million. The e-commerce turnover (buying from Macedonian online merchants) in the first 10 months of this year is around 4.000.000 denars (~65.000 EUR), while the e-commerce turnover when buying from foreign online merchants with payment cards issued in Macedonia is 20 times higher. Whether a card can be used for online payment depends on the bank's policy and whether the bank obtained a license from the international payment card organization. The bank does not open a separate account for the Internet merchant to perform e-commerce, but to allow the trader to conduct e-commerce (to gain revenues through Internet transactions) it requires fulfillment of number of conditions. Most important of all is the bank's assessment whether the potential internet merchant has a serious and professional attitude. A large number of interested traders have given up on opening e-store, after the bank has introduced them with all aspects of e-commerce, which traders themselves had not taken into account in the elaboration of the idea.

Payment processors are technical support to the banks in payment card operations and link to the systems of international card organizations, which network all bank-members in order to realize banks payment card transactions, including payments over the Internet. In RM only CaSys works as payment processor. NLB Tutunska banka has a specific role, i.e. it is not a payment processor, but it is uses the services from First Data, well know international payment processor, with the aim to enable its clients – online merchants – an adapted web based system for online payments. To become payment processor, the system of the payment processor has to be validated by an

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international card organization. RM does not have regulations governing the operation of the payment processors. Five commercial banks use CaSys as a payment processor, while three use the services of foreign payment processors. Payment processors pay great attention to security of transactions, such as 128 bit SSL encryption and 3D secure code, or security standards as required by international card organizations.

The commissions in e-commerce fall on the online merchant, with an average amounted to 3-5% of the value of the transaction. Through the commission that the bank charges the online merchant, the payment processor and the international card organization are paid as well. At the moment, commissions are high and raise the cost of electronic trading, but the increased volume and amount of transactions should contribute to reducing commissions.

Commercial banks in Macedonia have not yet adopted national closing of transactions with payment cards (using the services of a home switching center). Due to that, they are currently subject to various bank commissions and fees of international banks members of payment card networks. The only exception is the recently formed national closing of the payment card transactions between the banks licensed by Visa. If domestic institution becomes a switching center, then it is likely to significantly reduce the commissions in payment card operations nationwide.

The essence of e-commerce is a non-cash payment which is conducted through bank transfer and via the Internet and therefore it is not required for online merchants to be “fiscalized”. The exception to this rule is if the trader allows and the buyer decides to pay in cash on delivery of the products, which is the case with some online merchants in RoM. PRO requires from those online merchants who only accept payment by card over the Internet to get fiscal equipment and issue fiscal bills, which is not in line with the Law on Registration of Cash Payments. The basis for making the payment in e-commerce is the invoice which is issued to the buyer after the payment is made, that is, when receiving the products. Current legislation does not prescribe electronic form of an invoice and only the printed form can be used for accounting and tax purposes. PRO currently has no technical and human capacity to accept and control the electronic invoices, causing the adoption of Law on e-Invoice to be delayed.

With the liberalization of the market for postal services, the number of companies in Macedonia that offer express courier services and delivery of products to the buyer's door have been increased. This allows competition and relatively affordable prices. The deadline for delivery of a product outside Skopje is 24 hours, while for the territory of Skopje is shorter. The cost of delivery ranges from 80-150 denars for delivery in Skopje, while for delivery in other cities in the country the price ranges from 120 to 250 denars. Free delivery, offered by online merchants is rare and is for short period and has promotional character. The increased number of transactions should enable further reductions in prices for delivery.

Customs duty on submission of export declaration has been abolished and will not be a problem to export products ordered from Macedonian Internet traders, i.e. it is not adding cost of the order. The obligation to file an export customs declaration must remain. Central Bank will lift the requirement for individual notification of each foreign currency income generated through Internet sales, which would reduce administrative procedures for local online merchants. World renowned express delivery companies that have branches in Macedonia offer a reliable and quick, although probably more expensive, delivery of products that local online merchants (want to) sell abroad.

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Purchase of products via foreign online shops by Macedonian citizens and companies no longer presents a problem, because the world renowned online stores, which also offer a wide range of attractive products, allow orders from and deliver to the Republic of Macedonia. Those online shops that do not accept orders from persons or cards issued by banks from the Republic of Macedonia do it because of their policy or policies of the payment processor and delivery company. The number of cards issued by Macedonian banks that can be used for online payments is increased. The threshold for exemption from payment of customs duties for products ordered through the Internet (postal parcel) is set too low (45 EUR), while the tariff rate applied for purchase exceeding this amount is high, which is increasing the cost of the internet ordered products, often including products unavailable in the domestic market and that are from great interest of the society (i.e. educational materials).

Recommendations

Under the coordination of MIS, and with the involvement of all stakeholders in e-commerce in RoM, to undertake a comprehensive campaign on raising the awareness among citizens as potential buyers and among the traders as potential Internet merchants that would lead to increased supply side on the Internet market. Banks that issue credit cards with possibility for online payment need to inform their customers: a) on the possibility to use cards for online payment and b) about all the internet stores that operate in Macedonia, especially those who have accounts at that specific bank. All stakeholders, under the coordination of MIS, should be engaged in developing promotional material, which in user-friendly, attractive and effective way will provide basic information and explain the advantages of the e-commerce. The opportunities offered by the media should be used and through a series of articles in certain journals, participation in informative, debate and radio-TV shows to contribute in wider promotion of e-commerce. The campaign should be targeted to the civil and public servants as persons who possess payment cards and stable income. The campaign should not be incidental, but intense and continuous.

