Harley Hahn's
Internet Insecurity


Chapter 13...

Protecting Your Money: Shopping and Selling Without Fear

Two True Stories

Kelly was shopping at a second-hand store when she spied an interesting looking plate on sale for $1. The plate had pictures and information commemorating the 125th anniversary (1848-1973) of the founding of the small town of Lodi (population 2,882) in Columbia County, Wisconsin.

Kelly, who is knowledgeable about genealogy, realized that the plate had significant genealogical value. For example, there were several surnames listed, which would be valuable to people who were researching their family history. Kelly likes to buy and sell on the Net, so she bought the plate, took it home, and put it up for sale at an online auction.

The auction ran for a week and, during that time, Kelly publicized the sale. First, she found as many email addresses as she could for businesses in the Lodi area and sent them a short note. In the note, she described the commemorative plate and announced that it was for sale at an Internet auction.

Kelly then did a bit of research and found six genealogy mailing lists to which she thought it would be appropriate to send her notice. Five of the lists were devoted to surnames that were listed on the plate; the other list was for Columbia County, Wisconsin. She then joined the mailing lists and asked each of the list coordinators if it would be all right to send her ad to the entire list. Once she received permission, Kelly emailed the ad to all six lists.

Kelly's advertising paid off. Several people started to bid on the plate and, eventually, it sold for $56. Interestingly enough, the fellow who bought the plate had never participated in an online auction. He had to learn how to do it just to bid on this particular item.

"I've been buying and selling things most of my adult life," said Kelly. "In this case, I was so happy to find the perfect home for an obscure piece of merchandise. Without the Net, there would have been no way for me to find a buyer for this item, let alone someone who was happy to pay $56 for a plate that cost me $1."

Lydia's situation was different: she, her brother and her sister were preparing to buy a car for her parents, and she wanted the best price she could get without having to haggle with a lot of salesmen. To start, she used the Internet to find information about the type of car she wanted. She decided on the exact model and options, and then (also on the Net) found out the dealers' invoice price.

To start the buying process, Lydia visited the Web site for the car company, and found the email addresses of all the dealers within a 50-mile radius. There were nine such dealers. She then sent a mass mailing to all nine dealers. In the message she told them three things:

  1. "I am serious about buying a car. If the price is right, I will be making the purchase within a week."
  1. "Here is the car I want. I have been informed that the following features are standard for this model. Can you please confirm that this is correct?"
  1. "I am serious about buying a car. If the price is right, I will be making the purchase within a week."

Eventually, by sending email back and forth, Lydia was able to negotiate a great price from a dealer near her parents' home. Each time she got an offer, she would email it to all the other dealers, inviting them to beat the price. When the electronic dust had settled, Lydia was able to buy the car for a base price that was $300 below the dealer's nominal invoice cost.

Obviously, the dealer found some way to make money on the deal. (Car dealers don't sell cars at a loss.) The important point, however, is that the price was a good one, and Lydia was able to negotiate everything without ever having to step into a dealership. "Believe me," she said, "I hate shopping but, in this case, the entire process was fast and easy. I could not be this hard-nosed in person, but on the Internet, it was quite simple to be direct and ruthless."

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How the Net Affects Buying and Selling

The stories of Kelly and Lydia show how the Internet changes the process of buying and selling. As you can see, the Net acts as a conduit of information and, by doing so, it affects commerce in four different, but related, ways.

First, the Web enables you to browse a large variety of sites and look at many different items quickly. For example, if you are looking for a particular type of shoe, it is much faster to look at a number of shoe-related Web sites than it is to drive all over town from one store to another. Moreover, for many types of items, you are likely to find a larger variety on the Net than in a store.

Second, the Internet allows you to search for specific items, ones that might be impossible to find at a regular store, for example, the 1969 version of the Truly Scrumptious doll from Chitty Chitty Bang Bang, or a rare printing of an old Freddy the Pig book.

Third, if it is necessary for you to negotiate a transaction with another person, you can discuss the details via email. You will find that using email for such discussions will often make buying and selling easier than negotiating in person. In the previous section, for instance, I described how Lydia used email to negotiate a price for a new car. This saved her from having to visit various car dealerships in person. It also enabled her to be tougher and more assertive than she would have been in person.

Finally, the Net makes it easy for you to pay for a purchase, either by credit card or by using an online payment service (which we will discuss later in the chapter).

By facilitating the buying and selling process in these ways, the Internet has had a significant effect on the world of commerce. Store owners, for example, are able to expand their reach by using the Web, and entrepreneurs are able to start new, entirely Web-based businesses. Large companies use their Web sites in the same way as they use mail-order catalogs. However, a Web site can offer more flexibility and efficiency than an actual catalog, which must be printed, mailed and delivered.

The Net makes it possible for deals to take place that would otherwise never happen. For example, Kelly, whom I mentioned in the previous section, is interested in certain photos of Native Americans. While browsing on the Net one day, she once found a collection of postcards that showed people from one of the tribes in which she is interested. Without the Net, it would have taken her years to accumulate the same photos one at a time. Instead, she was able to buy the entire collection at a reasonable price.

There are many stories like this. Every day, many people around the world use the Net to sell items, often one-of-a-kind items, that would otherwise never even be put up for sale. This is especially true on the online auction sites, which we will discuss later in the chapter.

As a result, the Net affects prices in two important ways. First, some types of items are rare in part of the world but common in another area. The Internet tends to smooth out the marketplace for such merchandise, increasing the price of items that would otherwise sit on a shelf for months.

Similarly, when the price of an item is artificially high, due to a scarcity in a particular part of the world, the Net can even out the prices. For example, I have a friend who, several years ago, paid $50 to buy a particular type of frying pan in her local area. Today, the exact same pan sells on the Net for $15.

Because the Net makes markets efficient and payments quick and easy, it acts to increase the flow of money in the economy. As I explained in Chapter 12, when more transactions take place, the "velocity" of money increases, which, indirectly, expands the economy by raising the GDP (Gross Domestic Product). In terms of the entire global economy, the amount of money that changes hands on the Net is still small. However, it is not hard to see that, one day, the Internet is going to have a significant effect on the GDP of the world.

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What Is It Like to Buy Something on the Net?

There are two common ways to buy something on the Internet. You can buy something at a Web site for a fixed price, or you can bid on an item at an online auction. (We'll discuss auctions in detail later in the chapter.)

Using the Web to buy something is straightforward and, even if you have never done it before, you'll catch on quickly. In many ways, buying on the Web is a lot like buying over the phone. The biggest difference is that, instead of talking to a person, you place your order by filling out a form on a Web site. The form is then processed by a program that runs on the Web server.

On the Web, the details may vary a bit from site to site, but the general procedures follow the same pattern:

  1. Choose what you want.
  2. Give your name, address and credit card number.
  3. Wait for the item to be shipped to you.

As you shop, you choose one item after another. To keep track of your choices, the Web server maintains a list called a SHOPPING BASKET or SHOPPING CART. You can look at this list and make changes at any time. Once you have finished making your selections, you click on a button to go to a special CHECKOUT Web page, where you arrange to pay for whatever is in your shopping basket.

Interestingly enough, in many cases, your shopping basket does not reside on the remote Web server. The list is actually stored on your computer in the form of cookies. (A cookie is information that a Web server stores in a special folder on your computer. See Chapter 4.) For this reason, if you choose to block all cookies, you may have trouble buying from certain Web sites.

To make the checkout process simpler, some Web sites allow you (or even require you) to REGISTER, by specifying various information, which the company retains in its database. Each time you visit the Web site, you log in by specifying your user name and password, and the Web server retrieves your data.

Quick diversion: The need for shopping baskets is the most common example that Microsoft and other companies give for why a cookie system is necessary. The example, of course, is real. You do need cookies — or something like them — in order to enable a Web server to store a list of shopping choices on your computer. However, if you take the trouble to look at all the cookies that such Web servers actually put on your computer, you will see that they are far more than necessary.

The extra cookies are put there to track your movements and target you for as much marketing as possible. The plain truth is, although shopping baskets are necessary, they are often used as a convenient excuse to deflect criticism of how often companies use cookies to invade your privacy. For a more detailed discussion of these issues, see Chapter 4.

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How to Protect Your Privacy
When You Buy Online

Companies require you to register on their Web sites for two reasons. First, once you register, it is easier for you to make purchases, because you don't have to type in the same information each time (name, address, credit card number, and so on). Second — and this is far more important — companies want you to register because they can use the information to make money by invading your privacy.

