EFFECT OF ESCROW SERVICE ON THE PURCHASING BEHAVIOR

OF ONLINE BUYERS IN NIGERIA.

Somtochukwu Lady-Diana Okoye

Department of Economics, Faculty of Social Sciences,
Nnamdi Azikiwe University, Awka, Anambra State, Nigeria.
Email: ld.somto@gmail.com Phone: +234 8061388655 Website:
www.somtochukwu.com.ng

Abstract

The issue of trust has been a major hindrance in the free flow of online
transactions between sellers‟ e-commerce stores and potential buyers. Buyers‟
scepticism has been on a steady increase as a result of high rate of online fraud
in Nigeria.

This study examines the effect of escrow service on the purchasing behavior of
online buyers in Nigeria. The result of the study should enable current and
future entrepreneurs and owners of online stores to ascertain if escrow service
should be adopted as an alternative mode of payment for goods online. A
survey of potential and active online buyers revealed that age, trust, and family
and friends defraud experience has no significant contribution to the willingness
of online buyers to pay for goods before it gets delivered, while online
purchasing experience, personal defraud experience, income and escrow service
has a significant contribution to willingness of online buyers to pay for goods
before it gets delivered to them.

Thus, Escrow service could be an alternative payment option that should be

adopted by e-commerce merchants in order to mitigate scepticism among
buyers and thus boosts sales.
Based on the finding of the study, it was also observed that income has an effect
on the willingness of online buyers to pay for goods before it gets delivered.
Hence, the Nigerian government should embark on policies that can increase the
income of individual households in the society which will in turn increase their
willingness to pay online before goods get delivered.

Keywords

Economics, Business Economics, Escrow Service, E-commerce, Nigeria,

Behavioral Economics, Limult Group (www.limult.com), Information and
Communications Technology (ICT).

Introduction

The world is a global village, people say. This village gets smaller and smaller
as new Information and Communication Technology (ICT) innovations spring
up every day to connect people who may never be within reach via ordinary
means. The current trend in the world of business today is electronic commerce
(e-commerce).

E-commerce is defined as the buying and selling of goods and services or the
transmitting of funds or data, over an electronic network, primarily the internet.
These business transactions occur either as business-to-business, business-to-
consumer, consumer-to-consumer or consumer-to-business. (What is e-
commerce (electronic commerce or Ec). (2018). Retrieved from
https://searchcio.techtarget.com.

E-commerce is a business activity carried out electronically on the internet

rather than at a physical location. Through websites, some businesses do
business with other businesses, an e-commerce model known as business-to-
business (B2B). Other businesses sell to consumers online, in a business-to-
consumer (B2C) e-commerce model. The advent of e-commerce has had a lot of
positive effects, some of which are;

Energy Consumption: one positive effect of the emergence of e-commerce is

that it may save energy. Consumers who shop online rather than drive to stores
use less fuel and their cars emit less pollution. Also, because e-commerce
reduces the need for warehouse space to house goods near retail stores, these
warehouses use less energy.

Cost Reduction: e-commerce can reduce costs for consumers when companies
cut down on middlemen involved in distributing goods, warehouse space to
store the goods and personnel expenses. E-commerce also enables companies to
manage their inventory better. To be competitive, businesses are likely to pass
down at least some of these savings to consumers.

The positive effects of e-commerce on the economic growth of a country cannot

be overemphasised. However, a major hitch to free flowing business on internet
platforms is trust issues.