Government institutions, public enterprises and state-owned companies should provide the possibility the services they offer to be “sold” and paid online and thus be a good example that the e-commerce they advocate for is realistic and easily achievable in the RoM. The government institutions are not traders, but for the services they provide charge fees. The rise of e-banking, through which clients make payments, among other things, taxes and monthly bills delivered by public utility companies, indicates that the process should end up with an online service and payment of the service. Pilot institution which could first start charging for online services is the Central Registry, because it is one of the most advanced in the use of IT, it is providing the services (documents) quickly, and soon it will begin issuing documents in electronic form.

It is necessary to amend several laws aimed at completing the legal framework for e-commerce, which will allow its greater attractiveness to consumers and facilitate the work of online merchants. In that respect the following should be done: 1) adopt a special law or provisions in existing law to regulate e-invoice, 2) adopt rules for the establishment and operation of payment processors, 3) amend the e-commerce provisions in order to oblige online merchants to adopt and publish privacy

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policy, shipping policy and refund policy, 4) amend the Regulation on on criteria for excluding from paying import duties and the value, quantity and type or purpose of goods that can be excluded from paying import duties in order to increase the amount of duty exemption for postal items (products ordered from abroad via the Internet) and to reduce the tariff rate for products whose amount is above the threshold. Proposed amendments to the Law on e-Commerce in connection with the establishment of contact centers should not have delayed implementation. PRO should align its internal acts and operations with the Law on Registration of Cash Payments, i.e. not to require “fiscalisation” from those online merchants who accept payment exclusively via the Internet. In order to prevent possible damaging consequences for consumers and for the development of e-commerce in RoM, a control mechanism over the work of the online merchants should be applied, i.e. to check whether they meet the requirements contained in the Law on e-Commerce. This will be reached by training the employees in the Ministry of Economy and above all the inspectors from the State Market Inspectorate. Ministry of Economy should maintain a record with basic data on the online merchants, which could be used for statistical and control purposes.

Ministry of Information Society, in cooperation with the Ministry of Finance, Central Bank and the Bank Association, should take the initiative to simplify the operations with payment cards, thus make them cheaper. This could be achieved by establishing a so-called switching center, i.e. national closing of transactions with payment cards issued by domestic banks, which would reduce fees in payment card operations nationwide.

Ministry of Information Society should organize an initial coordination meeting with all e-commerce stakeholders in Macedonia, and establish a system of regular quarterly meetings. At the meetings ongoing issues will be discussed and follow up activities and measures aimed at the development of e-commerce in Macedonia will be agreed. MIS should appoint a person from its employees to work on e-commerce issues.

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INTRODUCTION

Reasons for conducting the analysis

The electronic (internet) commerce on a world level appeared in the mid 90’s of the last century, and in the last decade experienced a real boom. Moreover, the number of transactions and turnover made through the online sales in developed countries are seriously getting close to the one derived from traditional sales. Republic of Macedonia (RoM) lagged behind the developed countries in this respect for several reasons: low internet penetration for many years; unavailability and later on low use of payment cards; lack of choice where to buy, since there were no Macedonian online stores; the huge number of foreign online stores that were not allowing orders made by persons from RM, etc. The development of e-commerce in Macedonia began several years ago, main reasons for that being the following: commercial banks started to issue cards with authorized online payment and to open accounts of the domestic online merchants; the legal framework for e-commerce has been adopted; because of the reduced number of frauds (transactions made with fake or forged cards) the number of foreign online stores that allow sales in RM has increased, etc.

After being established in 2008, the Ministry of Information Society (MIS) undertook activities aimed at identifying possible problems in the area of e-commerce and initiated measures to resolve them. During 2008 and 2009, several coordination meetings were held with the e-commerce stakeholders, where the problems faced primarily by the online merchants, as well as the ways to resolve them were discussed. As a result of these meetings, the Government of RoM, during 2010, adopted conclusions which requested from certain institutions to undertake corrective measures and thus encourage the development of e-commerce in Macedonia.

However, there was a lack of a more comprehensive analysis that will examine all possible aspects of the e-commerce, particularly the work of the online traders, while not ignoring the aspect of the international e-commerce, which includes either the Macedonian online traders or the Macedonian consumers. For this reason, the USAID funded e-Gov Project through its consultant, Darko Janevski from the Consultancy Services ACT! Ltd. Skopje, conducted the analysis on the e-commerce status in RoM. The analysis contains findings on the conditions identified in certain segments, which not always indicate problems, recommendations on how to overcome certain problems and measures that can be taken to influence the development of the e-commerce.

Methodology of work

The analysis of the status of the electronic commerce in RoM was conducted in the period from August to October 2010. During the preparation of the analysis the following tools have been used:

- Meetings with individuals involved in the e-commerce as a whole or in certain aspects - Analysis of materials such as reports, minutes, researches, presentations and publications

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- _{Analysis of relevant international and national regulation for e-commerce} Meetings were held with the following persons and institutions:

- _{State authorities: Snezana Nikolovska (Ministry of Economy), Borche Smilevski (Ministry of} Finance), Dejan Rajchanovski (Customs Administration)

- Commercial banks and payment processors: Igor Davchevski (Tutunska Banka), Sandra Tomanovic (Casys), Biljana Doneva Gechevska (Uni Banka)

- _{Internet traders: Alexander Tasev (TC), Natasha Muratovska (Exquisite) Nicolas Kuemmerle} (Skopski Pazar)

- Companies for Transport and courier service (express delivery): Sasko Nedelkov (DHL) and Globko Logistic

- Software companies: Marta Tomovska (UNET) and Victor Sotirovski (Seavus) - _{Associations: Sonja McGurk (AmCham)}

The following regulations have been considered and taken into account:

- _{National legislation: Law on Electronic Commerce, Law on Electronic Data and Electronic} Signature, Electronic Communications Law, Law on Value Added Tax, Law on Consumer Protection, Trade Law, Law on Payment System, Law on Registration of Cash Payments, Regulation on Exemption from Customs Duties.

