Consumers’ Perceived Risks in e-Shopping

Nenonen, Sanna Institute of Occupational Safety Engineering / Tampere University of Technology / P.O. Box 541 / FI-33101 Tampere / Finland +358-3-3115 2092 / sanna.nenonen@tut.fi

ABSTRACT

This paper is a literature review focusing on consumer perceived risk in shopping and WWW-based insurance services. Perceived risk affects all purchase decisions and consumer behavior, curbing consumers’ willingness to buy. The use of the Internet is increasing and the Internet is broadening fast as a marketplace. Several studies have shown that consumers perceive higher risks buying online than in traditional ways. Risks in buying services are also assumed to be higher than those in buying products. Some factors affecting consumers’ willingness to buy online are known, for example, their concerns about misuse of credit cards or personal information. However, these factors have not been studied lately, and means are still lacking for reducing perceived risks. Keywords Perceived risk, e-shopping, insurance.

INTRODUCTION

Background of the study E-services are interactive Internet-based services [35], providing companies

with opportunities to offer real time, non-location-specific services [73]. Technology-based services [58] and the significance of e-services [4] are growing all the time, and more and more consumers are exploiting new technologies for shopping on the net instead of at the usual store [58]. Consumers benefit from doing business on the Internet, but they may also perceive high risks in that environment [46].

The concept of risk is widely used in various contexts though not uniformly defined. For technical purposes, risks are usually defined by probability of undesirable consequences and their severity [34]. These risks are assessed objectively based on statistics and mathematical estimates [72]. In contrast, in everyday usage, risk refers to situations whose outcomes are uncertain [39]. These risks are assessed subjectively by intuition [72]. Perceived risk is thus imagined risk, comprising assessments of possibilities of getting into an undesirable situation and concerns about these situations [56]. Perceptions of risk depend greatly on various factors such as the individual’s knowledge and values, and psychological, social, cultural and political makeup [76].

Electronic commerce involves more uncertainty and risks than traditional commerce [21, 69, 80]. When in need of insurance services, consumers rather do their business by personally contacting the representative of a service provider, because the same services on the Internet seem complex and difficult to use [42]. Current web-based insurance services are provided as self-service, which means no assistance is available in using the service [2]. Hence electronic insurance services have to be improved to make consumers feel comfortable doing business on the Internet.

Objectives of the study This article reviews the literature about consumer perceived risk in shopping via

traditional and electronic channels. The objective of the review is to study risk perceptions of e-shopping from the consumer’s viewpoint. Another aim is to survey the uncertainty and risk factors in the electronic insurance business. This review is part of a research project seeking to develop comfortable and user-friendly electronic insurance services for consumers.

RESEARCH METHODS

An extensive literature search was carried out based on seven article databases: Science Direct: Elsevier, Emerald Library, EBSCOhost Academic Search Elite, ISI Web of Science, SpringerLink, Compendex and IEEE Xplore. The search was conducted out using the following key words and their combinations: risk, perception, consumer, service, insurance, Internet, online, e-commerce, and trust. In addition, literature was searched in Finnish University library databases by using both Finnish and English key words. Statistics were compiled from the web pages of Finnish organizations gathering statistical information. Additional literature was gathered from the reference lists of articles. The searches resulted in well over a hundred articles and other literature.

ELECTRONIC SERVICES

Usage of e-services In 1999, almost 20 % of Finnish households had access to the Internet [67]. By

the end of 2004, the number of Internet connections had almost doubled, with about 37 % of Finns having Internet access at home [77]. At the beginning of 2005, 70 % of Finns aged 15-74 had used the Internet, whereas three years earlier the figure had been smaller by eight percent [68]. The number of Internet users has increased in each age group. Proportionally, use has increased most among people older than 50. The most avid computer and Internet users are those aged 15-19, with 98 % of them having used the Internet. The most popular services were e-mail, information searches of products and services (more than 80 % of all Internet users), and electronic banking services (about 70 % of Internet users). [75]