The issue of trust arising as a result of fraud and customer scepticism has been a
major drawback on sales for e-commerce stores in Nigeria. Most customers who
have effective demand and are in dire need of a product ask online merchants
this very question „What guarantee do I have that after making payments, my
product will get delivered to me?‟

Despite the recent difficulties experienced by dot-com companies, according to

the Forrester report in 2018, Business to Consumer (B-to-C) internet commerce
enjoys a steady growth rate (about 19% per year), and it is a familiar mode of
shopping for many consumers. Many scholars like Harrison McKnight and
Vivek Choudhury have argued that trust is a prerequisite for successful
commerce because consumers are hesitant to make purchases unless they trust
the seller. Consumer trust may be even more important in electronic, „cyber‟
transactions than it is in traditional, „real world‟ transactions. This is because of
some of the characteristics of internet cyber transactions — they are blind,
borderless, can occur 24hours a day and 7days a week, and are non-
instantaneous (payment may occur days or weeks before delivery is completed),
can cause consumers to be concerned that the seller won‟t adhere to its
transactional obligations. Consequently, trust in an internet business is focused
much more on transaction processes, in contrast to that of traditional
transactions involving brick-and-mortar stores where trust tends to be focused
on face-to-face personal relationships. Quite possibly, the key to success in
internet business is the establishment of trusted transaction processes where
electronic sellers create an environment in which a prospective consumer can be
relaxed and confident about any prospective transactions.

Since trust is likely to play an essential role in online transactions, it is

important to identify the antecedents of a consumer‟s trust in the context of an
internet transaction.

An escrow is a financial arrangement where a third party holds and regulates

payment of the funds required for two parties (buyer and seller) involved in a
given transaction. It helps make transactions more secure by keeping the
payment in a secure escrow account (that is the company‟s account) which is
only released when all of the terms of an agreement (delivery of the goods and
product quality) are met as overseen by the escrow company.

Using an Escrow Service would cost you an additional nominal amount (5% of
the amount of product you want to purchase from any online store); not using an
Escrow Service can potentially save you some money. However, if you are
defrauded in a transaction, and you did not use an Escrow Service to lock your
cash, you stand to lose the amount you paid to purchase the product. On the
other hand, if you had paid for an Escrow Service, you would be protected
against such fraud.

This research is considered important because we are yet to know the effect the
introduction of an Escrow service as an option of payment will have on the
willingness of online buyers to pay for goods before it get delivered to them.

The findings of this research will help potential and active-commerce investors
in Nigeria such as www.limult.com to decide whether or not to adopt Escrow
services in a bid to increasing customers‟ willingness to pay for goods before
they are delivered to them.

More so, this research may create reliable information to advise young
entrepreneurs to venture into the development of an Escrow Service company in
Nigeria that will perform the service of the trusted third party by either being a
private enterprise or a public private partnership.

Escrow service in Nigeria may help increase the trust or willingness of online
buyers to pay for commodities from online merchants before getting it delivered
to them. This research represents a study on the effects of Escrow services on
the willingness of online customers to pay before getting the goods delivered to
them.

A lot of potential customers in Nigeria are lost in the online market due to the
fear of being duped of their money (fraud). This decrease in available customers
means reduction in sales for online businesses which will bring about
unemployment and hinders the economic growth of the country.

For example, Limult Group; a Nigerian company that has an online store at
www.limult.com and engages in the sale of high quality red clay burnt bricks
for housing construction, yam & cassava flour and rice observed that even with
their high number of sales recorded, they are still concerned about the buyers
who decide to abandon their purchasing decision simply because of scepticism
of paying before the goods get delivered to them.

Limult also says that as a company they are also not able to produce goods for
customers and receive payments afterwards because they need the payment to
carry out production activities. And like every other medium scale enterprise,
they lack the ability to render the service of pay after delivery because this
requires the employment of staffs throughout the country that will be an agent
to carry out the service.

Limult Group as the online company used for part of the study also said that
they are also sceptical about producing and sending goods to customers before
payment is received. They ask the question of „What guarantee do they have
that after committing their funds for production and delivery of the product that
the buyer will make payments afterwards‟. They feel that without commitment
by the buyer, (s) he might become reluctant towards making payments.

Alongside this background, the purpose of this research is to answer the

following research question. “Will Escrow service increase or decrease the
willingness of online buyers to pay for goods before they are delivered to
them?” and “If the age, online purchasing experience, personal defraud
experience, family and friends defraud experience, trust, income of a buyer have
an effect on his/her willingness to pay for goods online before it get delivered?”