- Regulations of the EU: Directive 2000/31/EC on electronic commerce and communication by the European Commission: European Initiative in Electronic Commerce [COM (97) 157] The following materials have been reviewed and considered:

- _{Reports, minutes, letters:}_{Minutes of coordination meetings organized by MIS, as well as} reports and information prepared for the Government by MIS, letters sent by the Central Bank of the Republic of Macedonia and the Union of Chambers of Commerce;

- _{Presentations: presentations of the speakers during the conferences on e-commerce held in} May 2009 and May 2010, organized by the American Chamber of Commerce in Macedonia (AmCham); presentation of research on e-commerce conducted by the advertising agency New Moment New Ideas;

- Publications: "Emerging Macedonia - Magazine of the AmCham" no. 2 of 2009 dedicated to e-commerce and "e-Commerce Law" book of the author Paul Todd published by Cavendish Publishing Ltd. in 2005.

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What is electronic commerce?

Electronic commerce is an expression that contains two words, which are explained below in order to understand what this analysis is focused on.

The first term "electronic" refers to the means (medium) through which the transaction is executed. There are many publications, regulations and views under which this term means any manner (form) of communication that excludes physical contact between participants in the trade, and involves any sort of electronic means. According to this concept e-commerce covers trading through any of the following means (media): telephone, fax, telex, internet, intranet ... In difference to this wide understanding of the term "electronic", the second, narrower understanding and definition of this expression includes only transactions which are conducted online or using the Internet as a medium.

The second term "commerce" refers to the type of action (transaction) that is implemented through certain electronic means. There are different understandings of this term as well. According to one, indirect electronic commerce involves electronic ordering (buying) of goods that have a tangible form, must be physically delivered and that depends on many external factors such as transportation system and postal services. Under the second, direct e-commerce involves electronic ordering, payment and delivery of intangible (immaterial, digital) goods and services, such as computer programs or entertainment content (music, movie, book).

For the purposes of this analysis, the term electronic commerce means transactions that are conducted online, and only through web-based applications (e-mail transactions are excluded), covering goods and services in tangible and intangible form.

Also, this analysis does not cover the operation of Internet Service Providers (ISPs), although a vast portion of the Law on Electronic Commerce relates to their obligations. The reason for this is that the functioning of the ISPs has been previously regulated by the Law on Electronic Communications and is a subject of control by the Agency for Electronic Communications, as well as the fact that ISPs have very small role in the development of e-commerce.

How does e-commerce function?

The essence of e-commerce is based on using the Internet as a means through which the seller and the buyer communicate, make the order and conclude the contract for sale of products and services, as well as to make the payment. In order to process the order, web-based software applications are used, known as shopping cart, while for processing the payment a special payment portal is used. Main means of payment are credit and debit cards issued by various international card organizations and electronic money as an electronic surrogate of the banknotes that are used for payments in electronic form. The transaction itself is realized through specific payment gateways

-payment processors.

Username and password are mostly used to identify the buyer, while more sophisticated forms of identification such as digital certificates are very rarely used. However, for security of the transaction

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it is necessary for the web site of the seller to use system for data encryption (Secure Socket Layer-SSL). Recently, the security of the overall transaction has been additionally increased by using the secure code of the credit cards.

The e-commerce involves few parties:  vendor (online merchant)

 buyer (consumer, client)

 banks (the bank issuer of customer card and bank where the merchant has an account), and  payment processor as an institution that serves the payment portal.

In short, electronic commerce functions as follows:

Registered consumer searches the online store, selects the products or services, the terms of shipping and payment and after clicking appropriate button confirms the order. The web site of the merchant re-directs the order information to the payment processor. Payments processor communicates with the banks as follows: a) the bank that issued the credit card through which payment is made and b) the bank which holds the account of the merchant. Bank that issued the credit card allows or refuses the payment of the order, depending whether the client has the funds on the card. Once the payment is allowed, the money is transferred from the customer's account to the merchant’s account through the payment processor, and the seller delivers the goods or services.

Unlike the number of online merchants that can be huge, the number of payment processors is smaller. In fact, online merchant cannot receive orders and collect payments without concluding a prior agreement with a bank to open an account over which the online transactions will be charged, and on the other hand, the bank must have a contract with a payment processor. Such "back-office" functioning of commerce increases the security of payments as the most sensitive part of e-commerce. Customers feel more secure when they know that internet merchant has been previously reviewed by institutions such as banks and payment processors, where the latter do not allow for the data from the card to be visible and available to the online merchants.

What are the common problems associated with e-commerce in general?

 Buyer uses a card issued by an international card organization (eg, Visa), and the seller accepts payments with cards issued by other international card organizations (eg, American Express and MasterCard). Thus, the buyer is unable to place orders.

 Payment processor does not communicate or does not cooperate with certain international card organizations and banks that issue the cards.

 When a merchant opens a bank account, it does not automatically mean that the account can be used to receive income from transactions conducted via Internet. The reason for this is that Internet transactions are still being treated as riskier than the classic offline sales. Therefore, banks and international card networks reduce risks by evaluating potential Internet merchant

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through established rules and policies, and by charging the fees, but on the other hand they reduce the prospect for huge number of internet merchants.

 Internet merchant does not accept an order, payment or delivery in certain countries. The large number of internet traders which limit the sales only in certain countries is due to large number of fraudulent transactions made from certain countries, using forged credit cards, and also due to the problem of transport and delivery of products to other countries.

