Impact of Cyber Fraud and Trust of e-Commerce System on Purchasing Intentions:
Analysing Planned Behaviour in Indonesian Business

Backgroud

Electronic commerce (e-commerce) has increased in popularity and adopted by the business world (Gibbs and Kraemer 2004). Businesses have converted their ways of operations and processing transactions by adopting information technology (Kartiwi and MacGregor 2007). Businesses believe that using e-commerce technology provides advantages as business operations can be undertaken faster, reduce inventory space required as well as minimise advertising and delivery costs (Kartiwi 2006). Therefore, firm could save time and be cost effective (Yu and Wu 2007). As a result, e-commerce systems have positive effects on increasing business operations effectiveness as well as improving financial performance (Kartiwi 2006).

E-commerce, in its wider implementation, is not only using information technology for internal operations but also for external transactions (Kim and Eom 2002). E-commerce for internal operations can utilise a local area network (LAN) or a virtual private network (VPN) as a medium of transmitting transactions. On the other hand, external transactions are commonly conducted through the internet which basically is an open network. Due to its ‘openness’, everyone can access it which opens the medium to fraud (Hawkins, Yen, and Chou 2000). Hence, vendors and customers of businesses face serious fraud threats if their transactions are conducted via the internet without any appropriate security systems.

Fraud on the internet can be carried out by organised or individual actors (Albanese 2005; Levi 2008) which can lead to large losses. The total dollar loss due to internet fraud has increased every year. A report by KPMG (2009) indicates that in Australia, during 2008 fraud incidents in financial sector was approximately 31 percent of total external party values. In addition, a Trojan horse or phishing technique over the internet was popularly employed by perpetrators to steal account holders’ identities. Identity fraud incidents amounted to 21 percent by 2008. Among Asian countries, it is reported that Indonesia and China have the highest fraud incidents, reaching 22 percent in 2008. Therefore, transactions security on the internet is very important in helping to increase customer trust towards e-commerce use.

Statement of the problem

Trust is an important element in any transaction (Pittayachawan, Singh, and Corbitt 2008). Transactions will occur when there is willingness and trust among sellers and buyers. Virtual transactions via e-commerce are not transacted among parties physically (Flavian and Guinaliu 2006). Consequently, there is some potential for fraud to be committed by either party or a third party. Indeed, it is purported that trust plays a significant role in successfully conducting transactions in the virtual space of the internet.

Transactions via e-commerce do not only involve sellers and buyers, but also involve the medium (Lee and Turban 2001). The media through which e-commerce transactions are processed include the internet network for transferring data, websites as transaction interfaces and credit cards for making payments. These media have vulnerabilities since they can be used by perpetrators to undertake fraud. Thus it is purported that transactions via e-commerce using the internet as the medium will occur and increase if buyers have trust of the medium used for processing transactions.

As stated above, the numbers of fraudulent transactions in an e-commerce environment have tended to increase (Baker 1999). Perpetrators commit fraud in a number of ways including identity theft. Buyers realise that transactions in e-commerce are risky and fearful (Hofman, Novak, and Peralta 1999). A previous study indicates that security systems around e-commerce transactions become an important way to protect privacy of information to reduce identity theft (Pittayachawan, Singh, and Corbitt 2008). Accordingly, the concern about cyber fraud influences a buyer’s trust to perform transaction via internet based e-commerce. Thus the problem that this study addresses is how customers’ trust and perceptions of cyber fraud influence their intentions to purchase via internet-based e-commerce.

Motivation

This study is focused on an Indonesia context for the reason that the country is in the early stage of adoption on internet-based e-commerce. According to Internet World Stats (2009) Indonesia has a large population (240 million people in 2009) dispersed across a wide area (1,904,569 sq km) with little access to major retailers. Pandin (2009) reports that hypermarkets are concentrated in Java. Indeed, this indicates that people living outside of Java have limited access to modern stores with a wide range of goods.

Indonesia as an archipelago country needs to develop internet access using satellite links. The percentage of internet users in Indonesia in 2008 represented around 12 percent of the total population. Internet growth was likely impeded by poor quality telecommunication infrastructure.

