It may well have begun when King Charles I of England first made postal services available to citizens in 1635. There were no stamps, and the cost of postage was paid by the recipient. Its modern avatar in India is cash on delivery (COD) - the biggest reason for the success of e-commerce in India.
According to Ernst & Young (E&Y), COD accounts for 50 to 80 per cent of online transactions in India. For the larger e-retailers, this payment mechanism is available in 600 cities and towns, and has helped them acquire first-time customers rapidly.
There are many reasons why India took to COD.
Credit-card penetration is low - in August 2012, former Reserve Bank of India governor D. Subbarao noted that in comparison to other emerging markets such as Brazil, Mexico and Russia, the value of banknotes and coins in circulation in India, at 12 per cent of GDP, is high. The number of non-cash transactions per person in India is six per year - low compared with other emerging economies. Many cardholders avoid paying with plastic because of security concerns.
Another reason for COD's popularity is black money, says Milan Sheth, Partner and Technology Industry Leader for Ernst & Young India. People prefer to use cash for high-value transactions. "Many want to pay by cash in Tier-II areas. Aspirational purchases are a trigger for COD," he says.
- Low credit-card penetration in India
- Black money culture
- Privacy and security concerns of using cards online
- Desire to touch and feel a product before paying for it
- Builds trust for new companies
COD is used in other emerging markets such as China, Russia and Vietnam, too. The popular perception is that Flipkart, India's biggest online retailer, pioneered it in India. In fact, older e-commerce companies have tried
it before. "In 2005, we were doing it at Indiatimes shopping," says Sharat Dhall, President of Yatra Online. He was vice president of e-commerce at Indiatimes.com between 2005 and 2007. Flipkart started in 2007 and introduced COD in 2010.
E-commerce companies also use COD to build trust. E-commerce is young in India, and COD bridges the gap between online and brick-and-mortar retail, by allowing consumers to touch and feel the product before they pay up.
"COD offers a fairly risk-free trial process
for a new user," says Dhall. "It has helped unlock a huge amount of demand." Some travel e-commerce players, he adds, offer COD for international tickets and holidays. "When it started happening five or seven years ago, it popularised international products. Customers had card limits, and these were high-value transactions," he says.
Trust is a driver for COD, considering that none of India's e-commerce companies are huge brands, says Harish Bahl, founder and Chairman of online retailer Fashion & You. "COD is easier than credit cards, which have a high failure rate," he says. "Then there are category-specific factors that necessitate COD. In fashion, you may not be sure of the fit." Sixty per cent of Fashion & You transactions are COD.
COD has helped e-commerce grow, but it does have pitfalls. It can be expensive for the seller if the buyer returns a product, as the company pays two-way courier charges. The return rates in online shopping in COD transactions averages around 40 per cent, the E&Y report says.
There are also working capital issues. The report notes that COD adds a layer to the supply chain, because of cash handling. This can increase the settlement period of online retailers and courier companies to as much as three weeks. This stretches the online retailers' cash collection cycle.
"Besides more supply-chain costs, from a control perspective, it is not the best environment. There are chances of pilferage in cash handling," says Gaurav Gupta, Senior Director at Deloitte in India. However, for now the cons of COD are outweighed by the pros - it is expanding the e-commerce market and drawing in new customers such as students, who don't own credit cards but spend a lot of time on the Internet. No wonder many industry watchers call it a "necessary evil".