Unlike the Western countries, online shopping in India is mostly done through Cash on Delivery payment method. Although it is aiding the growth of eCommerce industry, the challenges it poses for sellers needs to be reviewed.
Cash on delivery (CoD) is the most preferred payment method for online shopping in India. This method allows buyers to make the payment by cash at the time of delivery of the product. CoD was introduced with the aim to build confidence among the Indian consumers and encourage them to shop online.
In India, CoD is used as the mode of payment for 5 out of 10 online transactions. On the contrary, the situation is completely reversed in western countries where approximately more than 80% of the online transactions are made by debit or credit cards, net banking or any other alternate channel of online payment.
Although CoD has aided the growth of the Indian eCommerce industry, its pitfalls cannot be ignored.
* Some major problems with CoD payments are -
" CoD transactions are expensive for the seller, especially in case of product returns. Instances of product returns are also higher in CoD transactions - approximately 35% more.
" It complicates the supply chain process by adding another layer of transaction - that of passing on the collections to eCommerce companies. It also increases the settlement period and cash collection cycle to more than 2 weeks.
" Nearly all courier companies charge some extra amount for collecting cash. This cost is divided in two parts fixed and variable cost. Fixed cost margins are INR 20 to 150 and variable cost is 1% to 3% of the CoD amount. This is for high priced product such as laptops and mobile phones. If the item is priced low then the CoD charges at times exceed one's margin in the product and if the item is priced very high then the percentage CoD charge turns out to be in hundreds or even thousands.
" Adding to the above pitfalls is the possibility of pilferage in cash handling. Collecting cash, collating the receipts and maintaining records is a time consuming process. Due to all these reasons, the very concept of CoD defies the eCommerce model as it locks up working capital and increases the eCommerce company's risk to exposure.
" Till now, most new entrants in the field have had to offer CoD as a payment option so as to cater to the customers who are skeptical about the security in online payment system and those who insist on making payments only after receipt of the actual product.
" To overcome consumer's reluctance, it is important that eCommerce players concentrate on building consumer confidence and address their concerns regarding risk and fraud associated with online payments. Hopefully, the second factor authentication process introduced by Reserve Bank of India will aid in addressing security issues.
Current status of CoD mode of payment in India & elsewhere
The infographic below gives a snapshot of the current status of CoD mode of payment in India and other countries where the CoD mode of payment is popular. It also captures where we stand in terms of mobile payments and banking, which if developed and promoted adequately, will be the future of all things eCommerce.
Steps that online retailers can take to promote other (online) modes of payment are -
" Encourage customers to pay digitally by offering discounts or freebies: eCommerce companies can run promos or discount offers only for consumers who are paying online. Additionally, they can also offer free delivery offer to consumers who pay online.
" Offer multiple online payment options: Some eCommerce portals do not accept all debit and credit cards, which often forces consumers who did want to pay online to opt for the CoD payment. To encourage online payment, they should increase the available online payment options to include wallets, mobile banking, SMS payments and service providers like PayPal.
" Card on Delivery: eCommerce players can introduce card on delivery payment method (some have already done it) which does away with some of the issues of the cash on delivery and also provides benefits of the online payment methods. The infographic below gives us a snapshot of why CoD payment method is popular, and where we stand in terms of mobile wallet and mobile banking.
The article is authored by Ashish Jhalani, an Angel Investor, Mentor & Advisor, Founder - eTailing India; and Co-founder, Indian School of eBusiness.
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