However, the country is considered to have enormous potential as an online market. Nowadays online stores are spread in some cities, particularly Jakarta, Surabaya, Medan, Bandung, Yogyakarta and Semarang; meantime their consumers come from across Indonesia. Advertisements by those stores are placed on the internet, in newspapers, and on television. Through these media, Indonesian people are motivated and educated to purchase via online. Yet, on the negative side fraud and corruption are still high in this country (KPMG 2009). Such evidences challenge online stores to convince customers that their systems are secure for conducting transactions.

This study is motivated base on the information above to get a clear picture of consumers’ trust of the (internet) medium and cyber fraud perceptions as moderators of the relationship between trust in the seller and buyer intention to purchase using internet-based e-commerce. Furthermore, this research intends to provide recommendations to businesses in conducting transactions in e-commerce environments. In addition, it hopes to provide recommendations to the Government of Indonesia to strengthen legislations for e-commerce and create a national taskforce to protect buyers from cyber fraud.

Personal motivation for conducting this study is that e-commerce is gaining increased popularity in Indonesia but has been little studied. There are few Indonesian professionals that have expertise in the e-commerce field so that it is an opportunity to become an expert to provide research based evidence in the development of this emerging technology. This will help support government policy formulation and implementation for a safe and usable system for e-commerce, which has good prospect for growth in the future.

Research Questions

The main research question of this study is to what extend do trust and the perception of cyber fraud impact on behavioural intentions of customers to transact purchases using internet-based e-commerce?

This question is addressed by answering six sub questions

• Does customers’ trust of a seller have a positive impact on behavioural intention to purchase using internet-based e-commerce?
• Does customers’ perceptions of cyber fraud have a negative moderating impact on seller-buyer relationship in internet-based e-commerce?
• Does customers’ trust of the (internet) medium have a positive moderating impact on seller-buyer relationship in internet-based e-commerce?
• Does customers’ attitudes towards behaviour have a positive impact on behavioral intention to purchase using internet-based e-commerce?
• Does customers’ subjective norm have a positive impact on behavioral intention to purchase using internet-based e-commerce?
• Does customers’ perceived behavioural control have a positive impact on behavioral intention to purchase using internet-based e-commerce?

Research Objectives

This study will investigate two dimensions of trust, namely customers’ trust of the seller and customers’ trust of the (internet) medium used for e-commerce. It also will explore attitudes towards behaviour, subjective norm, and perceived behavioural control as the dimensions of Theory of Planned Behaviour.

Therefore, the research objectives are:

• to examine the impact of customers’ trust of a seller on behavioural intention to purchase using internet-based e-commerce (seller-buyer relationship);
• to examine the moderating effect of customers’ cyber fraud perceptions on seller-buyer relationship in internet-based e-commerce; and
• to examine the moderating effect of customers’ trust to the (internet) medium on seller-buyer relationship in internet-based e-commerce;
• to examine the impact of customers’ attitudes towards behaviour on behavioural intention to purchase using internet-based e-commerce;
• to examine the impact of customers’ subjective norm on behavioural intention to purchase using internet-based e-commerce;
• to examine the impact of customers’ perceived behavioural control on behavioural intention to purchase using internet-based e-commerce.
  

Conceptual Model

This study proposes a conceptual model by adopting Theory of Trust (Mayer, Davis, and Schoorman 1995), Concept of Medium Trust (Lee and Turban 2001), Theory of Planned Behaviour (Ajzen 1991), and Concepts of Fraud Triangle (Albrecht et al. 2009, pp 33)

The model postulates that trust of the (internet) medium and cyber fraud perceptions have moderating effects on relationship between trust of the seller and behavioural intention to purchase by customers using internet-based e-commerce. Both trust of the (internet) medium and cyber fraud perception are treated as moderating constructs to test whether or not they strengthen the relationship between trust of the seller and behavioural intention of customers.

Trust of a seller is determined by benevolence, ability, and integrity (Mayer, Davis, and Schoorman 1995). Trust of the (internet) medium is a construct consisting of technical competence, reliability, and medium understanding (Lee and Turban 2001). Behavioural intention to purchase by consumers using internet-based e-commerce is affected by three factors, namely attitudes towards behaviour, subjective norm, and perceived behavioural control (Ajzen 1991). Indeed, perception plays an important role in behaviour. Therefore, it is proposed that cyber fraud perception will moderate the relationship between trust of the seller and behavioural intention of purchase by customers.

