Contrary to popular belief, ecommerce began in India way before Flipkart came into existence in circa 2007. I remember placing orders from a dial-up modem on Fabmall, Rediff and a couple of other Indian ecommerce pioneers in the late 1990s. The only mode of payment supported was online by credit card.
That said, Flipkart did pioneer COD in 2010, which gave a huge fillip to ecommerce in India. For the uninitiated, “Cash on Delivery” is a mode of payment whereby a customer buys online from the ecommerce website but pays offline to the person who delivers the goods at their doorstep. The actual payment is made typically by cash but also increasingly with credit card, debit card or mobile wallet nowadays. So COD could equally well stand for “Card on Delivery” or “Wallet on Delivery”. Given the variety of payment instruments actually used in a COD transaction, “offline payment” is perhaps a more accurate term for this method of payment. But that’s a post for another day.
In this post’s context, there’s another characteristic of COD that plays a more important role: In this mode of payment, the customer does not pay at the time of order placement but only against receipt of goods.
Initially, Flipkart and other ecommerce companies ascribed the runaway success of COD to low card penetration in India. Even the mainstream media went along with their claim that there were very few cards in India. This claim was highly patronizing at the time – I used to pay for my online purchases in the late 1990s by credit card. Today, it’s total BS: There are more than 600 million cards and only 40 million online shoppers in India, so an average Indian shopper has a choice of 15 different cards with which to pay for an ecommerce order.
— GTM360 (@GTM360) January 26, 2016
If card penetration is not the reason for the overwhelming popularity of COD, what is?
Going by personal experience and anecdotal evidence, it could be friction and failed payments caused by two factor authentication. For the uninitiated, 2FA became mandatory for all online payments in India in 2009. For reasons explained in the below exhibit, 2FA mucked up online payments and drove many long time credit card users like me to COD for online purchases.
Cue to the present.
The Government of India demonetized high value currency notes in November 2016. On the back of the “Note Ban”, the government began pushing cashless payments. Trending as #CashlessIndia, the drive has resulted in the proliferation of several new digital payments such as UPI, BHIM, BharatQR and, most recently, Aadhaar Pay.
Bugs and all, @NPCI_BHIM app is a miracle in s/w dev. Similar apps in developed nations have taken months to develop & cost millions.
— GTM360 (@GTM360) January 6, 2017
Credit card, debit card, e-wallet, m-wallet, realtime A2A, biometric – you name it, India has it. I wouldn’t be bragging if I claimed that India has more types and brands of digital payments than any other country in the world today. Some of them (credit and debit cards, mobile wallets) involve incumbent banks and card networks (Visa, MasterCard and the indigenous RuPay) whereas others (UPI, BHIM and Aadhaar Pay) disintermediate card networks from the payment value chain. But I digress.
More important point is some of the recent digital payments have found innovative ways to enhance the CX of online payments and improve their success rates while still remaining compliant with the regulator’s two-factor authentication mandate. Think HDFC Bank’s PayZapp and PayTM.
The proliferation of frictionless digital payments has had an immediate and perceptible impact on brick-and-mortar retail, going by the direct attribution made by the doyen of India’s organized retail industry of digital payments to his company’s topline.
— S.Ketharaman (@s_ketharaman) January 19, 2017
But ecommerce still remains stubbornly driven by cash. According to latest reports, nearly 70% of online purchases are paid by COD, with some reports putting the figure as high as 83%.
70% COD in ecommerce is even higher than widely believed – or has the %age gone up in recent times? pic.twitter.com/kDqBr3Ev72
— GTM360 (@GTM360) June 6, 2016
If that sounds puzzling, it is – but only if you think of payments in the isolated context of its operating model.
If, on the other hand, you look at the entire customer journey, payment plays another role: It acts as a seal of trust placed by the buyer on the seller. In simple terms, you pay someone only if you trust them to deliver. It’s this facet of payment, which is unrelated to the mechanics of its operating model, that determines the winners and losers among payment methods.
