One of the big problems in the Indian e-commerce industry is that a lot of business happens through the “Cash on delivery” model, where the customer pays for the goods upon receiving it rather than at the time of ordering. According to sources, nearly three fourth of e-commerce in India is paid for using this model.
The problem with Cash On Delivery (COD) is that it leads to higher product returns and non-deliveries, since the recipient is not pre-committed to accepting it. While e-commerce vendors might try methods such as blacklisting customers in order to cut their losses, there is no clear solution in sight. COD is also a massive source of fraud, especially given that currently e-commerce platforms are more likely to subsidise rather than take a cut of transactions on their platforms.
One of the reasons given for the development of the COD model is the low credit card penetration in India (compared to other markets), and Indians’ unease with transmitting money online. Research (which I can’t be bothered to find and link to right now) shows that the Indian e-commerce industry actually took off once CoD was introduced.
Given that India is developing some new and innovative payment systems (the Immediate Payment System (IMPS) is one. There is a Unified Payments Interface (UPI) which is even better which is coming up), it will be interesting to see how the e-commerce industry in India shapes up from a payment standpoint.
There are two factors that drive CoD – one is the ease of payment transaction – you just hand over the cash to the courier when the goods are delivered. This is not seamless, of course, since it could involve problems involving change, and handling of large amounts of hard currency which makes it unsafe.
The other factor is trust – Indians don’t seem to trust vendors enough to pay for their goods before they receive them. While not prepaying gives the option to change mind at a later date, this can lead to significant friction in the system resulting in costs that are likely to get added to the customer (this doesn’t happen right now since platforms are still in heavy subsidy mode).
By paying for goods on delivery, the customer hedges against fraud by the vendor, and the transaction is smoother from the customer’s perspective.
While the industry claims that CoD is primarily due to lack of credit card penetration, my hypothesis is that it is more due to the trust factor. So far there has been no method (apart from possibly surveys which are internal to e-commerce platforms and which will never get disclosed) to understand which of the two it is.
With the development of new and innovative payment platforms, and the ability for a large number of people in India to transact online (willingness is another matter), this hypothesis can be tested. Once people have access to mobile apps that let them make instant and secure inter-bank payments (we are already on our way there), the low credit card penetration is unlikely to be a constraint against pre-payment for goods. If my hypothesis is true, the proportion of CoD will not fall despite the growth of these new payment methods.
There are flies in the ointment of course – platforms, driven by losses, are investing in moving customers away from CoD, so the data might not be very clear. Also, over time, people may develop more trust in e-commerce companies and start pre-paying, which will not tell us anything about their confidence levels right now.
We are in for interesting times!
PS: Like telecommunications (where most of India skipped the landline) and retail (where India skipped the “walmart step”), the payments industry in India is also likely to “leapfrog”, with a large part of the country set to bypass credit cards altogether.