More specifically, this research has two objectives;

1. To determine how the introduction of Escrow Service will increase

buyers willingness to pay for goods online before it gets delivered.
2. To determine if age, online purchasing experience, personal defraud
experience, family and friends defraud experience, trust, income of a
 buyer have an effect on his/her willingness to pay for goods online before
it get delivered.

The paper has five parts. The first part is the general introduction which
provides the overall direction and thrust of the study. A considerably large
chunk of the work is in the second part which reviews the existing literature that
is relevant to the Escrow Service and Consumer Purchasing Behavior. Then, the
research methodology is presented and data analysis techniques are discussed.
Next, the findings are discussed and summarized. The paper concludes with a
discussion of theoretical and economic implications and directions for further
research.

Literature Review

In line with Solomon Antony et al in their research work titled „Determinants of

escrow service adoption in consumer-to-consumer online auction market: An

experimental study‟, they explain that the consumer-to-consumer (C2C) online

auction market has undergone rapid growth in the last few years. However,

increasing online fraud has been haunting tens millions of traders in the market.

It was reported that among the 35.6 million Americans who participated in

online auction, more than 40% have encountered Internet fraud problems. In

2003, among the 37,183 complaints reported to Internet FraudWatch, 89% were

related to online auctions. According to Internet Fraud statistics, online auctions

continue to be the most fraud prone Internet service. Traders in C2C online

auction markets have limited information to estimate the risk in transacting with
others. The high risk of online trading fraud coupled with low trust in potential

trading partners significantly affects traders' willingness to trade. Although

governments are refining the legal system to protect online businesses, the

legislation process is falling behind the growth of electronic commerce.

The impersonal nature of online transactions and information asymmetry

remains the main obstacle to building trust between seller and buyer. For an

opportunistic trader, the information asymmetry provides an opportunity to

benefit by defrauding the trading partners. For an honest trader, the

disadvantages arise from the spatial and temporal separation caused by the

communication media. According to Palak Gupta et al, in their study titled ‘E-

Commerce- Study of Privacy, Trust and Security from Consumer‟s

Perspective‟, they observed that Trust is an important issue in e-commerce,

because unlike real world transactions, the retailer is not present in person

during the transaction and the consumer is not dealing with a real person. It is

just dealing with an interface. It is much easier for an entity to set up a website

and an electronic payment processing system than a real world storefront. It is

cheaper, faster and more transparent. It is also much more difficult for

customers to determine the authenticity of websites. This makes it very difficult

to trust that the retailers are who they claim to be. Trust is a mental shortcut that

consumers can use when trying to reduce the uncertainty and complexity of

transactions and relationships in e-commerce markets. Online it is difficult to

connect identities with actual individuals. For consumers, security, privacy,

functionality and user-friendliness issues are considered to be barriers to online

shopping. Moreover, they want their personal data to be private and confidential

so that they are not exposed to any fraud. They also want that the technology

they are using should enable them to freely operate and take sensible control

over it. But they are more flexible and willing towards taking risks with the

people or organisations that they trust. The probable risk is higher in e-

commerce mainly because of unawareness, proximity and negligible physical

interactions. So, in order to see why consumer engage or do not engage in e-

commerce, it is important to study their online trust in e-commerce as a

marketplace. Some factors which are the most important to the consumers for

trusting a website are the security systems, privacy, reputation of the company,

payment methods offered by it, customer service provided, the website design,

control of technology, ease of usage, user friendliness of the website, and the

price offered by the company. When we look at the age wise differentiation of

factors, it is observed that the people in age group of above 35yrs are more

reluctant to use internet as a market place than those who are 18-35yrs.

In summary, the above literature shows that risks in online transactions

critically affect online traders' adoption of trusted third parties' services. The

risk a buyer perceives is a subjective estimate of the objective risk and is

defined as “a decision-maker's assessment of the risk inherent in a situation”. It

is a proxy for the objective risk in a real-world situation, and becomes the basis

for people's decisions and choices. In online markets, perceived risk is the

buyer's perception of the uncertainty and the possible adverse consequences of

buying from a seller. Perceived risk has been found to influence the purchase

intention.