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RELEVANT NATIONAL AND INTERNATIONAL REGULATIONS

Law on Electronic Commerce

Macedonia adopted the Law on Electronic Commerce relatively late, in 2007 (Official Gazette of RoM 133/07). This given the fact that RoM commenced to harmonize its national legislation with EU regulations long time ago, and the EU Directive on e-Commerce was adopted back in 2000. Partially, the reason for this delay lies in the fact that there was so called “a negative conflict of competence”, i.e. which ministry is responsible to draft the law. The need to adopt this law was huge, taking into consideration that back then there was already in practice e-commerce on small-scale which included several Macedonian companies, banks, ISPs, and also consumers whose number was increasing on a daily basis. All of them operated in an insufficiently regulated market, which could have easily led to negative consequences to those who participated in e-commerce, as well as to the potential beneficiaries and to the development of e-commerce in Macedonia in general.

The goal set with this law was to introduce a legal framework for development of electronic commerce by providing legal certainty in business relations. Simultaneously, the law was to enable conditions for security and safety in performing information society services (including e-commerce) and consumer protection when using such services. The law regulates the basic principles for providing information society services, particularly related to electronic commerce, the responsibilities of providers of information society, commercial communication and rules related to conclusion of contracts in electronic form.

It was written in the rational for this Law, that it is fully compliant with EU Directive on e-commerce. If a comparative analysis is performed, this would be confirmed. The law does not contain provisions out of those contained in the Directive. This law did not impose an obligation to adopt bylaws that would closely define this matter. This means that e-commerce in Macedonia is regulated by a single legal act which does not mean that other regulations do not determine the work of online merchants.

So far, the Ministry of Economy, as a body that drafted this law and supervises its implementation, has not analyzed the implementation of this law, nor has any other state authority carried out such an analysis. The amendments to this law have been already prepared and it is expected to be adopted by the end of this year. They are few and relate to the precision of certain terms, restrictions on freedom to provide services of information society through judicial proceedings, the manner of judicial protection of consumer rights and establishment of competent bodies to perform the function of contact centers. All amendments are anticipated to be applied upon accession of RoM in the EU.

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Other relevant national regulation

There are other national laws and regulations which exist and are relevant for electronic commerce in Macedonia. These regulations complement or overlap with the provisions of the Law on Electronic Commerce.

Law on Electronic Data and Electronic Signature - provides legal validity and power of evidence of the data in electronic form and electronic signature in payment operations. The existence and application of the provisions of this law provided, from a legal point of view, electronic commerce even before the adoption of the Law on e-Commerce.

Law on Electronic Communications - this law, among other things, sets rules for electronic communication and operation of the ISPs as a segment of electronic commerce. The provisions from the Law on Electronic Commerce which refer to unsolicited commercial communications (spam) and responsibilities of providers of information society services are part of the Law on Electronic Communications.

Law on Trade - sets out the conditions and manner of conducting trade on internal and external market, as well as basis for conducting electronic commerce. This law defines electronic commerce in a very general and insufficient way, leaving other regulations to precise the details.

Law on Consumer Protection - regulates in detail the rights and obligations of the parties - the merchant and the consumer – of the agreement concluded at a distance. This group of agreements includes all agreements where means for distance communication are used (no physical presence of the parties at conclusion of the contract).

LawonPayment Operations - this law, among other things, regulates the manner and conditions for issuing electronic money as a legal tender used for payments over the Internet, including the requirements for establishing the electronic money issuer and the rights and obligations of the issuer and owner of the electronic money.

Penal Code - several articles from this law relate to cyber crime and its various forms of appearance. These crimes can be committed in the framework of electronic commerce, especially by the seller and buyer.

EU Directive on e-commerce

Key provision of the EU in the area of e-commerce is the Directive 2000/31/EC of the European Parliament and of the Council from 8 June 2000 on certain legal aspects of information society services, in particular for electronic commerce, in the Internal Market (hereinafter: Directive on e-commerce). Directive applies and covers all information society services: services between companies (legal entities), services between enterprises and consumers, services provided free to consumers and which are funded through revenues generated from advertising and marketing and services that allow online electronic transactions (especially interactive tele-shopping of goods and

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services and online sales centers). The Directive in particular covers the following online sectors and activities: newspapers, databases, financial services, professional services (agents, doctors, accountants, real estate agents), entertainment services (eg. video on demand), direct marketing and advertising and internet access services. The Directive applies only to service providers established in EU.

The Directive defines the key terms that help facilitate the understanding, transposition and application of the Directive. The following terms are particularly important: service provider, a registered provider of services, recipient of services, information society services, commercial communications, opt-out, opt-in and spam (junk) e-mail.

The European Commission report from 21 November 2003 on the application of the e-commerce contains the first evaluation of the transposition, application and impact of the Directive. Transposition of the Directive was satisfactory and its use had a positive effect. All member states, except the Netherlands, have transposed the Directive into separate law on e-commerce. Some states have decided to supplement the national law on e-commerce with provisions which are not contained in the Directive, such as: responsibilities of the providers of Internet links and search tools on the Internet, the procedures for notification and withdrawal of illegal content, conditions and requirements for registration of service providers, filtering, encryption and retention (storage) of data. Thanks to the Directive, the number of court cases is reduced, and the legal certainty is increased, especially for ISPs.

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HOW DOES e-COMMERCE PRACTICALLY FUNCTION IN MACEDONIA?

Establishment and operation of Internet merchant

What is necessary from a legal point of view to establish and register an Internet merchant? In order to start functioning and perform electronic commerce, internet merchant (legal entity) must first be registered as a company in the Central Registry. Those companies that are already registered in the Central Registry and act as "offline" traders, but want to expand the manner of selling goods and services do not need to re-register or amend the registration. There are two reasons for this: a) almost every newly founded company when getting registered chooses the "general business clause" for business activity which enables performance of all activities that do not require special permission and b) the Law on e-Commerce strictly prohibits special license or permission to be issued to the merchant that wants to perform this activity.