This is not a new idea. Whenever you order something over the phone, the person taking your order will put the information in the company's database. The company will then send you more catalogs, sell your name and address to mailing lists, sell your phone number to telemarketers, and so on.

What I want you to appreciate is that the exact same type of thing is done whenever you buy something on the Web. For example, many companies will track what you do on their Web sites, and then use automated tools to analyze your patterns. They will put this data together, along with the information you provided when you registered, and use it to target you more effectively. In addition, they will sell this information, as well as the data describing your purchases and activities, to other companies.

Privacy policies are bogus; don't even waste your time reading them.

Many Web sites have a privacy policy that explains what they plan to do with the information they gather about you. Privacy policies, however, are bogus; don't even waste your time reading them. As I discussed in Chapter 7, such policies are not enforceable, and — no matter how much a company may deny it — they can and will change the policy whenever they want and, when they do, there is nothing you can do about it. (See Chapter 7 for more details.)

If you care about your privacy, the following guidelines will help you:

1. Don't register on a Web site unless it is the only way you can get what you want.

2. When you do register, specify as little information as possible, especially personal information.

Many Web sites are designed to force you to reveal personal information and preferences in order to register. In such cases, it is perfectly acceptable to lie. For example, you can lie about your income, your hobbies, and your preferences. You can also make up a fake phone number, fax number, and so on.

3. Don't ever use your permanent email address to register on a Web site.

If you use your permanent address to register at Web sites, you will end up receiving so much spam that you will need to change your address. Either make up a fake address or, if the registration process requires a real address, use a disposable one. (See Chapter 8 for a discussion of disposable email addresses.)

4. When you register, look for a way to specify that you do not want to receive spam.

Some companies will allow you to opt out of junk mail. However, they may design the registration page so that, by default, you are giving them permission to send you spam. It is up to you to read carefully and find the places where you can express your preferences. You can then make sure that everything is set the way you want it. For example, you may have to turn off various check boxes that are turned on by default.

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Why It Is Okay to Specify Fake Information

As a general rule, it is bad to be dishonest. Normally, if you allow yourself to tell lies — even small lies for the best of reasons — you open the door to a lot of trouble. However, when it comes to registering on a Web site, the normal rules do not hold. Here is why.

Many companies design their Web sites to force you to divulge information that is none of their business. They do so, not to provide you with better service, but to make as much money as possible from your personal data. Moreover, as we have discussed, no matter what promises a company may make, you cannot count on them to keep your information confidential.

Consider a similar situation at a regular store. Some retail chains have a policy that requires their salespeople to ask each customer for his or her name, address, and phone number every time a sale is made. If you agree to furnish this information, the salesperson will type it into a computer system connected to a company-wide database. The company will then send you junk mail and, possibly, sell the information to other companies. Of course, you can always refuse to give out any personal information.

When you fill out a registration form on a Web site, however, you don't have that option. Many Web sites are deliberately designed to reject your data if you omit certain information, such as an email address or home phone number. In such cases, it is fine for you to lie when you fill out the registration form. Indeed, if you do not want to give the company your real address or phone number, you have no alternative but to make up fake ones.

At times like this, it is certainly convenient to lie, but is it morally acceptable? To put this question in perspective, let me remind you of our discussion in Chapter 2, in which I explained that companies, by their nature, will always put their own interests ahead of the needs of individuals (including their own employees).

In Chapter 6, I showed you why, when it comes to furthering their own interests, companies have much more power than do individuals. Thus, if you care about your privacy, it is up to you to look after yourself. The companies you deal with are certainly not going to care. What's more, they will often do whatever they can to make it as difficult and inconvenient as possible for you to put your interest above theirs.

Here is an example to show you what I mean. The following notice is from the Web site of C2IT, an Internet payment service operated by the Citibank company. (We will talk about such services later in the chapter.) I took this information from the C2IT registration page. It appears just below the form in which Citibank asks you to specify your name, email address, postal address, phone number, date of birth and social security number.

Marketing Offers:
 
c2it may send you marketing offers by e-mail. If you
do not want to receive such marketing offers, please
write to c2it, P.O. Box 6274, Sioux Falls, SD 57117
and include your name, address, social security
number and tell us you don't want offers by e-mail.

As this example shows, when a company asks for information from you, they are concerned only with their own interests. Citibank is not unique. No company will ever care about you as an individual or about your privacy. On the Net, you are on your own, and you must look out for your own interests. That is why, when you fill out a registration form on a Web site, it is morally acceptable to enter fake information to protect your privacy.

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Is It Safe to Buy Online?

Just about anything that can be sold is available somewhere on the Net. You can buy all types of consumer goods, such as clothing, books, CDs, computers and cameras, as well as more intangible items such as airline tickets, computer software and club memberships.

Regardless of what you buy, there needs to be a way for you to pay for it. Most methods of payment on the Net require you to specify some type of financial information: your name, your address, and the number of a credit card, debit card, or bank account. Since you want to keep such information private, it makes sense to ask the question, "Is it safe to buy something on the Net?" After all, if a malevolent person were to find out your credit card number, he could cause you a lot of problems.

In general, it is safe to buy online, so don't worry about it. Although there are risks, most of them come from fraud and poor customer service, and if you take certain precautions — which I will talk about in a moment — you will be okay. First, however, I want to give you a categorical answer to one of the most common questions people have when they start to buy over the Net: "Do I need to worry that someone might intercept my credit card number as it is sent from my computer to a Web site?"

Although it is possible for someone to tap into your Internet connection, the chances of this happening are remote, so don't worry about it. (Later in the chapter, I'll tell you what you should worry about.)

In Chapter 1, I explained that when information is sent over the Internet, the information is repackaged as data packets, which are sent from one computer to another. When the packets arrive at the destination, they are reassembled into the original information. Thus, if a thief wanted to steal your credit card number, he would have to intercept the packets going in and out of your computer, assemble them properly, and recreate the original data. He would then have to determine that you were sending a credit card number to a remote Web site, and extract the number, the expiration date, and your name. If he somehow managed to do all of this, he could, in principle, buy something using your credit card.

Such a scenario is theoretically possible. However, as I mentioned, the risk of it happening to you is so low that you don't need to worry about it. It takes a lot of effort, knowledge and equipment to steal individual credit card numbers as they travel across the Net. Credit card thieves have much easier ways to get such information. For example, they can bribe a waiter or a salesclerk, steal a purse, or look for discarded credit card slips in the trash container behind a store.

If you are scared to use your credit card on the Net, it is most likely because you are not used to the idea, so think about it this way. You have probably, at one time or another, ordered merchandise over the telephone. During the conversation, you would have had to tell the salesperson your credit card number. In theory, someone could tap the phone line, record the conversation, and listen to it carefully to find out your number. Although this is possible, it is so unlikely that you don't spend time worrying about it. Once you get used to buying online, you won't worry about that either.

Most Web sites that sell merchandise use a facility called a SECURE SERVER, a system in which your browser cooperates with a remote Web server to encrypt the data that goes in and out of your computer. Here is how it works.

Say you are buying something from a Web site. You have just filled out a form with your name, a credit card number, the expiration date of the credit card, and your address. When you click the button to transmit the form to the remote server, your browser will encrypt the data before it is sent out. At the other end, the Web server decrypts the data and recreates the original information. If a thief were to intercept the data packets, it wouldn't do him any good, because the information inside the packets would look like gibberish and he would have no way to decrypt it.

How do you tell if you are visiting a Web site that uses a secure server system? Look at the bottom of your browser window. If you see a small picture of a locked padlock, it means that all the information sent between your browser and the server is encrypted.

Actually, the whole thing doesn't matter because, realistically, no one is going to intercept your data. Like many other overly complex systems, the idea of secure servers was developed to solve a psychological problem, not a technical one.

In 1996, when the Web was just starting to become popular, various companies were eager to use the Net to make money. However, at the time, the technology was still new to the general public, and many people were reluctant to send credit card information over their Internet connection.

The companies that had the most to gain were the ones that sold the software and hardware necessary for online commerce: the browser companies (Microsoft and Netscape), the software companies, and the communication companies. Working together with the credit card organizations, these companies created the secure server system and spent a lot of money publicizing it. Their goal was to convince people that now that the Internet was secure, all Joe and Jane Consumer had to do was look for the tiny padlock at the bottom of their browser window and then spend, spend, spend.

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Will a Hacker Get Your Credit Card Number?