It is common now to buy products and services on the Internet [21]. Yet most Internet users are only browsing and searching for information about products or services they are going to buy from stores [45]. In 2004, less than a third of Finnish Internet users, that is, 20 % of all Finns aged 15-74, had bought from the Internet, whereas 60 % of them had just searched for information. [75] Two years earlier, only every tenth consumer had used the Internet to buy products or services [68]. In 2004, two thirds of the purchases made by Finns on the Internet were products and one third services. Four years earlier, products had figured 20 % more. In 2004, mostly trips, hotel bookings, clothes, and footwear were bought on the Internet by one third of all Internet users. [75]

Electronic insurance services

Electronic insurance service is quite a new concept, and insurance companies have been slower than others to provide electronic services to consumers [1]. The first Internet insurance services were only sites for information, but since the turn of the millennium, insurance companies have been developing their electronic services and are now offering interactive services as well. Yet most such electronic insurance services are self-service operations. [2] Finnish insurance company web pages allow consumers to search for information about insurances, calculate the prices of various

options, and make an insurance contract. Customers can also monitor their insurances and change their coverage. [85]

Electronic insurance services are still infrequently used: 16 % of all Internet shoppers have used electronic finance and insurance services, and less than a tenth have bought insurances, shares, or stocks on the Internet [75], amounting to a few percent of all Finnish consumers aged 15-74. One reason is that insurance services are often seen as requiring personal contact with a competent service provider [42]. Hoffman [36] states that consumers find insurance services complicated and thus more manageable through personal contacts with a salesperson. Some consumers will always prefer traditional insurance business to electronic services [3].

PERCEIVED RISKS IN SHOPPING

Risk perceptions and shopping Since the 1960s, consumers’ risk perceptions have been widely discussed in the

literature and have been shown to affect all purchase decisions and consumer behavior [14, 16, 18, 81]. Perceived risk significantly guides consumer behavior, because people wish to avoid making mistakes [60]. An acceptable risk has only a minimal effect on intended behavior [61], whereas significant risks cause avoidance or abandoning the activity. The magnitude of a perceived risk depends on many factors such as how important the target is and how serious the possible consequences of a mistake [16, 22]. Situations are considered risky if decision-making involves uncertainty [23], discomfort, concern [81], or ambiguity [10]. Risks related to familiar situations are considered minor compared with new situations [71, 74, 80].

In the consumer behavior literature, authors have defined perceived risk in various ways, some solely by undesirable consequences, others by undesirable consequences and situational uncertainty. Usually, the concept is defined as two-dimensional, consisting of uncertainty and seriousness of undesirable consequences [for example, 6, 18, 22, 43, 47, 64]. In the commerce literature, risk is commonly defined as one perceived by a consumer in a purchasing situation [17]. Perceived risks can be consequences of consumers’ insufficient knowledge of their needs, their buying objectives, and the import of these objectives [16, 17]. A consumer may also be uncertain about the many options linked with buying [70]. Many times consumers buy things they are not familiar with, and risks are then almost impossible to assess [60].

Risk dimensions

Risks perceived in buying are in most cases divided into six components: financial, social, physical, psychological, performance, and time risks [for example, 24, 71, 78]. Financial risk means possible monetary loss [for example, 71, 79]. Social risk refers to consumers’ assumptions of other people’s attitudes to their buying behavior. Physical risk means possible harm to the consumer’s health involved in the purchase. Psychological risk means possible customer discomfort about the purchase. Consumers can, for example, become frustrated if what they buy fails to satisfy their expectations. [38] Performance risk has to do with losses incurred if a product malfunctions. Time risk means that consumers may lose time, for example, with subscriptions, returning of faulty products, or reclamations. [71]

Perceived risks in buying services

The literature shows that buying services causes more uncertainty than buying products [33, 61, 65]. Though perceived risk has been researched less in services than products, it is thought to have greater effect in the former [33, 64, 65]. Services must be used before they can be evaluated [62, 66, 90], and because they change and differ, they cause uncertainty about their costs and functionality [65] and complicate the comparison of alternatives [32]. The invisibility of services and the unpredictability

of their outcome further increase consumers’ uncertainty about decisions and risks, affecting their buying behavior [33, 62, 65].