Spatial and staff conditions for the online merchant. Unlike the physical stores that according to regulations must meet certain minimum technical requirements and standards of the space so that the trader can operate through it, the online store does not require physical premises for operating. Also, Internet merchant does not need to have its own offline store, but can operate through online sales only. According to the regulations, it is required that a minimum number of employees in a physical store are registered depending on the working hours of the store (one or two shifts). Theoretically, the online store, can work with only one employee and hence comply with the legal requirements, regardless of the 24 / 7 working time, since most of the processes are automated and do not require people to work in shifts . Internet merchants do not need to issue fiscal bills, if payments are made via the Internet.

Establishing, publishing and implementation of Privacy Policy, Shipping Policy and Refund Policy. Adopting clear privacy policy, shipping policy and refund policy, which is key aspect of electronic commerce, is not an obligation that derives from the Law on e-Commerce, although it is partially contained in the Law on Consumer Protection. However, such an obligation has been requested by the banks directly, i.e. indirectly from international card organizations. Namely, among many requirements that a bank sets as a condition to open an account for online merchant is the requirement for the merchant to establish and implement privacy policy, shipping policy and refund policy. Those arise from the license the bank receives from the international card organizations. These policies actually ensure the security of consumers.

The main formalities and major investment for start-up of an online merchant is the authorization obtained from the bank where the account is opened for doing online trading, as well as procurement of software for shopping cart, which are explained in more details below.

Finding: The existing legislation is not a problem for establishment and initial operation of an Internet merchant, because it does not imply specific requirements and conditions for this activity. Moreover, certain conditions which an offline store must meet do not imply to online store, such as minimum technical requirements and standards of the premises, certain number of

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employees and fiscal bills and equipment. The mandatory adoption and publishing of privacy policy, shipping policy and refund policy which guarantee the security of the consumers is imposed by banks and international card organizations.

Purchase of software for e-commerce

For an e-commerce to exist it is necessary to use Web-based software application which will enable user registration, browsing and ordering of products and connection with the portal where the payment is made. Some online merchants in RoM worked on their own to develop such software, as they had experience in or the company’s main business is software development. Others have decided to make an adjustment of the already existing solutions from reputable manufacturers or open source solutions which required a small investment. Finally, some online merchants contracted software company to develop the software solution. In Macedonia there are several companies that make and sell specialized software for e-commerce. Unofficially, the cost of making such software ranges from 3,000 EUR for a simple solution up to 20,000 EUR for a solution that offers a complete set of functionalities.

The software solution is always tested before its release for official use, which is actually a condition set by the banks and payment processors. Usually online merchants themselves administer the software and update the data. This option for online merchants means more expensive development (initial investment), but do not require additional cost for its administration by the developer. Very often the software developer is engaged again when there is a need to upgrade the software with new functionalities.

Most Internet merchants, especially those that have no offline store, stated that so far they had no need to make connection between the e-commerce software and the software for financial and material operations of the traders they cooperate with, or the traders have no such system. Connection of software systems will become a necessity when transactions will become more frequent, otherwise online merchants will face problems (delay due to lack of accurate data on the products in stock). In this regard, a large initial investment, in terms of effort and time, that part of online merchants faced is digitization of products data, which most traders they cooperate with do not have in electronic form or in a proper electronic format.

All parties involved (online merchants, payment processors and software developers) confirmed that establishing interoperability of software for e-commerce and the payment gateway is not a problem. The payment processor gives a special piece of software to which the shopping cart software should be connected and adjusted. The usual time required for software solution to adjust for data exchange and connection to the payment portal is 3 to 15 days. None of the parties involved have yet faced a practical problem of incompatibility, failure or other problem in communication between these two systems.

Financial and administrative issues related to the buying, installation and maintenance of the software that the potential Internet merchants might face with are overcome with the concept of Internet shopping mall. Company that serves the shopping center cares not only about the software

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aspects, but also offers many other services to merchants who have their own store in the center such as logistics, payments and marketing which creates a complete B2B2C system. This concept does not require any initial investment from the trader, and also the monthly fee is quite low in terms of services and opportunities that are available.

Finding: The procurement of software for e-commerce (shopping cart) is one of the larger initial investments for online merchants, which unofficially costs from 3,000 EUR to 20,000 EUR. Many Internet merchants in Macedonia minimize this amount by customizing existing software or the online merchant itself is a software developer. It is not common for the online merchants to connect their software with the software for financial and material operations of the traders they work with (and often there are no such systems), which may be a problem when transactions will become more frequent. Related problem is the lack of products data in digital form. So far there were no practical problems in establishing interoperability between e-commerce software and the payment gateway. Financial and administrative costs and problems that the potential Internet merchants may have related to the purchase, installation and maintenance of software, as well as with the logistics, payments and marketing are overcome with the concept of Internet shopping mall.

Online payment

Payment is perhaps the key element of commerce, which can most affect the development of e-commerce. The most common method of payment in e-commerce, worldwide and in RM is with payment cards. Increasingly, worldwide, people are using electronic money, but in our country there is no company which deals with issuance of electronic money. Some Internet merchants in the RM provide possibility of cash payment at the delivery of the products (this is allowed by those online traders who have their own delivery service and thus can easily implement this method of payment).

a) Issuing payment cards and creating an online merchant account

Data on the number of issued credit cards and online transactions. In the recent years, the number of issued credit cards considerably increased. This is largely due to a measure that the Government has taken, that every payment from the state budget to certain categories of persons (civil and public servants and pensioners) to be carried out to a payment cards. Currently, the number of cards in circulation is about 1.4 million, while the number of merchants that accept payment cards is over 22,000. 8-10% of the total turnover in the country (buying from Macedonian traders) is realized through payment cards, whereas e-commerce turnover (buying from Macedonian online traders) in the first 10 months in 2010 година is around 4.000.000 denars (~65.000 EUR). On the other hand, the total e-commerce turnover realized through payment cards issued by Macedonian banks (buying from foreign online traders) is 20 times higher! In terms of transactions, around 1% is the share of the online transactions in the total number of transactions realized with payment cards. The increased number of issued payment cards and their increased usage is certainly a necessary pre-condition for the e-commerce development.

