Why consumer preference for cash on delivery is holding back global ecommerce.
In summary: Cash on Delivery (COD) remains a preferred payment method in emerging markets like India, the Middle East, Russia, and parts of China, hindering ecommerce growth due to high return rates and logistical challenges. Despite its initial role in encouraging new online shoppers and overcoming trust issues with online payments, COD is unsustainable for retailers in the long term. Efforts to transition consumers to other payment methods face obstacles including low bank account ownership and persistent consumer preference for COD.
Although markets such as India and parts of the Middle East offer huge potential to ecommerce retailers, the preference of consumers to pay using cash on delivery (COD) is really holding back the growth of ecommerce in these regions.
Retailers in the Gulf identify COD as a major obstacle both to growth and to risk taking in online sales. The delivery failure rate is much higher for customers paying via COD: the customer both has to be at home and have cash to hand. It’s impossible to deliver to an empty house. This means goods are less likely to reach the people who ordered them, in which case there’s no hope of receiving payment.
Returns more likely
Customers paying cash on delivery are also much more likely to return goods without payment by simply refusing to accept delivery. It’s said up to 10% of COD orders result in a refusal to accept delivery, and returns up to 45%.
Possibly COD enables consumers to treat online ordering as a way to view goods rather than a decision to buy. With COD the onus is on the retailer to bring the goods to the customer for review rather than for the customer to research what they are buying thoroughly in the online environment. Either way, retailers are fruitlessly paying delivery charges.
Layers of complexity
COD also has a tendency to add a layer of unwelcome complication into supply chain. Delivery agents are obliged to carry cash, with the risks and additional organisation that entails. The settlement period between the online retailers and courier companies increases, stretching the retailers’ cash collection cycle. All in all, COD is a troublesome method of payment.
Consumer preference for COD as a payment method is persisting in many emerging markets, holding back ecommerce growth at the expense of retailers. It’s putting power in the hands of consumers at retailer’s expense and needlessly suppressing online spending in various regions around the world.
Middle East
Retailers in the Gulf region identify that the prevalence for COD as a preferred payment method is holding back e-commerce despite growing revenues from online retail. Some retailers are seeing return/undelivered rates of up to 40% associated with this payment method, which is obviously unsustainable. At the same time, COD is the chosen payment method for around 90% of ecommerce orders.
The United Arab Emirates is seeing growth in digital sales of more than 20% annually. Google has estimated that digital presently accounts for only 1% of spend here, compared with around 10-15% of more mature digital markets such as the US and Western Europe. This suggests the potential for online commerce could be huge.
Even in established retail markets such as Saudi Arabia and UAE, retailers are obliged to offer COD. Although these countries are well-established economically, COD persists because of low rates of credit card proliferation and because consumers still don’t trust online payment systems.
India
In emerging market India, there’s huge potential for online retail as a middle class growing in wealth tentatively begins to take to the internet and all it offers. Credit card proliferation is low, as is online banking, and only around 35% of Indians have a bank account at all. But use of online payment is even lower than credit card proliferation. Even if customers own a bank card, they are still disinclined to use it for online payment.
In India’s emerging economy, COD accounts for around 75% of online purchases. When a customer is new to online shopping, COD is a preferred method that lets them buy online while remaining within their comfort zone. Indian stores that offer COD have more online customers than those that don’t, and it’s a way to engender consumer trust.
COD is perhaps a necessary evil to tempt new online shoppers to attempt their first purchase. But it’s hard to persuade them to change payment method preferences even once they are more experienced at online ordering. Indian retailers who have tried using incentives to tempt consumers away from COD find that once the incentives are removed, purchasers revert back to their previous preference for COD payment.
Whilst COD works well for getting consumers to try online shopping, and enables those who don’t have bank cards or other online payment methods available to try ecommerce, it isn’t a sustainable model from the retailers’ perspective.
Russia
COD is also the payment method of choice for around 80% of Russians and it’s thought over 90% of online transactions are through COD. Russians mistrust both online retailers and online payment methods. Even if these problems were overcome, the national postal service is notoriously slow and renown for losing parcels. Factors like this mean it makes sense for consumers in Russia to insist they only pay when their parcels are delivered.
China
In China the picture is slightly different: COD remains popular but an increasing number of consumers are using online payment. COD remains a favoured method of payment for around a third of online Chinese consumers: in 2011 COD accounted for half of online purchases so the picture is improving.
Is COD here to stay?
Getting consumers to trust online payment methods will be a slow process. In the short-term retailers have some options to mitigate some of the negatives of COD. These include blacklisting COD customers who are persistent offenders when it comes to refusing delivery or returning goods, offering permanent incentives to switch to other payment methods, and asking for an advance payment to cover at least the initial delivery and deter timewasters.
Whilst COD really helps unlock demand for nervous consumers new to online retail, it’s a purchase method that favours the consumer at the expense of the retailer. COD should perhaps be seen as a necessary evil in the early days of ecommerce but consumers should be moved on from this stage as soon as is feasible. Cash on delivery is a payment method that favours the customer at the expense of the retailer. Whilst it helps grow the market initially, COD is not a sustainable model for ecommerce in the long-term.
Unfortunately it seems to be the case that in some markets in particular it is hard to persuade consumers to use other payment methods. Whilst retailers can do much to engender trust with their customers, and can offer incentives to try other payment methods, some factors remain outside retailer control. This includes unreliability of the postal service, the unscrupulousness of other online retailers, and low ownership of bank accounts. In some markets it seems COD will persist, at the expense of the development of the ecommerce market.