In Chapter 11, I talked about hackers, people who devote a great deal of time to nerd-like activities. I explained that, although most hackers are socially useful people (for example, Bill Gates), a relatively small number of them are troublemakers.

From time to time, you will read or hear a news story about how a hacker has broken into a computer system and caused trouble. When you hear such stories, it is only natural to wonder whether or not your financial information is safe on a remote Web server. After all, if a hacker breaks into a server where your credit card number is stored, might he not be able to get your number and use it to make fraudulent purchases?

The possibility is a real one. Hackers do break into computers and they do steal credit card numbers. For example, in March 2001, Amazon.com admitted that hackers had broken into a number of computers at their Bibliofind subsidiary. It took Amazon four months to discover and fix the breach, by which time the hackers had accessed a massive amount of customer data, including credit card information.

Although such activities exist and are becoming more common, relatively few people actually have had their credit card information stolen on the Net and then used for purchases. Most companies, especially the larger ones, go to a lot of trouble to ensure that their computer systems are secure. If you think about it, you will realize that a lot of companies already have your credit card information in their computers, and you don't stay up at night worrying about it. Although it is possible that a hacker might break into a computer somewhere, steal your credit card number, and then use it to buy something, the chances are remote, so don't worry about it. Keeping customer data safe is something that falls under the heading of things-that-someone-else-has-to-worry-about.

This doesn't mean to say that I don't want you to worry when you buy stuff on the Net. I do. Worry is good for you (if you do it right).

I just want to make sure that you worry about the problems that are most likely to hurt you: the ones that you can prevent with proper precautions. What I don't want is for you to be scared silly worrying about problems that are beyond your control and will probably never affect you anyway.

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What You Really Need to Worry About

Most of the time, you can buy online with no problems at all. However, there are two pitfalls that can cause you trouble: fraud and bad customer service. In the following sections, we'll talk about these problems and how to avoid them.

There are a huge number of people buying and selling on the Net, so it's no surprise that there is a significant amount of fraud. Commerce and fraud seem to go together like cats and tuna, and as the amount of buying and selling on the Net increases, so does the fraud.

Internet fraud has become such a big problem that, in May 2000, two United States law enforcement agencies established the Internet Fraud Complaint Center (IFCC). (The two agencies were the Federal Bureau of Investigation [FBI], and the lesser-known National White Collar Crime Center [NW3C].)

According to statistics gathered by the IFCC, the most important types of fraud on the Net are:

Fraud associated with online auctions (65%): [We'll talk about this problem later in the chapter.]

Non-delivered merchandise (22%): You pay for something, but you never receive it.

Credit card fraud (5%): You give someone your credit card information, and they use it to bill you for spurious charges.

Here is the address of the IFCC, if you want more information. In particular, they have a form you can fill out if you have been defrauded. They won't be able to help you directly, but they may be able to put you in touch with the appropriate authorities.

Internet Fraud Complaint Center

http://www.ifccfbi.gov/

The IFCC does not police the Internet (no one does). Their job is to gather statistics and help the FBI track down criminals. It is up to you to make sure you don't lose your money in the first place. If you have been cheated, you are on your own. No one will be able to get your money back: not the IFCC, not the Better Business Bureau, not your local police.

Aside from outright fraud, you need to be careful for another reason: bad customer service. Although most companies are honest, many of them are not able — or not willing — to give you, the customer, the service you deserve. Every company is happy to place your order and take your money, but some of them are not as cooperative when it comes to helping you afterwards. The main reason is that companies tend to keep their workforce to a minimum in order to hold down costs, so, when you have a problem, there are very few people to help you.

This phenomenon is not new. If you are old enough, you will remember a time in which stores were filled with salespeople who understood their merchandise, and who were eager to help you find what you needed. Now, you are on your own. Large stores have been transformed into self-serve warehouses, where a relatively small number of employees spend their time maintaining the store, stocking the shelves, and running the computerized cash registers. In such an environment, there is very little customer service. Even when you do find someone to help you, it is often the case that he or she will know very little about the products in the store.

The same thing happens over the telephone. Each time you call a company for help, you are forced to maneuver through a phone menu. If you insist on speaking to a real person, you will be put on hold and, as you are waiting, you will hear a message:

"All of our customer service associates are busy helping other customers. Because of the unexpectedly high demand, it may take a few minutes for us to answer your call. However, your business is important to us, so please wait and your call will be answered in the order it was received by the first available associate."

A more honest message would be:

"We make money selling to a large number of people. As an individual, you are not really all that important to us. That is why we are never going to spend enough money to answer our phone calls right away: it's just not worth it. So wait your turn and, eventually, you will get to speak to an underpaid, undertrained phone operator with an attitude problem. In the meantime, we hope you enjoy listening to the snappy music... By the way, don't hang up, or you'll have to start all over again."

Companies operate like this for several reasons. First, labor costs, including employee benefits, are expensive, and it is unrealistic in today's economic environment to expect a company to spend enough money to handle every customer's needs promptly.

Second, as a company grows larger and larger, individual customers become less and less important. Economically, it makes sense for a company to spend a small amount of money on advertising to create the illusion of personalized customer service. It does not, however, make economic sense to spend the exorbitant amount of money it would take to actually provide such service.

Internet-based companies have two other important problems to consider. As I explained in Chapter 1, the normal economies of scale do not apply to Internet companies, because as they grow larger, they become less efficient. This means that, as an Internet company begins to sell more and more, it actually has less and less money to spend on customer service. That is why so many Internet companies want you to use their Web sites, rather than calling the company, when you have a problem. A small Internet company can afford to pay someone to talk to you in person. A large Internet company can't.

The other problem faced by Internet companies is the one I discussed in Chapter 12. Because of the stock market bubble of the late 1990s, Internet companies are under enormous pressure to generate real profits quickly. For this reason, they must concentrate on increasing revenues and cutting costs in any way they can, even if it means trading long-term gains for short-term profit.

When you buy something at a store, you have a measure of protection against fraud and poor customer service. You can examine the item before you buy it, and you know the exact price when you pay for it. Many stores have liberal return polices. If you are dissatisfied with an item, you can take it back and get an instant replacement or a refund. If you need help, you can usually find someone to assist you (if you are willing to look long enough).

On the Internet, this is not the case. When you buy from a Web site, there are no built-in protections. You can't look at the merchandise before you buy it, you can't be sure what has been charged until you see your credit card statement, and there is no one to help you in person. On the Net, you are on your own, and you need to look out for yourself. Here is how to do it.

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6 Ways to Protect Yourself
When You Buy Online

The very best way to protect yourself when you buy online is to take the time, before you buy, to make sure that everything looks okay. There are a lot of sleazy vendors on the Web. Moreover, as I explained in the last section, even legitimate vendors often don't have the resources or the inclination to give you much customer service. To help you protect yourself, here are 6 points to consider when you buy on the Web.

1. Don't choose a vendor just because they offer the cheapest price.

There is an old saying, "If it looks too good to be true, it probably is." Although this saying is good advice for any type of business dealing, it is especially important on the Net. Anyone can create a Web site and put anything they want on it. If you get tricked, there is no one to help you.

As an example, let's say you are looking for a particular camera and you find six or seven Web sites that sell it for $400. You should definitely be suspicious of a site that purports to sell the same camera for $250. In such cases, the explanation will be one of the following:

  • The company is lying about the price.
  • The company will never send the item.
  • The company doesn't really sell the item at that price. When you try to buy it, they will try to switch you to a more expensive item. (This is an old trick called "bait and switch".)
  • The item you see on the Web site is not really what you think it is.
  • The item is an old, discontinued model.
  • The company will charge you extra for parts and accessories that should be included for free.
  • The item is a gray market item. (See #3 below.)

2. Check out the shipping and handling charges.

When you compare costs, be sure to add in all the extra costs, such as shipping and handling. I'll discuss this topic in detail later in the chapter.

3. Confirm that the warranty is valid.

When you buy something that should have a warranty, be sure to check the details. Don't assume anything. Here is why.

Many manufacturers sell certain products in foreign markets for lower prices than they charge for the same products domestically. For example, a particular camera that sells for $800 in the United States might be sold in an overseas country for $500. The manufacturer will set up its distribution network to prevent the foreign-bound merchandise from ending up back in the home country.

From time to time, a distributor will find a way to divert these cheaper items into the home country (in this case, the U.S.), and sell them at a substantial discount. This type of selling is called the GRAY MARKET.

