Study Shows Perceived Risk of Online Credit Purchases Linked to Trust, Familiarity with Intermediaries

BUFFALO, N.Y. -- Despite the high volume of shopping done on the Internet each day, many consumers fail to make online purchases because of continued reluctance to engage in transactions with intermediaries that are not familiar and trusted, according to a study by researchers at the University at Buffalo School of Management.

"The perceived risk of consumers can be reduced considerably if the transaction is guaranteed by a familiar, trusted intermediary," explained H.R. Rao, UB professor of management science and systems and co-author of the study, to be published in Communications of the Association of Computing Machinery (CACM).

"Trustworthy institutions can be banks and other financial institutions, as well as thriving electronic identities like Amazon and eBay."

Prior studies published in CACM showed that less than 10 percent of the 4.5 million Web users in the U.S. had ever bought anything online. Rao and his co-researchers set out to discover why this percentage was so low.

Using a Georgia Institute of Technology Web survey of 4,000 individuals of various age, income and education, they analyzed consumer perceptions of Internet institutions that serve as financial intermediaries for online purchases.

The analysis showed that all financial intermediaries (banks, credit card companies, Internet mall operators, check-clearing companies, known third parties and digital banks) are not perceived as equally trustworthy. Socially recognized and entrenched institutions such as banks and credit card companies were preferred over the others.

The researchers concluded that businesses could reduce the perceived risk of Internet shopping and improve e-commerce sales by contracting with a bank or credit-card company to process or guarantee online sales.

"This represents a significant opportunity for established financial institutions," Rao says. "While some banks, such as Citibank, First USA Bank and UMB Bank, have taken initiatives in this direction, there is a vast market that remains, as yet, untapped."

The researchers also found that consumers tend to trust established electronic entities like Amazon and eBay, which explains why some retailers have partnered with these companies to sell their products over the Web.

Another finding of the study was that Internet shoppers were more willing to risk their credit-card information when presented with a financial incentive, such as prices that are lower than what is available off-line.

"This implies that online merchants need to be cost competitive and aware that consumers vary in their perception of risk over the Internet," Rao cautions.

"While the reputation of an online merchant may remain unchanged, the consumer's perception of loss may change to a perception of gain in the transaction if the economic incentive is sufficient," he adds.

Rao conducted the study with A.F. Salam, assistant professor of information systems and operations management at University of North Carolina at Greensboro, and C. Carl Pegels, UB professor of management science and systems.