Consumers assess service-related information differently from product information [12] and often want more information when they assess services [20]. Zeithaml [91] shows that consumers need extra information if the services they assess are complex. If this information or their knowledge is inadequate, consumers feel more uncertain and see a higher risk in the services [90].

PERCEIVED RISKS IN E-SHOPPING

Compared to traditional shopping, e-commerce is perceived as more risky by consumers because it is less familiar to them. Furthermore, they cannot personally verify product’s or service's quality before deciding on it nor control the safety of the personal of financial information submitted. And because the e-service provider is often unknown, its behavior or motives may be difficult to predict. [51]

Like in all forms of commerce, perceived risk in e-commerce has several dimensions [78]. Risk dimensions are intertwined and affect simultaneously consumer behavior [92]. The effect of the various risk dimensions on perceived risk depends greatly on the buying situation and the products or services bought [78]. Perceived risk varies also between individual consumers [54]. Even the consumer’s nationality affects risk perceptions [49, 82, 89]. In addition, risk perceptions differ between sexes, since women associate more risks with e-commerce than men [5, 27, 44].

Featherman & Pavlou [24] showed that time, financial, and privacy issues are the most significant concerns hindering the use of e-services. Risk perceptions diminish considerably consumers’ willingness to buy online [37] and compound the possibility of aborting online transactions [15].

Financial risks

Using electronic services may entail financial losses because of the poor quality of products or services and misused credit card information [31, 55]. Consumers see such financial factors as significant risks in using e-services [13, 19], and most e-service users are concerned about the safety of Internet commerce [27, 45] and misuse of credit card information [26]. Consumers’ unwillingness to release their credit card information on the Internet has been quoted as a significant obstacle to the use of e-services [55].

Financial risks are linked with e-commerce in general rather than with buying a single product or service, and perceived risk is associated more with an overall fear of using the credit card on the Internet than with the amount of money spent [11]. Financial risks tend to diminish with increasing Internet use; that is, inexperienced net buyers perceive more financial risks than those who have used e-services longer. Women perceive financial risks more significant than men. [25]

Privacy risks

The Internet is often perceived as violating consumers’ privacy, and consumers do worry about losing their privacy [for example, 9, 52, 55, 86], in fact, to the extent that many hesitate to use or even avoid using e-services because of privacy concerns [37] or lack of trust [48, 87].

Privacy fears reflect the possibility that the information given on the Internet could be used inappropriately, for example, to study consumer’s shopping behavior [41]. Fox [26] shows that almost all consumers perceive it as a risk that an unknown service provider comes into possession of their personal information. Privacy issues and lack of trust are considered a significant obstacle to the use of e-services [51, 63].

Performance risks Product or service performance is a major e-service risk component [13, 19].

According to Forsythe & Shi [25], almost half of the consumers perceive product or service performance as a significant risk. Frequently, consumers avoid buying on the Internet because they find it hard to assess the quality of their purchases. Research shows that consumers see more risk involved in buying expensive and sophisticated than inexpensive and simple products or services [11].

On the Internet, performance risks may be a consequence of poor selection of products or services, and ultimately consumers’ inability to assess the quality of their purchases. After all, quality assessment on the net is limited because touching and testing are ruled out. Inadequate information about product or service quality increases perceived performance risks. [25] An additional uncertainty factor for consumers is that they depend on the information the seller provides [30]. Consumers may also worry about their purchases because they do not receive them immediately upon order [46].