As you can imagine, manufacturers do not like the gray market. Still, they can't always prevent this type of thing from happening, and a lot of gray market merchandise finds its way into the hands of vendors who sell it on the Internet.

In one way, gray market items are a good deal, because you can save a lot of money. However, you have to be careful. If the product was not meant to be sold in your country, the manufacturer will probably not honor the warranty. They may also refuse to give you technical support, rebates and documentation.

So take care. Before you buy anything that looks as if it is a bit too inexpensive, make sure that it comes with the warranty you think you will need.

4. Find out the return policy.

Before you buy anything, find out what happens if you have to return it. Most Internet vendors will allow you to return an item as long as you meet certain conditions:

  • You must return the item within a certain amount of time, usually 30 days.
  • With certain types of merchandise, such as music CDs or computer software, you cannot return an item if you have opened it. (Otherwise, people could just make copies, and then ask for their money back.) However, if the item was defective in some way, most vendors will replace it, even if it has been opened.
  • You must return the item in good condition, with the original packing and documentation.

Reading the return policy before you buy is a good idea, because sending an item back is not always as smooth as you might think. First, unless the product is defective, you will probably have to pay for your own shipping. Second, most companies will only refund the base price, not the shipping and handling charges. Third, you may have to wait several weeks for the refund to be credited to your account. Finally, it is up to you to get the item back to the vendor. If it gets lost along the way, there is nothing they can do to help you.

5. Don't believe everything you read.

There is a lot of misinformation on the Net, especially in areas where vendors can profit from people's misunderstandings. Before you pay for anything, ask yourself, "Does it seem likely that what I am paying for will actually work?"

For example, there is a huge problem on the Net with medical fraud. A great many Web sites make false or unsubstantiated health claims in order to sell medical remedies. You should be especially suspicious about any treatment for cancer, AIDS, arthritis, heart disease, diabetes or multiple sclerosis. You should be equally suspicious of anything that promises to help you lose weight.

To make it easier for you to detect medical fraud, compare the claims you see on a Web site with the following list. If anything matches, you should be careful, as you are probably being scammed. (This list is based on a warning issued by the United States Federal Trade Commission.) Be suspicious when:

  • A Web site promises a fast, efficient cure for many different types of medical conditions.
  • A product is described as a scientific breakthrough or a miraculous cure with a secret ingredient, possibly an ancient remedy.
  • The text of the Web site is written in impressive-sounding medical terminology.

Scam artists often use technical terms to hide the fact that there is no scientific basis for what they are promoting.

  • The Web site claims that the government, the medical profession, the drug companies, and research scientists are conspiring to keep this product from the general public.
  • There are undocumented case histories that claim amazing results.

If you or a loved one is suffering and you see such claims, you are going to want to believe it. It's only human, so be careful.

  • The product is available from only one source.

6. Check your credit card statement carefully.

The best way to make sure that no one puts spurious charges on your credit card is to check your statement carefully. If you do a lot of online shopping, you can use the Web to check your statement. That way, you won't have to wait for it to arrive in the mail.

If you see something wrong on your statement, call your credit card company right away. If a charge is incorrect, the credit card company will put it into "dispute" for free. This means that you don't have to pay until everything is straightened out. Once a charge is put into dispute, call the company that made the mistake and see if you can get them to fix it.

If you live in the United States, here are two important facts you should know:

  • If someone uses your credit card without your permission, you are only liable for up to $50 in unauthorized charges.
  • A merchant is not allowed to charge your credit card until they have shipped the product.

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5 Ways to Evaluate an Online Vendor

If you have never bought anything online, it is important that you take time to investigate before you make your first purchase. Now, I know what you are thinking: "I don't want to spend time checking out every company I buy from. It's too boring and time-consuming. I just want to get online, buy something, and move on."

Okay, I'll compromise. If you see something that costs less than $50, go with your instincts. But if you are thinking about buying a more expensive item — especially a computer or a camera — please listen to me: you need to investigate the company before you spend your money.

Repeat after me:

If I get scammed, no one is going to help me.

Just for fun, say it once more:

If I get scammed, no one is going to help me.

Okay, how do you evaluate a company?

1. Look carefully at the company's Web site.

If the Web site looks sleazy, the company is probably sleazy. Look for:

  • Sloppy Web page design.
  • Broken links.
  • Spelling mistakes (which shows carelessness).
  • Outdated information.

These are all tip-offs that this is a company that you should avoid.

2. Make sure you know the company's address and phone number.

Do not buy from a company that does not have a real address and phone number on their Web site. A post office box is not good enough. There must be a street address.

Some companies go to a great deal of trouble to make sure you can't find them. This is a tip-off. If a company's Web site does not have an address and phone number, cross them off your list, no matter how badly you may want what they are selling.

3. Call the company's phone number.

Before you buy anything expensive, call the company. If you have a choice, call a customer service number, not a sales number.

See how long it takes to get a real person on the phone. When you get someone, ask a few questions and see how cooperative they are. At this point, you don't really care about the answers. Your goal is to determine what type of customer service you will get if you buy the product.

If you are buying a computer or another type of electronic device, call the tech support number and ask a technical question. (If you can't think of a question, ask them to explain how to add more memory to the computer.)

I know that taking the time to call a company sounds like a pain, but if they are going to make you wait for a half hour to talk to a tech support person who doesn't know what he is talking about, isn't it better to find it out before you make a purchase?

4. Check out the company at an online rating service.

An online rating service is a Web site that has information about various online vendors. Here are the addresses of two such services:

These services can be useful, but don't depend on them. First, many companies will not be rated, especially the smaller ones. Second, information is usually slanted in favor of the vendors. If you see negative information about a company, take it as a warning, but if a vendor has a good rating, don't take it as a guarantee. You still need to check things out for yourself.

If you live in the United States, you may have heard of the Better Business Bureau (BBB). Don't waste your time checking with them. Many people believe that the BBB is a consumer-oriented complaint agency. Not true at all. BBB offices are supported by their member companies, not by consumers, and the information they give — even on their Web site — is pretty much useless.

5. Look for a discussion forum in which people discuss online vendors.

There are various Web sites and discussion forums devoted to discussing online vendors. (You will find some of these on the rating service Web sites.) Reading about other people's experiences is a great way to save yourself trouble, especially when you are ordering complicated products that require good customer service.

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Shipping and Handling Charges:
The Real Truth

I'm going to tell you a secret about the mail order industry, which includes sales from catalogs, TV, telephone and the Internet. A lot of the time, shipping and handling charges are bogus. In fact, within the mail order industry, it is well-known that such charges are used to create the illusion of a lower price in order to fool the customer.

For example, let's say a regular store sells a particular item for $20. On the Web (or on TV, or in a catalog, or over the phone) a mail order company sells the same item for $15 plus $5 shipping and handling. The final price ($20) is the same, but the mail order company can make it look as if they are selling the item for less.

So what is this mysterious shipping and handling cost? The shipping cost is supposed to pay for the merchant to send the item to you. The handling cost is supposed to pay for processing your order. Of course, these are both legitimate expenses but, let's be honest here, every retailer has expenses. A regular store must order merchandise, manage its inventory, pay its rent, and so on. Moreover, all goods must be shipped and handled. These are just the costs of doing business.

In the mail order business, however, it has become customary to treat shipping and handling costs as separate items, and so, because they can get away with it, they do. Your job, then, is to make sure that you add up all the costs before you make a purchasing decision.

Here is an example. While I was writing this chapter, I checked the price of a particular Britney Spears CD ("Oops!... I Did It Again") at a number of online Web sites. The list price of this CD is $18.99. As you can see from the following table, the total cost varied from $16.97 to $20.43 (not including sales tax, which may or may not be charged).

Online Stores Total Base
Price
S&H %Surcharge
amazon.com $16.97 $13.99 $2.98   21.3%
hollywood.com $17.86 $14.87 $2.99   20.2%
cdnow.com $18.97 $14.99 $3.98   26.6%
barnesandnoble.com $19.46 $16.48 $2.98   18.1%
borders $20.43 $16.14 $4.29   26.8%

You will notice that both the base price and the shipping and handling charge vary significantly from one site to another. The right-most column shows the shipping and handling charge as a percentage of the base price. For example, at amazon.com, the shipping and handling surcharge was 21.3% of the base price. At borders.com, it was 26.8%.

The shipping and handling prices I put in the table are the lowest ones. They reflect the cost of shipping a single CD to an address in the U.S. by the least expensive method (regular mail). For faster delivery, or for delivery outside the U.S., you would have to pay significantly more.