Since the adoption of OES can effectively eliminate the online transaction risk,

rational buyers would weigh the decision of OES adoption using the cost for

OES fee and the risk of suffering some loss. They would make the decision

according to the expected utility.

Methodology

The choice of design according to Asika (1991) is conditioned by the nature of

variables being interrogated by a study. In survey, this research is interested in

observing what is happening to sample subject or variables without any attempt

to manipulate them (Asika, 1991). The kind of survey chosen is the sample

survey which allows a researcher to study only a part (sample) of a given

population and generalize the result to the entire population (Akuezuilo and

Agu, 2003). Therefore the study is designed to obtain data through primary

sources. The basic instruments designed for use during the survey is the

questionnaire. The questionnaire is divided into four sections. Section A

contains information on the age characteristics of the respondents, Section B is

designed to collect information on the factors such as respondents online

purchasing experience, factors that influences buyers willingness to pay online

before goods get delivered and the effect of escrow service on buyers

willingness to pay online before goods get delivered. Section C contains

information on the respondents personal defraud experience and that of his

family and friends. Section D contains information about the income level of

the respondent. It is a combination of dichotomous and closed ended questions.

To determine the sample size, for the purpose of questionnaire distribution; the

Taro Tamani formula was used. The formula is stated thus:

Where:

n= sample size

N= population (300,000)

e = Margin of error (5% or 0.05)

1= Constant

n = 399.4. approx. 399

The population targeted for this study consists of online buyers in Nigeria. In
Nigeria presently, there are about 67,101,452 internet users
(Twoschmucks.com, 2015).

So, for the purpose of this study, it is assumed that for every person who intends

to buy goods online, has either bought from Konga or Jumia before. Hence, the

population of the online buyers in Nigeria is 300,000 online buyers (according

to Konga and Jumia online store users data).

The respondents to the sample questionnaire consist of students, parents,

working class persons, children and anybody who has bought or is willing to

buy products online soon. Each respondent was selected from friends, family

members, people who sell in shops, people the researcher met in the church,

passer-by‟s on the streets, people in their offices and hair salons, etc.

The sampling technique to be adopted for this study is a random sampling

technique because it ensures the law of statistical regularity which states that if

on an average the sample chosen is a random one, the sample will have the

same composition and characteristics as the universe (Kothari et al, 2014).

This is the reason why random sampling was considered as the best technique

of selecting the representing sample.

A mixed method strategy was adopted for this study. Data collected were

analysed using descriptive statistics (frequencies, mean, and simple

percentages), and independent t-test statistics from a linear regression model.

A linear regression model analysis using Ordinary least square regression

procedure was utilized for data analysis. The linear regression model was used

to evaluate the impact of major variables on willingness of online buyers to pay

before goods get delivered to them.

This research will employ econometric method. The specification of

econometric model is always based on economic theory or any available

information relating to the phenomenon being studied (Koutsoyiannis, 1997).

Hence the specification of the model adopted for this investigation is stated as

follows:

In functional form,

WPOBGD = f (A, T, PD, FFD, Y, OPE, ES, ε)

In Regression Analysis, the model can be written as:

WPOBGD = B0 + B1A + B2T + B3pD + B4ffD + B5Y + B6OPE + B7ES + ε

Where;

WPOBGD = Willingness to Pay Online before Goods get Delivered

A = Age

T = Trust

pD = Personal Defraud Experience

 ffD = Family and Friends Defraud Experience

Y = Income

OPE = Online Purchasing Experience

ES = Escrow

ε = Error Associated with WPOBGD

The research variables employed for this study would reflect the factors that

majorly influence the purchasing behavior of online buyers.

