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Cash-on-delivery addiction a drain on ecomm firms

E-commerce companies may be growing at an explosive pace, but their overdependence on cash-on-delivery mode of payment remains worrisome, particularly since online retail ventures in India are not yet profitable.

Cash-on-delivery, where customers pay for products at the time of receiving them, still accounts for up to 60% of transactions, according to a study by Internet and Mobile Association of India and audit firm KPMG. This, despite sales at some of these ventures expanding at over 500% annually.

Flipkart, considered the biggest ecommerce venture in India, is targeting to cross $1 billion (over Rs 6,100 crore) in sales by 2015.

Snapdeal has grown around 500% between 2012 and 2013 and is set to cross $500 million (over Rs 3,000 crore) in revenue this fiscal. Collectively, online retail firms have raised almost $1.4 billion (over Rs 8,500 crore) since 2011.

Clearly, the growing customer base for ecommerce companies has not translated into higher adoption of payments through credit or debit cards. Also, the additional processes required for cash-on-delivery orders, their longer payment cycle, higher instances of returns and associated costs are hurting margins.

Cash-on-delivery hurts bottom line of cos like Flipkart, Snapdeal due to extra associated costs "The bottomline is impacted due to such orders. These transactions add about 3% additional costs," said Ashish Jhalani, founder of eTailing India. That translates to an increase in cost by at least 30 per transaction. "This number goes up by about 30% when returns happen."

Most ecommerce companies have spent the past three years putting the processes in place to deal with these issues. But they admit that cash is not the optimal payment method for them.

"In an ideal world, I would not like to have cash transactions. The non-immediacy of payments and higher returns are the problems we face with cash-on-delivery," said Sachin Bansal, cofounder of Flipkart.

Saurabh Malik, business head at Indiatimes Shopping, said extra costs are incurred for the additional verification calls for cash-on-delivery orders, collection charges by courier companies as well as two-way transportation charges in case of returned goods.

"The problem of returns is that we have to bear the courier charges for the return and goods can get damaged during the returns process," said Ankit Khanna, Snapdeal's vice-president of product management. Online retailers also have to wait until the delivery happens and for the courier companies to settle accounts before they receive the money.

Leakages, which E-commerce companies claim is under control, is still a concern.

E-commerce cos limit sales to low value items

Mukesh Bansal, cofounder and CEO of Myntra, said the company has taken out insurance on cash collections. So has Mithun Sacheti, founder and CEO of online jewellery retailer Caratlane.

All e-commerce companies have also restricted the value of goods that can be bought with cash. Flipkart, Snapdeal and Caratlane have kept the limit at about 50,000, while Yebhi has a limit of 20,000.

"We are limiting purchases to lower value items due to systemic issues. There are not many payment options available to a large section of people," said Sacheti of Chennai-based Caratlane. The company delivers larger-value items to the top six cities where it has its own delivery network. "We get a copy of the customer's pan card for cash payments over 50,000."

Online retailers seem resigned to having to deal with cash-on-delivery for the time being. "We have built these complications into our overall planning. You cannot worry about this on a day-to-day basis," said Nikhil Rungta, chief business officer of Yebhi, which ships about 6,000 orders per day.

However, experts are worried by the lack of initiatives by online retailers to solve this. "The fact that there are more cash transactions points to a lack of trust on the part of customers. No one is talking about what can be done to make the consumers secure," said eTailing India's Jhalani.

In fact, about 400 million electronic cards - primarily debit cards - are in use in India today. Industry estimates put the number of people transacting online at 10% of the active internet user base of 130 million, most of whom have some electronic card or other.

Companies admit that trust is an issue, but so is the process-heavy nature of online payments. "Even I have opted for cash-on-delivery as it is a one-click option," said Snapdeal's Khanna. "A lot of people with electronic cards don't want to enter the card details and passwords for online transactions."

Flipkart is attempting to solve this with its online payment gateway, PayZippy, which is currently available only to its vendors. The company plans to launch a solution for customers soon.

"The mission with PayZippy is to reduce cash in e-commerce," said Flipkart's Bansal. The company has also made proposals to the government to reduce the number of steps needed for card transactions and to store card details of regular customers so they do not have to enter the information each time they shop. "But realistically, I do not think cash-on-delivery is going away any time soon," said Bansal.