To put this in perspective I checked the price of the same CD at two local music stores, Wherehouse and Borders. At both stores, the price was the full list price, $18.99. With tax, the total came to $20.41.

Local Stores Total Price Tax (7.5%)
Borders $20.41 $18.99   $1.42
Wherehouse $20.41 $18.99   $1.42

As you can see, it is a good idea to compare prices carefully before you make a purchase over the Net. However, make sure that you compare the total cost.

Total Cost = Base price + Shipping & Handling + Tax

Don't let yourself be fooled. At the hollywood.com Web site, for example, there was a notice that said:

Save 22%
CD Price: $14.87
List Price: $18.98
You Save: $4.11

However, when you add in the shipping and handling, the total cost — without tax — is actually $17.86, a savings of less than 6%, not 22%.

Unfortunately, online retailers don't make it easy to see the total price while you are shopping. They design their Web sites in such a way that you don't find out the final cost until you are actually paying for the merchandise.

There is a good reason for this. Internet companies, like all companies, must make a profit. However, in many cases they compete against regular stores that sell the same goods for (approximately) the same prices. So, to make their prices look better, the Internet companies use exorbitant shipping and handling costs to sneak under the radar of unsuspecting buyers. In fact, many Internet companies depend on these charges to stay in business.

To be fair, this merchandising technique is not new. Mail order companies have been doing it for years. What is important here is that you are aware of what is happening, so you can protect yourself. There is nothing magic on the Internet that allows vendors to charge less than other retailers. Business is business. Some vendors, like Amazon (in our example) discount heavily. Others, like Borders, charge full price.

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How to Find What You Want:
Shopping Bots

It's one week before your best friend's birthday, and you want to get her something special. You know what she would like more than anything in the world, but how are you going to find a place to buy a custom Celtic harp? You can search for it on the Net.

Once you get used to shopping online, you'll develop your own list of favorite shopping Web sites: places you'll return to, time and again, like a favorite store. However, there will be times when you don't know where to look for what you want. In such cases, ask yourself, is this a common consumer item, such as a computer, book, CD, camera, toy, DVD, and so on? If so, you can use a general-purpose shopping Web site to find what you need. If you are looking for something more unusual, such as a custom Celtic harp, homemade soap, or a poster of the book "Tintin in America", you can use a search engine. Let's take a moment to talk about each of these services in turn.

There are a number of Web sites, referred to as SHOPPING BOTS, set up to act as general-purpose shopping services. ("Bot" stands for robot.) To use a shopping bot, you tell it what you are looking for. The shopping bot then looks in a database, matches your request, and shows you a list of places to buy what you want. The list will have information, prices and, sometimes, ratings and recommendations. The database consists of information gathered from a particular group of online vendors, so a shopping bot will often be able to show you alternatives you would have trouble finding yourself.

There are many shopping bots on the Web, so to help you, my researchers and I tested a lot of them. Here are the ones we thought were the best:

If you are looking for a book, especially a used or rare one, here is a specialized bot just for finding books:

Shopping bots for books

http://www.bookfinder.com/

Shopping bots can be useful, but there are some caveats. First, don't depend on a shopping bot to do all your work for you. You should still follow the guidelines we discussed earlier in the chapter. For example, before you buy something from a particular Web site for the first time, you need to take the time to check out the company. In addition, when you compare prices, be sure to add in all the extra charges, such as shipping and handling.

Second, no shopping bot is completely comprehensive. It is common for a shopping bot to find only one or two different brands. If you are thinking of buying something expensive, use several different shopping bots to get a better comparison. If you are looking for a specific brand, you may be better off using a search engine (see below).

Third, don't depend on the ratings and recommendations. The ratings are often bogus and, in any event, they are mostly meaningless. No one has the time to do a proper evaluation of so many online vendors. Moreover, if you look carefully, you will see that the rating criteria used by most shopping bots is pretty lame. The shopping bot companies can't afford to alienate the online vendors, so you aren't going to see many bad comments.

You should also be suspicious of recommendations offered by a shopping bot. Such recommendations are usually the result of marketing deals in which online vendors pay to have their items displayed prominently. For example, a vendor may pay a shopping bot company to have that vendor's items displayed at the top of the list. The shopping bot company may be getting a kickback (that is, a commission) from certain vendors, but they aren't going to tell you.

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How to Find What You Want:
Search Engines

Once you learn how to use shopping bots, you will see that they can save you a lot of time. However, if you are looking for a specific item — especially one that is obscure — it is often more useful to look for it using a search engine.

A SEARCH ENGINE is a service that helps you find Web sites. You specify one or more words, called KEYWORDS, and the search engine gives you a list of Web pages related to those words. For example, to find information about me, you would search for "Harley Hahn". The search engine would then show you a list of Web sites relating to me, ranked from most relevant to least relevant.

In order to provide this service, the search engine company uses a special program that constantly explores the Web. This program accumulates information about individual Web sites and stores it in an enormous database. When you specify a keyword, the search engine looks in the database for Web sites that meet your criteria.

There are a large number of search engines on the Web, so to get you started, here is a short list of the ones I find particularly useful.

Some search engines organize their information into categories, so you can find what you want by starting with a general idea and narrowing it down. Other search engines are designed to help you find Web pages that contain specific information. My recommendation is to try all of the search engines in this list and see which ones you like best.

If you want to learn how to use search engines well — which is certainly a good idea — I have three recommendations. First, all search engines have a help facility. Once you find a search engine you like, read the help information. I know you probably won't want to take the time to do this, but do it anyway. It will make your searching a lot more effective.

Second, for a good explanation of how to use search engines well, see my book Harley Hahn's Internet Advisor (published by Que Publishing). Look at the chapter entitled "Finding Stuff on the Net".

Finally, for a large number of useful resources to help you find what you want on the Net, see another one of my books, Harley Hahn's Internet Yellow Pages (published by Osborne McGraw-Hill). Again the section you want is called "Finding Stuff on the Net".

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Personal Financial Services

There are any number of financial services available on the Net. In this section, I'm going to describe the most important ones, along with some advice on how to integrate them into your life in a way that works for you.

The most important online personal financial services are:

Banking: You can check the balance of your account, view transactions, transfer money between accounts, and so on. I particularly like this service, as it allows me to balance my checking account every few days, so it never gets out of hand. As a matter of fact, I don't even look at the printed statements that come in the mail. I get all the information I need from the Net.

Bill Paying: You can arrange to pay any bills you want and monitor the transactions. You can pay bills automatically at a preset time, or manually, whenever you decide to make the payment. Bill paying services are useful for making regular payments, such as paying your mortgage, utility bills, car payments and insurance. The money is automatically deducted from your checking account, so you don't have to worry about getting into trouble by forgetting to send in a check. This service is especially useful if you are unable to pay your bills when they are due, for example, if you are traveling on an extended vacation.

Credit Card Management: In the same way that you can check your bank account on the Net, you can also look at your credit card statements. You can look at past statements, as well as new charges and credits. I find this useful when I am expecting a credit, and I want to see whether or not it has arrived. If you prefer to pay bills automatically, you can arrange for your credit card bill to be paid each month from your bank account.

Investing: If you like to fiddle with your investments, you'll love doing it on the Net. You can check the value of your portfolio — the list of your holdings — as often as you want. You can buy and sell many different types of investments: stocks, bonds, mutual funds, options, futures, and so on. You can also do financial research and read the latest business news.

Payment Services: It is possible to use the Net to send a payment to anyone with email. Online payment systems are used widely by people to buy items in online auctions. You can also use them to send someone a gift (of money), pay a debt, and so on. We'll discuss these services in detail later in the chapter.

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Several Words to the Wise

When you first start using financial services on the Internet, it is easy to be infatuated with the idea that you can do so much, so quickly, from your home computer. However, before you get in too deeply, I want you to appreciate a few points.

At the end of Chapter 12, we discussed how people become desensitized to money. For example, many people take on a long-term obligation, such as a student loan or mortgage, without really appreciating how much they are borrowing, and how much effort it will take to pay it all back. Similarly, once you get used to using the Net to move money from one place to another, it is easy to forget that the abstract quantities you see on your screen represent real money. This is especially true if you use personal financial software, such as Quicken or Microsoft Money, that is designed to integrate your personal finances with the Net.