They are:

1. Income Level: buyers income affects their willingness to pay for goods

online. It is expected that the higher the income one has, the less sceptical

s(he) is when carrying out businesses regarding payment of money. If one

has a lot of money, he wouldn‟t be too scared to lose a small fraction of it

to fraud. Therefore, it could be said that a buyers income level has a

positive relationship on the willingness to pay online before goods get

delivered.

2. Age (Years): The age of the buyer is referred to be the time of life at

which some level of trust is gained. As humans grow older, they become

more sceptical about things in life and tend to trust less and thus it reduces

their willingness to pay for goods online. Therefore, it could be said that
 the buyers‟ age has a negative relationship on willingness to pay online

before goods get delivered.

3. Personal Defraud Experience: the defraud experience of a buyer have

make him/her less willing to pay for goods online before it get delivered.

4. Family and Friends Defraud Experience:. The family size is considered

as external factors that may influence the purchasing behavior of buyers.

Therefore, it could be said that family and friend defraud experience has a

negative effect on the willingness to pay online before goods get

delivered.

5. Trust: the way a person trusts people determines his/her purchasing

behavior. Therefore, trust is said to have a positive effect of the

willingness of online buyers to pay for products before it gets delivered to

them.

6. Escrow: if a trusted third party service is introduced, this may reduce the

level of scepticism of online buyers and thus improve their willingness to

pay online before goods get delivered to them.

7. Willingness to Pay Online before Goods get delivered (WPOBGD):

this is used to proxy the purchasing behavior of online buyers. This is

determined by a whole lot of factors.

Results & Findings

The qualitative data obtained from the respondents which are active and

potential online buyers were analysed with the use of simple percentages and

ordinary least squares regression estimation method. In analysis of the data,

Willingness to Pay Online before Goods get Delivered (WPOBGD) is used as

the dependent variable, while Age (A), Online Purchasing Experience (OPE),

Escrow Service (ES), Personal Defraud Experience (pD), Family and Friends

Defraud Experience (ffD), Income level (Y), were used as the independent

variables.

H0= online buyers are less willing to pay for goods before they are delivered to

them if an Escrow service is involved.

Alternative hypothesis:

H1= online buyers are more willing to pay for goods before they are delivered to

them if an Escrow service is involved.

H2= online buyers are indifferent about paying for goods before they are

delivered to them even if an Escrow service is involved.

Given the tables below, it has been shown that online buyers are more willing to

pay for goods before it get delivered to them.

  WOBPGD versus all Independent Variables

Model Summary
Adjusted R
Model R R Square Square Std. Error of the Estimate
a
1 .390 .152 .134 .64715
The independent variables contributed 15.2% to the total variations in the dependent variable.

a
ANOVA
Model Sum of Squares df Mean Square F Sig.
b
1 Regression 25.234 7 3.605 8.608 .000
Residual 140.719 336 .419
Total 165.953 343
Generally, the variables contributed significantly (0.000) to the variations in the dependent
variable at p= 0.05.

a
Coefficients
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -.084 .259 -.323 .747
 Age .115 .090 .068 1.277 .202
 Online Purchasing
.247 .080 .177 3.077 .002
experience
 Escrow Service .411 .079 .269 5.219 .000
 Personal Defraud
.186 .092 .113 2.024 .044
Experience
 Family and Friends
-.134 .076 -.096 -1.769 .078
Defraud Experience
 Trust -.065 .060 -.059 -1.088 .278
 Income .064 .033 .103 1.961 .051
Source: Researchers’ (Regression output via IBM SPSS Statistics 23)

The Model becomes:

WOBPGD = -0.323 + 1.277A + 3.077 IE + 5.219ES + 2.024PD -1.769FFD -
1.088T + 1.961Y
Subjecting the collected data to Ordinary Least Squares (OLS), regression

results were derived for the parameters of the model under study using the

Statistical Package for Social Sciences (SPSS) version 23.