HypothesesTo answer the research questions, hypotheses are tested by this study as follows:

• Trust of a seller has a positive impact on behavioural intention to purchase by customers using internet-based e-commerce.
• Negative perceptions of cyber fraud have a negative moderating impact on seller-buyer relationship in internet-based e-commerce.
• Trust of the medium (internet) has a positive moderating impact on seller-buyer relationship in internet-based e-commerce.
• Attitudes towards behaviour has a positive impact on behavioural intention to purchase by customers using internet-based e-commerce.
• Subjective norm has a positive impact on behavioural intention to purchase by customers using internet-based e-commerce.
• Perceived behavioural control has a positive impact on behavioural intention to purchase by customers using internet-based e-commerce.

Research Methodology

Data Collection
This study will utilise questionnaires as a primary instrument for data collection. Collecting data will be conducted via internet (online surveys). Respondents are invited through an e-mail posted to buyer groups to answer an online questionnaire uploaded on a particular website. Recently, data collection using online methods has become popular. Many researchers have chosen this method, such as Murphy and Blessinger (2003), Hansen et al. (2004), Jensen et al. (2005), and Liao et al. (2007).

The questionnaire is composed of two parts. First part is related to constructs in the conceptual model. The constructs have been adopted from prior studies with adjustments to improve relevancy to the problems and context under study. This section will use seven point Likert-type scales, ranging from one for strongly disagree to seven for strongly agree. The second part will gather basic information such as age, gender, education, occupation, experience using internet and experience conducting transaction using internet-based e-commerce.

Population for this study is all internet users in Indonesia, while the sample frame consists of members of the Indonesia Online Group. Internet World Stats (2009) reports that the number of internet users in Indonesia is approximately 30 millions, whereas Indonesia Online (2010) notes that this Group has 12,090 members, all of whom will be invited to participate.

Data Analysis
This study will employ structural equation modelling (SEM) to analyse data gathered from respondents. This analysis method is chosen because of its capability to reduce bias, particularly in assessing moderator effects. According to Holmbeck (1997) SEM could eliminate biased assessments of the moderator effects.

Construct validity will be examined via Confirmatory Factor Analysis (CFA). Liao et al. (2007) suggest the process of CFA validation can be accomplished in three steps. Firstly, measuring goodness of fit for the empirical data to meet the certain requirements index such as chi-square by meeting degree of freedom is less than 5; AGFI is more than 0.8; GFI, NFI, CFI are more than 0.9; and RMSEA is less than 0.10. Secondly, convergent validity, such as an item factor loading is more than 0.7 and T-test should be significant, construct reliability is more than 0.8 and construct AVE is more than 0.5. Finally, a series of X2 difference test will be conducted to examine discriminant validity.

In addition, they suggest that each test should include two separate analyses, namely unconstrained and constrained models. In the first model, all constructs should be correlated freely. On the other hand, in the second model, the covariance of a specific set of two constructs should be set equal to one while other constructs remain correlated freely. If the X2 difference between the two models is significant, two constructs can be declared as having discriminant validity (Liao, Chen, and Yen 2007).

Prior to data analysis, the data will be coded using SPSS software version 18. This software will be utilised to analyse descriptive statistic. Furthermore, to understand structural analysis by examine some relationships and their effects in the conceptual model, AMOS software version 18 will be employed.

Contributions of the Study

To the Literature
This study intends to provide at least two contributions to the literature. Firstly, it will explain trust of the medium (internet) and cyber fraud perceptions and how they moderate the relationship between trust of the seller and behavioural intention to purchase by consumers using internet-based e-commerce. This model appears to have not been researched by previous studies. Secondly, this study will enrich the literature about customers’ trust towards intentions to purchase using internet-based e-commerce in a developing country context, particularly Indonesia.

To Practice
This study will provide recommendations to businesses about consumer behaviour in term of how customers use and make internet-based e-commerce transactions. Results from this study could be very useful to develop strategies for businesses interested in conducting internet-based e-commerce. Therefore, businesses can increase consumers’ trust, number of customers and their business sustainability.

For the policy makers (governments), findings from this study may be considered to protect consumers’ transactions on the internet by enacting legislation or forming cyber crime task forces. Cyber fraud, in developed countries, has become a serious issue because of its impact and losses caused, particularly to economy and society. These experiences are expected to encourage developing countries to do what they can not to commit the mistakes that developed countries have.