With strong growth in access to the internet, rising household incomes, and increased interest in eCommerce, India is quickly becoming a promising market for online retailers. But consumers wanting to pay for online purchases using cash-on-delivery (COD) is proving to be an issue to many online retailers looking to enter the market.
Fortunately, there’s some indication that COD may be on the wane in India. If consumers can be persuaded to move away from choosing cash-on-delivery as a payment option, it’s likely to significantly boost eCommerce in this booming market.
India is a tricky place to be an online retailer. A number of recent protectionist measures implemented by the government has frustrated efforts by major online retail brands to penetrate this market.
India remains an extremely promising market for eCommerce, but it’s currently structured to benefit domestic rather than multinational retailers. There are also other frustrations, such as a lack of standardized address formats.
A 2016 study by Nielsen found that COD is the favoured method of payment for over 80% of consumers in India. In rural areas, this rate can reach as high as 90%. A cultural preference for COD is holding eCommerce back not only in India but in other promising markets, like the Gulf nations, where retailers also see it as an obstacle to growth.
Payment frustration
Cash-on-delivery frustrates retailers for many reasons, such as difficulty in collecting payment or simply not getting paid at all. As well, in countries where addresses are difficult to navigate, last-mile agents often have a hard time locating the customer’s delivery location. Plus the customer needs to be home to receive a COD delivery, and have the right amount of cash on hand for the payment.
COD is also associated with a higher rate of return. It’s not unheard of for a customer to open the package in front of the delivery agent, try out the contents, and immediately return them without paying.
Although popular with Indian consumers, cash-on-delivery purchases are often more trouble than they’re worth for retailers.
COD also poses a higher risk of theft, as agents can pocket the cash or be robbed. This adds a higher level of insurance risk, driving up the costs associated with doing business. Delays in getting paid for items also add cashflow problems to the retailer’s list of woes.
In essence, cash-on-delivery places the full risk on the vendor. There is, however, one advantage to COD: It gives the customer confidence in the process. This means customers don’t have to pay a thing until the item is actually in their hands. In fact, it’s thought that COD may have fuelled the growth in eCommerce in India by simply boosting the confidence of inexperienced online shoppers as well as those without a bank account.
The move away from cash
But things are changing rapidly in India. Customers are more and more likely to know someone who has shopped online, which increases the chances of them trying it for themselves.
As well, since eCommerce started to take off in the country, significant government efforts have been made to bring more people into the banking system. That means an increasing number of people have access to a bank card, mobile payments, or both. In fact, India is one of the world’s top markets for mobile wallet adoption, and mobile payment methods will most probably replace COD faster than bank cards.
RELATED: How Mobile Payment Technology is Powering India’s eCommerce Growth
The fight against COD in India has been a joint effort on the part of retailers and policymakers. Retailers are trying to incentivize customers to use other payment methods, such as giving preferential offers to customers using online payment methods. Plus retailers will often penalize cash-on-delivery buyers by capping their order values, adding extra charges, and restricting which products are available for purchase.
At the same time, India’s government is looking into policies to drive people into the formal banking system. This included a controversial and fairly aggressive demonetization process that made some bank notes invalid.
The government’s drive to demonetize certain bank notes has encouraged Indian consumers to forgo cash for mobile payment options.
This policy attempted to force Indians away from their cash-payment habit. Although highly disruptive, it appeared to have the desired impact of boosting debit-card usage and encouraged millions of people to open bank accounts for the first time. Following demonetization, the volume and value of non-cash transactions increased.
Despite these policy measures, it’s still far too early to announce the death of India’s strong preference for cash payment. In fact, cash-on-delivery appears to have bounced back after an initial dip following demonetization.
Significant industry players such as Flipkart may be pushing customers towards cashless payments, but there continues to be resistance. Recent regulatory changes may even damage the position of the major eCommerce players who are fighting COD the hardest.
The reality is that if you’re engaging in eCommerce in this market, you can continue to expect at least 50% of customers to opt for COD as their payment method of choice.