Sometimes, manipulating money can be too easy, and when this happens, it is smart to slow yourself down deliberately. For example, let's say you establish a system in which a lot of your financial transactions, such as bill paying, are carried out automatically. If your paycheck is late one month, the automatic system will still try to pay the bills according to your schedule, which might deplete your account too quickly, causing an important check to bounce.

One common situation in which people get into trouble is in handling their own investments. As a general rule, the best way to do well in the stock market is to have a good plan and stick to it. Buy wisely, and hold on to your stocks for a long period of time. Investing in stocks for short amounts of time is gambling, and trying to outguess the market is like trying to outguess the roulette wheel. If the financial gods are with you, you may win for a limited time but, in the long run, the odds are against you and you are going to lose.

In the olden days, before it was possible to buy and sell stocks on the Internet, being able to trade too much was not an issue for most people. If you wanted to buy or sell a stock, you needed to do it through a stockbroker and commissions were expensive. Now, however, you can use the Net to trade on your own and the fees are small. As a result, too many people trade too often, which is a guaranteed route to failure.

Moreover, since you can use the Net to check the value of your stocks whenever you want, it's tempting to do so every day, or even more than once a day. Since all stocks — even the ones that do well — have their ups and downs, you will find that checking stock prices daily is one of the fastest and most efficient ways to drive yourself crazy.

Another topic we talked about at the end of Chapter 12 was how money and our attitude towards it insinuates itself into our personal psychology in ways that are difficult to understand. As we discussed, money represents security, comfort, power and hope, all of which we need to maintain our mental health in an uncertain and, often, hostile world. For this reason, we sometimes make financial decisions for emotional reasons, more often, in fact, than we would like to admit.

I need to warn you. Once you start to use your computer and the Net to handle your financial affairs, you are going to become dependent on the system, and you will not be able to go back. This is not necessarily a bad idea, but my advice is to go slowly and do it wisely. At every step along the way, ask yourself, is this something I really need to be doing?

If you are the type of person who likes to tinker, you need to be especially careful. Unless you consciously make an effort to keep your financial life as simple as possible, you will, over time, create a lot of procedures, spreadsheets and habits that are far more complex than you really need. However, because this happens over a long period of time, you will become habituated to it, and you will be utterly convinced that everything you do is necessary to support life.

There are only two things you can do with money: you can spend it, or you can save it.

In the most basic sense, there are really only two things you can do with money. You can spend it, or you can save it. These two possibilities live within all of us, as two opposing forces that must remain in balance. When that balance gets disturbed, as it often does when we are overly emotional, we are likely to make decisions that are not in our own long-term interest: "I deserve a new pair of shoes for all the stress I put up with..."; "Everyone else is making money on Internet stocks. I need to jump in now before it's too late..."

The reason I'm telling you this is because using the Internet to control your finances is not as simple you might think. If you allow yourself to get caught up in an emotional juggernaut — as we all do from time to time — the Net will amplify your thinking. For example, if you like to shop when you feel down, the Internet will make it far too easy to spend more than you can afford. When you shop on the Net, you don't have to get dressed, leave the house, drive to a store, select an item, and make the purchase in person.

In a similar way, as I mentioned, it is easy to get caught up in the habit of buying and selling stocks, and then checking their value many times a day. It is important to realize that, in the short term, the stock market runs on fear and greed, and if you use the Net to trade stocks, you are going to be affected. This is normal, because you are human, but it is not good for you, so it behooves you to do your best to be aware of what is happening. The worst offenders are the type of men who think they are always right. (I'm sure you know someone like this.)

Regardless of whether or not you invest in the stock market, modern financial systems are complicated, and the best way for you to look out for yourself is to follow the timeless rules that have served us well for centuries:

1. Don't spend more than you can afford.

As you make purchases, on and off the Net, keep track of the total, so you don't get surprised at the end of the month. It's not as hard as you might think. All you need to do is (1) keep your checking account balanced, and (2) maintain a running list of your credit card charges. The Net can help you with both these tasks.

2. Borrow money only to purchase something of enduring value.

Borrow money to buy a house, a car, or to pay for your education. Don't borrow money to go on a vacation, buy new clothes, or treat yourself to an expensive dinner.

3. Know yourself well enough so you aren't driven by fear or greed.

The worst financial decisions you are ever going to make in your life will be because of greed. The second worst decisions will be because of fear.

I don't know a magic way to avoid these emotions. However, I can warn you that both fear and greed are contagious, so think carefully before you make any important financial decisions. Before you commit yourself to a significant financial decision, ask yourself if you are being influenced by an outside force, and be honest. As we discussed in Chapter 12, there are a lot of companies — and individuals — in the world who are ready to play on your emotions to get your money. If you are impulsive, you will just play into their hands.

I know that if I say money won't make you happy, I'm telling you something you have heard many times before. But, really, it's true. Money can't make you happy because it can only create the illusion of what you need for real happiness.

However, if you still want to be rich, I can show you how to do it wisely. When you get a moment, take a look at the following Web page:

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Online Payment Services

An ONLINE PAYMENT SERVICE is a facility that allows you to transfer money to anyone who has an email address.

The easiest way to understand this service is to think of it as a special type of bank account that is used only on the Net. To start, you open an account. Once you have an account, you can put money into it and transfer the money to other people. At the same time, other people can transfer money to you.

You can use your account to pay for various items on the Net, as long as the person or company from whom you are buying will accept such payments. For example, you can use a payment service to pay for items you buy at an online auction or at a Web site. You can also use a payment service to send someone a gift (of money) or to pay a debt.

There are a number of different online payment services, and each one has its own rules, although the basic idea is the same. Here is a typical scenario:

  1. You start an account by registering (which is free).
  1. You put money into the account. You can do this either by sending in a check or by transferring money directly from your bank account.
  1. Let's say that, one day, you buy something at an online auction. To pay for your purchase, you tell the payment service to send a payment to the seller. They send him an email message telling him that the payment is waiting for him. If he has registered with the same payment service, they will put the money right into his account.
  1. You can take money out of your account at any time. You can either have the payment service send you a check, or transfer the money directly into your bank account.

Although the basic idea is simple, there are a lot of nuances. For example, some payment services allow you (or require you) to give them information about your bank account and credit card. Once you do, they may use this information to take money when they need it. For example, if you have $100 in your online account, and you try to make a payment of $150, the payment service may, without asking you, take the extra $50 out of your bank account or charge it to your credit card. As you can see, you need to manage your online account carefully.

Most online payment services have fees, and they vary quite a bit from one company to the next. Some companies will let you send money for free, but will charge a fee to receive money. Other companies charge the sender, but not the recipient. Some services charge both parties, and some are completely free.

In addition, most online payment services will allow you to start either a "merchant account" or a "consumer account". Each type of account has its own rules and fees.

Once you get used to an online payment service, you may really enjoy the convenience, especially if you do a lot of buying and selling on the Net and you don't mind paying the fees. In fact, moving money around will be so easy, that you will want all your friends and relatives to do it too. For example, one of my friends is trying to get her boss to pay her in this way. (Hint: The easiest way to encourage someone to start using an online payment service is to send him a small gift of money. In order to retrieve the money, the person will have to learn how to use the system.)

I do want to warn you, however, to be careful. Online payment services have a lot of rules, so before you start moving money around, I recommend that you take the time to read all the help information, especially the fee schedule. You will find there is a fair amount of fine print that can come back to bite you if you don't understand what you are doing.

The online payment services all have arrangements with banks, credit card companies, and other financial institutions. As a result, you will find a variety of financial services integrated into one large system. For example, some online payment services will send you a debit card that you can use in stores and restaurants. When you use the card, the money you spend is taken directly from your online account. As another example, some payment services allow you to earn interest by keeping your balance in a money market account managed by an investment firm.

If you think an online payment service is for you, here are several to investigate:

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What is an Online Auction?

You may or may not have ever been to an auction, but I'm sure you know the general idea. At a particular location, say a store or a warehouse, various items are offered for sale. Before the auction starts, people who are interested in buying are given time to look around and examine the items.

The auction is run by a moderator, called the auctioneer, who offers the items for sale, one at a time. As an item is offered, people bid on it, one after another, raising the price with each bid. The auctioneer calls out the bids so everyone can follow what is happening. For example, the first person may bid $100, another person may bid $105, and a third person may bid $107. The first person may then put in a new bid of $110, and so on.

Eventually, the point is reached where there are no more bids. The auctioneer then declares the person who made the final (and largest) bid the winner. This person then pays for the item, takes it away, and lives happily ever after.