From personal experience and anecdotal evidence in the recent past, cash still rules ecommerce in India because of the following reasons related to trust:
#1. Delivery Address Ambiguity
While ordering a pizza on Pizza Hut’s mobile app, I reached the checkout page. I was asked to enter my building’s name. As soon as I finished typing in the first three characters of my building’ name (SAT), the app went into a tizzy. It recovered after 2-3 minutes and displayed a long list of buildings from which I had to select one. None of them matched mine. Ditto when I entered the first 3 characters of my street name on the next field of the checkout screen. Since I had to do something to move forward, I selected the option that came closest to my location. (No, the app didn’t allow freeform text entry of my building or street name). The app again went into a tizzy. When it came back, it displayed the delivery address the way it had reckoned it. This didn’t match my real address.
With so much ambiguity in the delivery address, I wasn’t sure if my order would ever reach me. No sensible customer under those circumstances would pay online by card in advance. Neither did I. I opted for Cash on Delivery.
#2. Delayed Deliveries
Order a Laptop on 7th April from Flipkart. Expect it to be delivered by 11th April. Delivery partner E-Kart’s phone is not reachable for the entire day on 11th April. The delivery person calls me in the evening to tell me that the delivery couldn’t be done on that day due to manpower shortage and would be done on 12th April 2017, 2.00 p.m. I explain to him that my work is suffering because of the delay in delivery. But he is not bothered and gives me more reasons why he couldn’t deliver on that day. 12th April – Entire day passes, again E-Kart’s telephone is switched off for the whole day. No way I can speak to any executive of Flipkart to understand by when the delivery will be made. Flipkart’s Customer Care only gives an automated response. Now that the money is already with them, they don’t give a damn.
No prizes for guessing what payment mode this guy would select the next time he orders something online.
#3. Fake / Wrong Deliveries
As I’d highlighted in Beware of Credit Card Reward Redemption Theft, fake / wrong delivery of documents, bills and magazines is a widespread problem. Looks like the epidemic is spreading to ecommerce packages now.
@amazonIN your text says package delivered , and here I am waiting for delivery, thank god for COD once again you delivered wrongly
— Chetan Naik (@ChetanDNaik) January 27, 2017
It’s easy for a courier company’s delivery boy – yes, they’re always boys – to log into his app that he has delivered a consignment successfully without even ringing the consumer’s doorbell. Ergo fake / wrong delivery is easily possible. If you pay upfront, you’d have to chase the courier. With COD, the courier will chase you. In this situation, any sensible customer would like to be chased rather than to have to do the chasing.
As the above incidents illustrate, many people who otherwise use credit cards extensively in their day-to-day lives – and have been doing so for ages – turn to Cash on Delivery when it comes to ecommerce (and then pay by card or m-wallets when they receive the goods!). In each example, the key issue is when the payment is made rather than how it is made. Lack of cards or fear of fraud risk – the go-to reasons given by online retail honchos – has had no role to play in the choice of COD in these three cases.
And it’s not only me.
Flipkart’s first employee Ambur Iyyappa, spills the beans about the real reason why Flipkart introduced COD. Contrary to what the top brass at ecommerce companies say, he makes the following observation in Times of India:
By 2010, Flipkart was doing brisk business. But the challenge to scale up was that customers didn’t want to pay for something before getting it. And our delivery partners at that time lacked the infrastructure for cash on delivery. It would’ve been easy for Flipkart to wait for others to build the capability first. Instead, Ekart, Flipkart’s supply chain, launched cash on delivery.
So, it’s trust deficit, specifically related to delivery, that explains why COD still rules ecommerce in India. 2FA-related issues will continue to pose challenges to the mainstream adoption of online payments but, even if those issues were to be resolved over time, delivery risks would continue to ensure that COD remains the most popular method of payment for online shopping.
In Will The Sad State Of Logistics Hurt eCommerce?, I’d highlighted the growth challenges posed by core logistics (also called “3PL”) to ecommerce in India. It now appears as if the finance side of logistics (“4PL”) is posing existential threats to the industry. Just when the Flipkarts and Snapdeals of India are trying to turn profits, logistics is pushing their customers to COD (or keeping them there), which is by far the most costly method of payment for a merchant to service.