In relation to the subject matter of this study, the major findings of this study are
as follows:

i. Age has no significant contribution to WOBPGD. The findings brought

about a t significant value of 0.202. This means that regardless of the age
in which an online buyer falls in, it does not affect the buyers‟
willingness to pay for goods before it gets delivered.
ii. Online Purchasing Experience has a significant contribution to
WOBPGD. The findings brought about a t significant value of 0.002.
This means that if an online buyer has previously bought goods online
before, he is more willing to pay before his goods get delivered to him.
iii. Escrow has a significant contribution to WOBPGD. The findings brought
about a t significant value of 0.00. This means that the introduction of
Escrow service as an alternative payment method will increase the
willingness of online buyers to pay for goods before it get delivered to
them.
iv. Personal Defraud Experience has a significant contribution to WOBPGD.
The findings brought about a t significant value of 0.044. This means
that, if a buyer has been defrauded online before, it reduces his
willingness to pay for goods before it get delivered to him.
v. Family and Friends Defraud Experience has a non- significant
contribution to WOBPGD. The findings brought about a t significant
value of 0.078. This means that the external factor which is family and
friends defraud experience has no effect on the buyers‟ wiliness to pay
for goods online before it get delivered to him. So, even if the buyer has a
 family member or friend that he knows has been defrauded online,
before, it will not affect his decision to pay before goods get delivered.
vi. Trust has a non-significant contribution to WOBPGD. The findings
brought about a t significant value of 0.278. This means that regardless of
if a buyer very easily trusts, easily trusts, hardly trusts or never trust
people, the buyer is usually still sceptical towards making payments
online before his goods get delivered.
vii. Income has a non-significant contribution to WOBPGD. The findings
brought about a t significant value of 0.051. This means that regardless of
how much income a buyer earns or total amount of money the buyer has,
he is usually still sceptical towards making payments online before his
goods get delivered.

By doing this, in a way may help boost the sales of medium scale genuine e-
commerce stores like Limult (www.limult.com); an online merchant that deals
in the production and supply of high quality burnt bricks for housing
construction, who are trustworthy and willing to sell but are also concerned
about the few sceptical customers that abandon their purchasing decision as a
result of the fear of fraud. The government should also take seriously a policy
either by public-private partnership of sponsoring some group of young and
emerging computer scientist in Nigeria that would effectively program and
design a flexible website embedded in a software that would serve the purpose
of the trusted party escrow service transaction in Nigeria which would monitor
and regulate the escrow payment service between online sellers and buyers in
the country.

Conclusion
Escrow service has been acknowledged as a factor that can influence the

purchasing behavior of online buyers in Nigeria. The purpose of this research

study as stated in the introductory chapter was broadly to ascertain the effect of

escrow service on the purchasing behavior of online buyers while examining

whether there is a positive relationship between Escrow service and the

willingness for buyers to pay for goods online before it gets delivered to them

in Nigeria.

The observations obtained from the economic a priori test show that the

introduction of Escrow Service as a trusted third party mode of payment has a

positive effect on the willingness of online buyers to pay for goods before it

get delivered to them.

i. The reason for the unwillingness of buyers to pay online before goods

get delivered to them is directly related to their income level. Thus, the

government should embark on policies that can increase the income of

individual households in the society.

ii. Government should also sponsor young and emerging computer scientist

in Nigeria that would effectively program and design an automated

response website that would serve the purpose of the trusted party

Escrow Service transaction in Nigeria.

The study has expressively shown that the introduction of Escrow service as a

payment option will increase the willingness of online buyers to pay before

goods get delivered to them.

In conclusion, the study found out that, in Nigeria, the introduction of Escrow
service has a significant impact on the willingness of buyers to pay for goods
online before it gets delivered to them. Thus, they will be more willing to pay
online for products of online merchants such as the products of Limult Group
(www.limult.com) which includes Burnt Bricks, Yam & Cassava Flour, Rice,
etc which will increase sales for businesses and in turn fosters the economic
growth of the nation.

The topic of Escrow Service is vast. For other researchers who might be

interested in this topic, the researcher suggests that you embark on examining

if there is a relationship between a buyers gender and his/her willingness to pay

for goods before it get delivered to them as this study doesn‟t include gender as

a variable.

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