An online auction follows the same basic principle: people bid on items and the highest bid wins. However, because the auction takes place over the Net, it has to be run differently than a live auction.

The biggest difference is that, since there is no auctioneer, the whole thing is run by an automated system. People use the Web to look at a description of the items, and make their bids, and a computer program keeps track of everything. Once the auction is over, the program sends email to the seller and the successful buyer, announcing the final price and other details. The buyer pays the seller, who then sends the item to the buyer.

There are several ways in which a buyer can pay a seller:

  1. Online payment service
  2. Credit Card
  3. Check
  4. Money Order
  5. Cash

If the seller is an individual, he probably won't be able to accept a credit card. However, you can pay by credit card by using an online payment service. (See the discussion earlier in the chapter.)

Since people can't bid in person, online auctions continue for a fixed length of time, for example, 7 days. At the end of this time, the highest bid wins. At any time during the auction, you can check to see the current value of the highest bid.

The most fascinating thing about online auctions is the sheer variety of items for sale. Literally, anything that can be sold legally will eventually find its way onto an online auction: books, collectibles (especially coins), computers, electronics, clothing, jewelry, sporting goods, toys, and on and on. (A friend of mine used an online auction to buy a BMW.) The Internet is now the home of the world's largest, continuous markets where you will find a huge number of useful items and rare bargains, among lots and lots of junk. You'll find:

  1. People selling the contents of their attic.
  1. Entrepreneurs who set up home businesses specializing in a particular type of collectible, such as movie stills or ancient coins.
  1. Scavengers who scour garage sales and surplus stores looking for discounted items to sell on the Net.

You'll also find a great many specialized auctions that allow businesses to sell commercial goods and services to one another. For example, one Web site allows companies to describe print jobs and have various printers bid for the business. Another site specializes in selling large, expensive industrial equipment. A third site offers commercial real estate to the highest bidder.

The following resources will help you get started with online auctions. First, here are some auctions sites on which people sell all types of general merchandise:

There are many different online auction sites on the Net. The following resources will help you explore a variety of auctions you might otherwise never find:

When it comes to finding what you want, the following auction bots (auction-oriented search engines) can help you find specific items:

Finally, just for fun, when you need a break, take a look at some of the strange stuff that people are selling online:

Strange stuff sold at online auctions

http://www.whowouldbuythat.com

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Getting Started With Auctions

If you think you would like to buy or sell at an online auction, I have a three-part plan to help you get started smoothly. First, you and I will go over the basic terminology, and I will give you some general advice. Then, you should visit one of the popular auction sites and read the online help information. Finally, I will recommend that you begin your auction career by buying something small to see how the system works.

Okay, let's get started with the basic terminology. An AUCTION is a sale in which merchandise is sold to the highest bidder. The person or company that puts an item up for sale is called the SELLER. The person who makes the highest bid, and ends up purchasing the item, is called the BUYER.

As a general rule, the auction company makes its money by charging the seller a fee. There is no fee to buy. In most cases, the seller's fee will consist of a small listing fee (to create the auction) and a commission, which is based on the final sale price. A typical commission might be 5% for inexpensive items, with a lower percentage for higher-priced items. As an example, an item that sells for $20 might cost the seller $1.30 in fees: 30 cents for the listing fee and $1.00 (5%) for the commission.

The most common type of auction is the one I described in the previous section. An item is put up for sale for a particular length of time and, at the end of that time, the highest bid wins. This type of auction is referred to by a variety of names: a regular auction, a standard auction, an English auction, or a Yankee auction.

A DUTCH AUCTION allows a buyer to sell a number of identical items at the same time. For instance, an electronics dealer might auction off 100 identical hard disk drives. People bid for the items in the regular manner, and when the auction is over, more than one person wins. However, the buyers all pay the same price: the lowest winning bid.

Here is an example. A seller offers 5 identical Monica Lewinski dolls for sale. 10 different people bid, and when the auction closes, the final bids are as follows: $15, $15, $13, $10, $9, $7, $7, $7, $3, $2. In this case, the top-five bidders — $15, $15, $13, $10, $9 — all win, but they each pay only $9, which is the lowest winning bid. During a Dutch auction, people are allowed to bid on more than one of the items. For example, if you were a serious collector, you might offer to buy all 5 Monica Lewinski dolls.

As a general rule, the bidding and selling process is binding on the participants. If you bid on something and you win, you are legally obliged to buy the item at the price you bid. Similarly, if you offer something for sale, you are legally obliged to sell it to the highest bidder. There are, however, ways in which the seller or the buyer can affect the bidding process.

First, before an auction starts, the seller can set a MINIMUM BID. This is the price at which the bidding must start. If no one meets this price, the auction will not take place. Second, the seller may set a RESERVE PRICE, which is not disclosed to the bidders. The reserve price is the lowest price the seller will accept. At the end of the auction, if the reserve price is not met, the seller has the option of canceling the sale.

Here is an example. A book dealer wants to sell a first edition of a Freddy the Pig book. The seller specifies a minimum bid of $30 and a reserve price of $45. Nothing will happen until someone offers at least $30. In this case, let's say that the bidding starts at $32 and finishes at $42. Since the reserve price ($45) was not met, the seller has the option of selling the book at $42 or canceling the sale. However, the bidders do not know this until the auction has ended.

The third way in which the bidding can be affected is if the seller specifies a price at which he is willing to sell the item immediately. For example, let's say that an aging baby boomer wants to sell a valuable Rocky and Bullwinkle lamp in order to raise money for a hair transplant. He sets a minimum bid of $150. Of course, he wants the bidding to go as high as possible, but when he sets up the auction, he specifies an immediate sale price of $250. The bidders will see this and, at any time, anyone can preempt the bidding and end the auction by offering the full $250.

The idea that anyone can end the option by paying a specified price is not a traditional auction practice. For this reason, the preemptive price is known by a variety of different names:

  • Buy Now Price (321Gone)
  • Take-It Price (Amazon)
  • Buy It Now Price (Ebay)
  • Threshold Price (MSN)
  • Buy Price (Yahoo)

When you attend a live auction, you are able to watch the action in person. On the Net, an auction can move slowly and last for days, which can make it difficult to follow what is happening.

To help buyers, auction sites have a facility called PROXY BIDDING. Proxy bidding allows you to specify the most you are willing to pay for a particular item. If someone outbids you, the system will automatically send in a new bid on your behalf. (Of course, your maximum price is kept secret from the other bidders.)

The amount by which a bid is raised automatically is called the INCREMENT. The increment is fixed by the system depending on the current price of the item. For example, for prices between $5 and $25, the increment might be 50 cents. For prices between $25 and $100, the increment might be $1.00.

Here is an example. One day you are browsing an auction site and you see a wonderful item for sale, a life-size map of the Grand Canyon. The current bid is $25 and the auction is scheduled to run for another three days. Since a life-size map of the Grand Canyon would be the purchase of a lifetime, you bid $27 and specify that you are willing to go as high as $100.

Over the next three days, every time someone outbids you, the proxy bidding system will raise that bid by $1. In this way, you don't have to drive yourself crazy watching the auction day and night. Instead, you can spend your time looking for a place to store the map in case you win.

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How to Protect Yourself
Against Auction Fraud

Earlier in the chapter, we discussed an organization called the Internet Fraud Complaint Center (IFCC). By far, the most common complaint received by the IFCC is auction fraud. Here are some interesting observations from one of the IFCC reports:

  • Over 90% of Internet fraud originates from within the United States, in particular, from California, Florida, New York and Texas.
  • All types of people from around the world are victims of fraud. However, the typical victim who files a report is an American male in his mid-30s who has lost over $200 in a fraudulent online auction transaction.

To protect yourself from fraud, don't rush in and start bidding as soon as you see something you like. Remember, if you bid on an item, you are legally obliged to buy it (if you win the auction), so, before you place your bid, take a few minutes to check out both the seller and the item.

To evaluate a seller, look at the advertisement for clues that the seller might be dishonest (big promises, excessive superlatives) or incompetent (poor spelling, punctuation mistakes). If the seller won't take the time to proofread his work, he probably won't care about helping you if something goes wrong. The best people to deal with are the ones who take pride in their reputation and in how they present their wares.

One of the nice things about online auctions is that everyone who buys and sells is allowed to make comments about everyone else. Before you bid on an item offered by a seller you have never dealt with, look at the comments previous buyers have made about that seller. In many cases, you will find that the seller is an entrepreneur who uses online auctions to sell many, many items, which means there will be lots of buyers' comments.

