When Flipkart launched in 2007, the Indian ecommerce sector was in its infancy. A decade later, India’s ecommerce sector is surging, thanks to an increasingly internet-savvy population and cheaper smartphones.
However, ecommerce in India remains heavily dependent on the cash-on-delivery mode of payment — more than 50 percent of transactions.
Cash on delivery is the process of shoppers paying for a product in person on its delivery. If the COD buyer fails to make the payment, the product is returned to the seller. In India, the system was designed to attract mainly rural consumers who didn’t have access to digital payment systems — such as online banking and credit cards. Cash on delivery has facilitated much of the growth of Indian ecommerce.
In this post, I’ll address why Indian shoppers continue this traditional payment route.
Familiarity. Indians are more comfortable with cash payments than digital, especially in rural and semi-urban regions. Likely a villager will be unfamiliar with internet banking even if he has a bank account or is willing to make payments using a debit card. Instead, he will withdraw cash from an ATM and use it to complete an online purchase.
In November 2016, the Indian government reduced the number of banknotes — currency — in circulation. This has cut down on ATM withdrawals. But, the average withdrawal amount is now higher. The demand for cash reached its tipping point in April 2018 when ATMs in several states ran out of currency, putting further pressure on the Reserve Bank of India, the country’s central bank, to print more bills.
Lack of infrastructure. The lack of a digital payment infrastructure is why many Indians are reluctant to go cashless. Most digital payment gateways require a smartphone and data connection. While cell phone penetration in India will likely be 85-90 percent by 2020 (up from the current levels of 65-75 percent), most observers predict that only half of smartphone owners will subscribe to network data service by 2020.
Beyond national highways and major cities, cellular connectivity in India is limited. Plus, not all smartphone owners have the latest models and software required to use the payment gateways. Thus many consumers shop online using outdated smartphones where the only payment option is COD.
Consumers can continue to use cash for online transactions even if the cell phone network is spotty or there are power cuts. Hence most cell phone users can’t jump on the digital payment bandwagon, not for a few years at least.
Lack of trust is likely the most common reason for not using digital payments. Most Indian shoppers are wary of perceived security risks. They are unaware of common security measures that protect online transactions. Banks may provide them with a debit card or similar, but the process to use it is often confusing and intimidating.
Further, reports of increasing incidents of online fraud and data breaches heighten consumer worries.
The lack of trust extends beyond the digital payment systems, however. Most Indians are also distrustful of online retailers. India has experienced a number of prominent ecommerce frauds where customers have received a fake product or something other than what they ordered. Thus the easiest way to avoid this kind of fraud is COD — is making the payment after an item is delivered and inspected.
Absence of cyber laws. India lacks cyber laws to protect consumers from losing money or sensitive information during digital transactions. Although the new Consumer Protection Bill, 2018 is an improvement over its predecessor — the Consumer Protection Act, 1986 — it does not adequately address online payment and ecommerce frauds, according to many legal observers.
Other laws such as the Banking Regulations Act and the Banking Ombudsman Scheme apply in part to online transactions, but the legal and technical roadblocks can make it almost impossible to prosecute fraudsters.
Moreover, none of the anti-fraud rules regulate e-wallets. The Reserve Bank of India’s recent plan for digital wallet companies to comply with the extensive know-your-customer norms can make it easier to track digital payments. Nonetheless, India needs a comprehensive legal framework to regulate its digital payments and ecommerce market.
A Long Journey
The Indian cash-on-delivery model has fueled ecommerce. But the industry must embrace digital payments to extend its growth. Owing to tradition and infrastructure and e-banking hurdles, India’s move to digital ecommerce will likely be a long journey. Thus international sellers looking to tap into the Indian ecommerce market should understand the consumer psychology and the importance of using cash.