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Ability to use payment cards for online payment. Whether a card can be used for payments over the Internet mostly depends on the policy of the bank, and whether the bank has been licensed from the international payment card organization. For this purpose, the bank goes through a complex and long process that is required by the international cards organization to issue a license. Also, the bank after obtaining the license, must follow the rules prescribed by the international payment card network. On the other hand, which payment cards will be accepted by the online merchants depend on the bank that he/she cooperates with, i.e. the licenses the bank has received from international cards networks.

Opening and servicing the transaction account of the online merchant. In order for the bank to allow its client - a trader - to conduct electronic commerce, it requires the fulfillment of certain conditions including the submission of a business plan, which does not need to be written by an expert and go into many details but should contain clear idea of the traders goals, then privacy policy, shipping policy and refund policy. But, the most important thing is whether the potential online merchant was assessed by the bank as a serious and reliable business partner. Making the assessment and evaluation is a requirement that is imposed by the international cards organization which prevents potential frauds. International cards organization can make an audit in the bank and if it concludes that the bank had allowed opening of an account of an online merchant who does not meet or fails to comply with conditions, may revoke the license of the bank.

The bank does not open a separate account for the online merchant to perform e-commerce. If he/she has already been a client of the bank, then it will be allowed to use this account to receive online payments. If he/she is not a client of that bank, then a single transaction account will be opened. For that purpose the client goes through certain procedure that the bank imposes. Bank and the online merchant sign an agreement, in which they precisely regulate the rights and obligations. One of the obligations of that agreement is that the Internet merchant has to keep logs (electronic records) for the completed order as proof mechanism to protect against abuses. The request for keeping database (detailed information about the order and the person who conducted the order) by the online merchant, are also imposed by the international payment card organization, which in this way deal with possible situations of later dispute of transaction.

Experience of the banks is that there are good ideas, but merchants do not always know how to develop them further. Potential online merchants do not know the rules and functioning of e-commerce well enough, that is, they do not take into account all possible aspects in presentation and elaboration of their plan. A large number of potential online traders have given up the idea of opening an e-store, after the bank presented to them the "rules of the game".

Finding: The number of payment cards in circulation in the RoM is around 1.4 million. The e-commerce turnover (buying from Macedonian online merchants) in the first 10 months of this year is around 4.000.000 denars (~65.000 EUR), while the e-commerce turnover when buying from foreign online merchants with payment cards issued in Macedonia is 20 times higher. Whether a card can be used for online payment depends on the bank's policy and whether the bank obtained a license from the international payment card organization. The bank does not open a separate account for the Internet merchant to perform commerce, but to allow the trader to conduct

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commerce (to gain revenues through Internet transactions) it requires fulfillment of number of conditions. Most important of all is the bank's assessment whether the potential internet merchant has a serious and professional attitude. A large number of interested traders have given up on opening e-store, after the bank has introduced them with all aspects of e-commerce, which traders themselves had not taken into account in the elaboration of the idea.

b) Payments Processor

Payment processors (payment gateways) are technical tool and assistance to the banks in payment card operations and link with the systems of international payment card organizations that network all bank-members so that they could realize the bank transactions (through all payment channels, including internet). In Macedonia there is already one company that works as a payment processor – CaSys, which deals with issues relating to non-cash payment since 2002. Its services related to payment cards operations are used by 14 out of 17 Macedonian commercial banks. Only 3 banks do not cooperate with them at all. 5 of the 14 banks they cooperate with use it as a payment processor for online payments.

To become a payment processor, it is necessary to be licensed by the international payment card organization, including for online transactions. The processor goes through the technical validation of the system which is conducted by the international cards organization. CaSys system is validated to serve transactions with payment cards of MasterCard and Visa, which are also the largest international card organizations. Unlike the rules imposed by international card organizations, the competent authorities in Macedonia have not yet adopted regulations that will govern the operation of the payment processors. Although this gap has not yet caused practical problems, still, because of the sensitivity of the area (transactions involving cash and personal data) it is necessary to establish basic rules and conditions for establishment, operation and method of controlling the operation of the payment processors.

Three commercial banks in Macedonia, which issue cards that can be used to pay online, are using services of foreign payment processors. Also, the scope of work of CaSys is limited to transactions involving only national online merchants. This means that payments carried out by Macedonian citizens for orders from online stores from other countries are processed through the payment processors from other countries (for example, cards issued by NLB Tutunska Banka use the services of payment processor Slovakia). Specific role in e-commerce in RoM has NLB Tutunska Banka, which is not a payment processor, but uses the services of the Slovakian branch office of First Data, well known international payment processor, with the aim to allow its clients – domestic online merchants a system (software, web portal linked to the First Data system) for online payment transactions. Using the services of foreign payment processors, i.e. the fact that almost entire domestic payment card operations is in international mode of operations, contributes to increasing the price of the transaction.