Psychological risks

E-services create psychological risks originating from responsibility. Among other things, price comparison and order validity are of consumer responsibilities. Consumers are also solely responsible for mistakes though they have only limited possibilities to correct them. [50] In the Internet environment, psychological risks may also refer to disappointment and frustration over the misuse of one’s personal information. Fears of such misuse prevent many consumers from giving information to a service provider. [37] Some net-customers are also concerned about possible delays or difficulties in receiving their purchases [45, 52]. One third of consumers perceive various psychological risks as factors discouraging them from using e-services. Especially older and inexperienced Internet users perceive more psychological risks than other consumers. [25]

Time risks

In e-services, time risks may derive from time loss in ordering, in finding right web pages, or in delayed deliveries [45]. Also time consuming installations and problem solving may add to lost time. Bellman et al. [8] state that time factors are significant risks with e-services, because consumers are time-conscious and worry about risks involved in losing time. According to Forsythe & Shi [25], 20 % of consumers perceive time risks as an obstacle to the use of e-services.

Other risks perceived

Other concerns about e-services originate from the supplier, inadequate information, or complex ordering procedures [25]. Mayer et al. [57] showed that customer opinions about the Internet environment, the service provider’s reputation, and e-services quality involve significant risks. To a degree, social risks are also perceived [13].

RISK REDUCTION

Perceiving a risk in buying, consumers try to reduce it by, for example, relying on recommendations [18, 59], searching for additional information about the purchase [7, 16], favoring domestic brands [53], or relying on warranties [16, 22].

In electronic services, risk is minimized, for example, by payment security, money back guarantees, exchange options, cheaper price, reputation of web pages, and the consumer’s experience of the service provider [13]. However, many reports have shown that in e-services trust is the best risk reliever [for example, 28, 60, 82, 84, 88]. It is, in fact, more important in electronic services than in traditional

commerce, because uncertainty tends to increase in the Internet environment [29]. In e-services, buyers and sellers are not in physical contact, and buyers cannot see nor test the product or service they would like to buy [86]. Often they are also inadequately informed about the service provider and the products or services offered. Consequently, trust is essential for consumers to become convinced that they get what they ordered. [40]

DISCUSSION

Consumers’ perceptions of risks in shopping have been studied now for a few decades, and literature shows that consumers perceive risks in most buying situations. Higher risk is perceived in buying services than products. Internet electronic services have changed significantly the way consumers do business. Because earlier consumers bought all their services straight from the service provider, research focused mostly on the consumer-provider interaction. So far little research has been dedicated to consumer perceived risks in electronic services, though the research available (mostly from the late 1990s) maintains that consumers perceive largely the same risks in electronic than other services. The Internet poses higher risks because of its unfamiliarity to many shoppers. Yet Internet services have come a long way in the past few years, making the Internet a well stocked market and more familiar to its customers. Because higher risks are associated with unfamiliar situations, it is arguable if the risks reported in earlier research are comparable with present situations.

Most studies of consumer risk perception in the electronic environment have focused on select services such as travel reservations or bank business. Electronic insurance services have not been studied in terms of consumer perceived risks but rather in terms of consumers’ experiences of Internet services and their suitability for the insurance business. Hence the risk perceptions in studies of other services cannot be directly applied to the insurance business. Research made by Tuorila [83] shows that though consumers use electronic bank services, it does not translate into electronic insurance services. Consequently, more research must be done to discover the factors consumers perceive risky in insurance services in the Internet environment together with ways to reduce these risks. The latter is necessary to make electronic insurance services more user-friendly in future.

CONCLUSIONS

Consumers perceive e-commerce as more risky compared with traditional shopping that curbs considerably consumers’ willingness to buy online. Perceived risk in e-commerce has several dimensions from which the most significant are time, financial, and privacy issues. In electronic services, trust is the most efficient risk reliever. In addition, payment security, cheaper price and exchange options have used to minimize perceived risks. Consumer’s perception of risks in e-services has been studied relatively little. Studies are made only on a few services, but perceptions are not surveyed in electronic insurance business.

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