Many eCommerce companies offer Cash on Delivery (CoD) to their customers as a mechanism to pay for products purchased online. Since the number of credit card holders in India is fairly small, and Indians tend to pay cash for most items, this seems like an excellent option to reduce the friction for customers to purchase.
The other benefit to customers is that they can actually ensure that the merchandise arrives before they pay for it, instead of paying for it upfront and not knowing when it will actually be delivered. Of the 6500+ eCommerce companies in India, less than 5% offer CoD as a payment option. So if it’s hailed as the savior of eCommerce , why are more companies not adopting it?
First it costs more. The two major companies, Blue Dart and Aramex charge a transaction fee (about INR 50) plus a percentage of the amount (about 1 to 2%) collected. Customers are not necessarily willing to pay more because they are paying by cash so this eats into the merchant’s margins. Although the fees are similar to credit card transaction fees, payments from them are much faster to the merchant.
Second the return rates (across all eCommerce companies) for merchandise is about 40%, according to Blue Dart. This may vary for certain companies (Some companies have undocumented claims of 15% returns, whereas others claim to have 60% non acceptance). So if a small merchant (doing 100 transactions a day), about 30% through CoD (30 TX/day), and their returns are at 40%, then INR 1200 is lost daily. The courier company charges an extra INR 50 to 100 as return fees to ship merchandise back.
Finally, when customers use the CoD option they don’t place a firm order. They indicate intent to purchase the item. So there’s no fallback for the merchant if the product is not accepted. Reasons for not accepting have been many including, “changed my mind”, “wife did not approve purchase” or “did not have cash when the courier arrived” or “found a cheaper price elsewhere”, usually offline.
Still it’s a very interesting option for many vendors who are tackling each of these issues with small innovations of their own.
For e.g. some vendors call customers after they place a CoD order to ensure they actually want to purchase product. Some even charge CoD customers a small transaction fee.
There are 3 vendors who have already started to report users who do not accept orders to a credit reporting agency (one is maintaining their own database and refuse to ship to customers who return goods after placing a CoD order). They have had limited success so far they claim, because the unique key to connect users tends to be missing, but they are using the user’s name and address pair as the combination to track errant customers.
Other innovations include using their own local courier personnel in major metros to reduce transaction costs.
Although the number or merchants offering CoD is fairly small, given the opportunity (especially in tier 2 cities) I expect a lot more merchants to innovate further to reduce returns. This would make CoD as a viable payment option for merchants and a safe one for consumers.