Payment processors pay great attention to the security of transactions. Casys and NLB Tutunska banka use 128 bit SSL encryption. Casys applies 3D secure code (MasterCard Secure Code and Verified by Visa), while NLB Tutunska Banka applies this code to its clients online merchants and not

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yet to its clients – credit card holders, though it is expected to be implemented very soon. Also, payment processors must follow security and safety standards of the international card organizations (eg, Payment Card Industry Standard) which are not only a prerequisite for getting a license, but also to keep it. This means that the work of payment processors, especially in the security aspects, is controlled by international card organizations. Finally, in establishing interoperability between the shopping cart software of the online trader and payment software of the payment processor attention has to be paid on preserving the standards for data exchange and data safety and security (online merchant does not have access to the data from the payment card used to make the payment). The security aspects are not well known to potential Internet merchants and consumers.

Finding: Payment processors are technical support to the banks in payment card operations and link to the systems of international card organizations, which network all bank-members in order to realize banks payment card transactions, including payments over the Internet. In RM only CaSys works as payment processor. NLB Tutunska banka has a specific role, i.e. it is not a payment processor, but it is uses the services from First Data, well know international payment processor, with the aim to enable its clients – online merchants – an adapted web based system for online payments. To become payment processor, the system of the payment processor has to be validated by an international card organization. RM does not have regulations governing the operation of the payment processors. Five commercial banks use CaSys as a payment processor, while three use the services of foreign payment processors. Payment processors pay great attention to security of transactions, such as 128 bit SSL encryption and 3D secure code, or security standards as required by international card organizations.

c) Commissions in e-commerce

In principle, all fees in e-commerce related to the use of the payment cards fall on the online merchant, never on the buyer. The bank where the online merchant has an account, charges the merchant a fee which is 3-5% of the value of the transaction. Part of that fee goes to the international card organization, part to the payment processor and part to bank issuer of the card. The amount of the commission is determined by the policies and tariffs of all parties involved, first of all of the international card organization, but also of the payment processor and banks. In this way, through the commissions, the cost of e-commerce increases, at least for online merchants. In RM, usually, the commission charged for transactions made through POS terminal is lower than the commission for online payment. However, CaSys decided in this initial period of development of e-commerce in Macedonia to charge the same amount as the commission for transactions made through POS terminals, which is a kind of stimulus measure. Some banks charge a monthly lump sum which is very low or not charged at all if the trader has higher turnover.

Finding: The commissions in e-commerce fall on the online merchant, with an average amounted to 3-5% of the value of the transaction. Through the commission that the bank charges the online merchant, the payment processor and the international card organization are paid as well. At the

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moment, commissions are high and raise the cost of electronic trading, but the increased volume and amount of transactions should contribute to reducing commissions.

d) Other problems associated with using the cards

Payment card operations in Macedonia and especially withdrawing money from a cash machine (ATM) of a bank that is not the issuer of the card is still expensive, that is, high commissions are charged. The main reason for this is that the banks have not agreed to create a nationwide closing of transactions with payment cards. If they have done so, then they will not be subject to various bank fees and commissions of the international card networks, and will create an opportunity to the national banks to agree on the amount of these commissions. Thus, the probability to reduce the amount of the commissions is great and they would range between 1-3%. Recently, domestic banks licensed to issue Visa payment cards formed national closing of transactions, i.e. these banks have agreed and unified the commissions among themselves.

In that respect, an institution such as CaSys should be a so called switching center, that is, should manage and administer such a system. Thus, the commissions of the payment card operations nationwide will be reduced, especially in withdrawing money from ATM. Estimates are that total savings for the Macedonian citizens annually would be 7-8 million denars.

Finding: Commercial banks in Macedonia have not yet adopted national closing of transactions with payment cards (using the services of a home switching center). Due to that, they are currently subject to various bank commissions and fees of international banks members of payment card networks. The only exception is the recently formed national closing of the payment card transactions between the banks licensed by Visa. If domestic institution becomes a switching center, then it is likely to significantly reduce the commissions in payment card operations nationwide.

e) Fiscalisation, invoice issuance and turnover evidence by the online merchants Until recently there was doubt whether Internet merchants should be “fiscalized” and should possess fiscal equipment to issue receipts. The essence of e-commerce is a non-cash payment which is conducted through bank transfer via the Internet and therefore it is not required for online merchants to be fiscalized. On the other hand, it does not mean that the internet merchant is not a taxpayer. He must be registered in the Public Revenue Office (PRO) as a taxpayer and as a VAT payer (if it has an annual turnover over 1.3 million denars). The exception to the rule that the online merchants do not have to issue fiscal receipt is when the Internet merchant allows and the buyer chooses to make payment in cash on the delivery of the products. Some online merchants in RoM offer and apply an option for a cash payment on delivery of products and then they issue fiscal receipt. Some of them also issue fiscal receipt, even when the payment is made by card over the Internet. As a reason for such practice they state the PRO who imposed such requirement. This requirement is not in accordance to the Law on Registration of Cash Payments, according to which the fiscal receipt should not be issued if payment is made by bank transfer.

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The basis for making the payments in e-commerce and also proof that a transaction is realized is the invoice. That means that every trader must issue an invoice for completed orders and payments. Unlike traditional offline sale where the seller first issues an invoice and then the delivery and the payment is realized, in e-commerce the payment comes first, and even upon delivery of the products the invoice is issued. This inconsistency, online merchants overcome by sending an electronic invoice to the e-mail of the buyer as soon as the order is made.

The problem is that the current legislation does not prescribe the form of electronic invoice and only the printed form can be used for accounting and tax purposes. Although, by the Law on Data in Electronic Form and Electronic Signature, data in electronic form and electronic documents (including invoices) cannot be deemed as not valid proof simply because they are in electronic form, still it is difficult to assume, at this point, that the tax authorities could accept the existence of an invoice in electronic form without the appropriate equivalent in printed form. For this reason all online merchants must submit printed invoices to the buyer, as well as for their own payment record. Establishing a Law on Electronic Invoice or amending the Law on VAT with provisions that will regulate the electronic form of the invoice is postponed. The reason for this is lack of technical and human capacities in the PRO to perform admission and control of invoices in electronic form as a basis for payment and verification of turnover in e-commerce.