Most sellers get good comments most of the time (which is important when you are going to send money to a perfect stranger). Every now and then, however, you will find a seller who is a real troublemaker. The tip-off is to look for people who are difficult to deal with when something goes wrong.

For example, I was looking at the comments for one particular seller and I noticed that, although most of the buyers were happy with him, there were a fair number of complaints. Evidently, this person was arrogant and condescending and, when something went wrong, he would always blame the buyer.

When I looked at the description of the item he had for sale, I saw that he listed a great many rules that he wanted people to follow if they were to do business with him. Whenever there was a problem, this fellow would blow it off by saying that the buyer didn't follow the rules that he (the seller) had made up.

Most of the time, everything works well and it doesn't really matter whether or not a seller cares about his customers. However, when there is a problem — such as a package going astray, or an item arriving in damaged condition — it is very important that the seller be reasonable.

Some people, like the person I mentioned above, live in their own world, and they expect everyone else to follow their rules. (I'm sure you know people like this.) If you buy from such a person and something goes wrong, you are going to have trouble. Moreover, you will be frustrated because most of the other buyers' comments will be good — because most of the time nothing goes wrong — and no one else will listen to your complaint.

As a general rule, if a person's Web page looks weird, the person is weird.

One clue to look for is to notice the manner in which a seller formats the description of the sale item. When a seller prepares his description, it is like creating a mini Web page. On the Web, there are various ways to present information so that it is readable and easy to understand. When someone ignores these customs, it tells you that he lives in his own world and likes to do things his own way. Such a person, for example, might use large typefaces, many colors, excessive repetition, and a lot of capital letters and exclamation points. If you pay attention and use common sense, it's not hard to recognize the crazy people. As a general rule, if a person's Web page looks weird, the person is weird.

When you buy online, you can't examine the item beforehand, so make sure you understand what is really being sold. In some cases, an excessively low price can tip you off that something is fishy. For example, I have a friend who once bought what she thought was an antique postcard. When the package arrived, she found that what she had really bought was a copy of an old postcard. In retrospect, she realized that she should have suspected something because the price was too low.

In this respect, buying at an online auction is the same as buying anywhere: If something seems too good to be true, it probably is.

One way to protect yourself is to ask the question, "Does the seller seem to know what he is talking about?" For example, some sellers sell things they don't own. Their plan is to get your money, and then use it to buy the item in order to resell it to you. If the description of the item is incomplete or the picture doesn't look right, it may be that the seller doesn't really own what he is selling. To check this, send email to the seller and ask a few specific questions. If he can't (or won't) answer your questions, be suspicious.

A lot of people buy discounted items for the sole purpose of reselling them on the Net. As a result, there is a lot of junk for sale, so don't be surprised when something that sells for a low price turns out to be worth next to nothing.

If you are buying a piece of equipment, look for words such as "untested" or "as is". This often means, "It doesn't work and I know it." This is especially important with electronics, such as computers and computer parts. For example, some companies will sell defective hard disks to people who then resell them on the Net. Such people will offer an extra low price and describe the disks as being "untested, as is". By the time you find out the disk doesn't work, it's too late.

If you are buying an expensive item, there are special precautions you can take. First, don't buy the item unless the buyer is willing to use an ESCROW SERVICE. This is a third party that acts as a go-between for the transaction. Here is a typical scenario showing how it works.

You have just won an auction for an expensive item. To pay for it, you send your money to the escrow company. When the money arrives, the company verifies that the payment is okay, and informs the seller. The seller then sends the item to you. Once the item arrives, you check it over and make sure everything is okay. You then notify the escrow company, who releases the money (minus a fee) to the seller. A typical escrow fee is 1%-5% of the price.

Many sellers don't like to use escrow services because of the cost — which comes out of the sale price — and the extra hassle. For example, the seller must pay the shipping charges up front and then wait to get his money. Still, escrow services provide valuable protection for a buyer. If you are dealing with a seller who you suspect is a troublemaker — or if you are going to buy an expensive item and you need to be extra careful — it is in your interest to insist on an escrow service. If the seller refuses, let the deal go. (A seller doesn't need an escrow service because, normally, he wouldn't send out an item until he had received the money.)

I have a friend who is very experienced with online auctions. However, one time, he needed to buy a computer and he was in a hurry. He sent money to someone he had never dealt with before, and the person never sent the computer. My friend tried his best to get back his money, but, at the end of a long story, there was nothing he could do about it.

To help you, here are the addresses of some escrow services:

At the beginning of the chapter, I told you about Kelly who likes to buy and sell using online auctions. Kelly has a lot of experience, and here is what she has to say about auction buying:

"Most of the sellers I've dealt with are honest, reliable people. There have only been a few instances where something has gone wrong and, usually, it's because of an unexpected event or human error. Almost every time something has gone wrong, the seller has made it right. The couple of times I've felt cheated, I realized later, when I had time to give it some thought, that I should have seen the signs and not bid on the item."

Now you know what the signs are.

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10 Tips to Make Online Auctions
Work for You

Buying and selling at auctions can be a lot of fun and financially rewarding, if you do it right. So to ensure that everything remains hunky-dory, here are 10 tips to help you make the most of your online mercantile experiences.

1. Read all the help information.

Buying something at an online auction is conceptually simple. You register with the service, you find an item you like, and you bid on it. If you win, you contact the seller and make arrangements to pay.

However, there are a lot of nuances. The online auction world is extremely complex, with a multitude of rules and customs, and each auction site is different. Before you start, you need to take the time to read all the rules, especially if you want to be a seller.

If you are one of these people who never reads the manual and plunges right in, listen to me on this one. Online auctions are a lot more complex than they look, so, for once, read the help information before you start.

2. Start small.

For your first few purchases, buy something inexpensive that you understand completely, like a CD. Whatever you do, don't start your auction career by buying a computer.

3. Before you bid, check out the seller.

4. Watch out for fraud.

Protect yourself by using the precautions we discussed in the previous section.

5. Don't get carried away.

Make a budget and, no matter what happens, stick to it. In the short run, you may miss out on something you wanted, but in the long run, you'll save a lot of money. Don't allow yourself to become emotionally attached to a particular item. Many people do and end up paying more at an auction than they would at a regular store.

It's a lot easier than you might think to get caught up in the action, especially when the price goes up a little at a time. One minute you are congratulating yourself on how well you have been following your budget. The next minute you find yourself bidding big bucks for something you wouldn't bend down to pick up off the street. This is especially true if you are an over-achieving, goal-oriented type of person, who doesn't like to lose.

Don't let greed or fear dominate your common sense. Once the price of an item grows beyond your budget, back off gracefully. Unless the item is one of a kind, there will be another one.

6. For expensive items, use an escrow service.

If you ever pay money to someone who doesn't send the item, there isn't much you can do about it. Before you spend a lot of money on something, make sure that the buyer will agree to use an escrow service.

7. Do your research before you bid.

Before you start bidding, make sure that the item for sale will do what you want it to do. For example, if you want to add a rewritable CD drive to your computer, make sure the model you select will work with your computer. Don't assume that this is the case, and don't assume that you can depend on the seller for technical support. That's not his business. When you buy something at an auction, you are on your own.

8. Check availability and prices.

Don't assume that just because you buy something at an auction, you are getting a good price or that the item is rare. A lot of items sold at auctions can be bought at a regular store. When you buy from a store, you have someone to talk to if you have a problem. If you see something being sold in large numbers at a Dutch auction, you can probably find the same item for yourself by searching on the Net or by making a few phone calls.

9. Sell items that are easy for you to handle.

If you want to be a seller, look for items that are easy to ship without damage, such as:

  • Anything made of paper, cloth or plastic
  • Vintage textiles
  • Collectibles, especially coins
  • Limited edition books
  • Non-fragile antiques

Avoid items that are heavy, breakable or difficult to ship.

10. If you plan to sell a lot, use an auction helper service.

There are services that offer automated tools to help you manage your auctions. Using such tools, you can:

  • Establish and monitor many auctions at the same time.
  • Create attractive ads.
  • Maintain a gallery of photos.
  • Handle auction-related email correspondence.
  • Organize payments and shipping.
  • Manage your inventory.
  • Keep long-term data about your customers.
  • Analyze your sales.

If you think an auction helper service might be of use to you, here are two to check out:

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The Most Important Hint of All

If you don't need it, don't buy it.

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