How to move from COD to Pre-paid

As I finish a little more than a year in Indian e-commerce, I plan to share my thoughts & learning in the coming days. This is the first of (hopefully) many more posts to come on topics related to Indian e-commerce.

Today's post is about the problems surrounding Cash on Delivery and how sellers & market-places are now working on moving towards pre-paid orders.

Cash On Delivery (COD) has played a very important role in promoting and expanding Indian e-commerce market-places by building a "trust factor". However, for the seller & market-places, it creates substantial additional over-heads - some of which are given below:

• While delivering a buyer's order, the logistics companies charge an extra fee for handling cash - many times the complete cash handling fee cannot be passed on to the buyer due to pricing competition
• The logistics companies take a few days to remit the money to the market-places - normally 4-5 days
• The market-places then deduct their commission & other charges and then remit the money to the seller after a few days - normally remitted twice a month
• There can be cases of money getting stolen/lost in transit as it is hard cash

These issues create a substantial cash-flow problem for the seller thereby needing to go for expensive financing options. Over the last year or so, most sellers & market-places have realized this as an important problem in the seller eco-system and have taken some steps towards addressing it.

Cash backs 

 The easiest approach that has been taken to make the buyer pay upfront is by giving her a discount for pre-paid orders. These are normally being given as cash backs for using a specific card or wallet while placing the order. This cashback approach ensures that the bank or the wallet company provides the discount to incentivize the buyer to use their card/wallet (going as part of their marketing or customer acquisition budget) and the seller & market-places don't have to bear the burden of discount. For example, SBI typically provides a cashback for using its card for shopping on Amazon. A similar set-up can be seen between HDFC's credit card or PayZapp and Flipkart.

Cashbacks in wallet

Some of the market-places have now entered into the wallets business to ensure that they can control the entire payments value chain. PayTM & Snapdeal are two leading examples of this approach. Since PayTM started as a wallet and then entered the e-commerce market-place business, so it has adopted the cashback approach in a slightly modified way. PayTM discounts pre-paid orders on their market-place if the buyer uses the PayTM wallet. That way, the buyer gets a discount, but the cashback money continues to stay in the PayTM wallet. Snapdeal started as a market-place and then entered the payments business by acquiring Freecharge. So unlike PayTM, when Snapdeal entered the payments business, it had an existing e-commerce buyer eco-system and wanted this eco-system to adapt the Freecharge wallet. So, instead of making the buyers use the Freecharge wallet to pay for the e-commerce transaction, Snapdeal gives a small cashback (usually less than Rs. 100) into the buyer's Freecharge wallet so that the same can be used for other non-e-commerce transactions like bill payments.

Card on Delivery

A third approach, primarily adopted by Amazon, is to allow the buyer to pay with a credit/debit card when she receives the order. For the buyer, this ensures that the hassles of carrying cash & having exact change is removed and the payment also happens only after receiving the order. The logistics player also finds this more convenient as his delivery person only has to carry a card reading machine (normally connected to a smartphone) instead of carrying cash, depositing it at the end of the day, etc. This is advantageous to Amazon and its sellers also since the payment is received as soon as the delivery is completed and reconciliations and remittances can be near instantaneous.