Finding: The essence of e-commerce is a non-cash payment which is conducted through bank transfer and via the Internet and therefore it is not required for online merchants to be “fiscalized”. The exception to this rule is if the trader allows and the buyer decides to pay in cash on delivery of the products, which is the case with some online merchants in RoM. PRO requires from those online merchants who only accept payment by card over the Internet to get fiscal equipment and issue fiscal bills, which is not in line with the Law on Registration of Cash Payments. The basis for making the payment in e-commerce is the invoice which is issued to the buyer after the payment is made, that is, when receiving the products. Current legislation does not prescribe electronic form of an invoice and only the printed form can be used for accounting and tax purposes. PRO currently has no technical and human capacity to accept and control the electronic invoices, causing the adoption of Law on e-Invoice to be delayed.

Shipping (delivery)

The speed, reliability and cost of the shipping (delivery) of products ordered through local Internet merchant may be a key segment in the development of e-commerce in Macedonia. Internet merchants typically use the services of specialized companies for courier and transport, because it is a type of trade where fast delivery of the products is expected. The number of companies providing such delivery in Macedonia is about twenty and their work is controlled by a regulatory body - the Postal Agency. This makes an order in this sphere and security for the participants in e-commerce. Some online merchants who have their own network of online stores use their network for transport and distribution, which is a benefit both in terms of speed and reliability of delivery, and in terms of price.

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Many express delivery companies offer delivery service to any spot in the country, with 24-hour delivery time for places outside Skopje. While for the territory of Skopje this time is shorter. The advantage of EMS, service within the Public Enterprise "Macedonian Postal Services", in comparison to other companies that deal with express delivery, is having the most developed network (branches and transport vehicles) in the country. On the other hand, they are less flexible in agreeing with online merchants, who receive treatment as any other client. Smaller companies are prepared to offer lower prices for shipment as well as other favorable conditions. From interviews with online merchants and delivery companies, as well as an overview of several web sites for e-commerce, it can be concluded that the cost of delivery ranges from 80-150 denars for delivery in the territory of City of Skopje, while for delivery in other cities in the country the price ranges from 120 to 250 denars.

Often, traders choose not to charge the customers for the shipping costs, in the initial period. However, this refers to a short period of time. On the other hand, online merchants do not provide free delivery if the buyer is from the same city where the products are sent from and if the value of the purchased products exceeds a certain threshold, which is a regular practice of world renowned online merchants. But given the small volume of transactions, the relatively high bank fees that online merchants pay, and the compensation paid to the delivery company, it is understandable why they have not yet decided to take this step.

Finding: With the liberalization of the market for postal services, the number of companies in Macedonia that offer express courier services and delivery of products to the buyer's door have been increased. This allows competition and relatively affordable prices. The deadline for delivery of a product outside Skopje is 24 hours, while for the territory of Skopje is shorter. The cost of delivery ranges from 80-150 denars for delivery in Skopje, while for delivery in other cities in the country the price ranges from 120 to 250 denars. Free delivery, offered by online merchants is rare and is for short period and has promotional character. The increased number of transactions should enable further reductions in prices for delivery.

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ELECTRONIC TRADE WITH INTERNATIONAL DIMENSION

Delivery of goods abroad ordered from an online merchant from the

Republic of Macedonia

Submission of export customs declaration. Until few years ago, for postal parcels, which include products that persons from abroad are ordering from Macedonian Internet merchant export customs declaration had to be filled and customs duties had to be paid. Payment of customs charges was increasing the order value. Few years ago this duty has been abolished, but the export customs declaration, which is required for any product being exported, must be submitted. This declaration does not have to be completed by a freight forwarder, but the online merchant can do it itself. The form is not complicated to be completed and the procedure does not require time. Some of the renowned foreign express delivery companies offer the option of completing and submitting the declaration within the cost of delivery.

Notification of the foreign currency income to the Central Bank. According to the rules prescribed by the National Bank of the Republic of Macedonia (Central Bank) for each foreign currency income generated by selling and exporting of goods or services abroad it is necessary to fill in and submit an individual notice of the transaction. This request is primarily for statistical purposes, but increases the costs and administrative procedures for the Internet merchant. The problem is that transactions in e-commerce can be numerous and the amounts in each of them pretty low. For that reason, this obligation of reporting any transaction realized by online merchants that already have or want to export abroad is unnecessary burden.

As a result of the conclusion of the 153-th session of the Government of the Republic of Macedonia, the Central Bank sent a letter to the Ministry of Information Society where they state that it would review the Instructions for payment operations in order to meet the demand of online merchants. Namely, the changes should allow summarized reporting of foreign currency income arising on the basis of transactions of a small amount. Thus, it will reduce the administrative procedures and costs faced by online merchants.

Delivery of products from the Internet trader of Republic of Macedonia to a buyer from another state. All large international companies that deal with express delivery such as DHL, FedEx and UPS operate in the country. These companies have a widespread network and communicate shipments from Macedonia to other countries on daily basis. For certain products that the Macedonian Internet merchant would ship through them, they would be charging about 20 EUR per shipment of products whose value is around 50-60 EUR. This price is no different from the price these companies charge when they ship and import products ordered over the Internet from another state by Macedonian consumer.

The problem with using the services of local courier companies for shipments abroad is that the local companies do not have branches abroad or business relations with similar companies in another state, which would have made the delivery of products faster and less expensive.