Why cash on delivery still exists in major markets

Cash on DeliveryGiven the explosive growth of global eCommerce, it can be easy to overlook the fact that effectively selling in a lot of major markets around the world requires a robust “cash on delivery (COD)” infrastructure.  Say again?  Yes, I’m talking about Cash on Delivery: when someone pays with cash, certified check or money order at the point that they receive their ordered product.

First a few stats (these will change based on industry, vendor, etc., but they are more or less in line with others).  COD in the US and Europe is about 1% and 5%, respectively.  That’s probably why this seems like an odd topic for online payments. But…

COD as an online form of payment in Taiwan is 52%, Russia is 41%, Poland is 25%, India is 25% and China is 11%.  The aggregate for Africa and the Middle East is 48% (93% in Ethiopia, 71% in Ghana, 70% in Egypt, and 45% in Kenya to name a few).  You’re probably thinking… that’s a lot of really big markets… with a lot of people paying this way… why?

Customers want COD because:

  1. Lack of cards - They don’t have credit cards or other forms of payment that work well online.
  2. Lack of trust – They don’t want to pay for something in advance and then not have it show up.  If you didn’t trust the US Postal Service, imagine a place where you’ve probably had the experience of someone going through your package or ripping it apart before it gets to you more than a few times.

Merchants want COD because:

  1. Larger market – They can reach a larger portion of their target population who can only pay with COD.
  2. More purchases – Impulse buys tend to increase since customers don’t need the money at the time of purchase.
  3. Cash in hand – It’s always better to get cold hard cash than credit.

Seems simple enough then, right?  You want to sell product in countries where COD is a major form of payment, so you just add it as a payment type.  Well, it’s not easy AT ALL.  Here’s why:

  1. Returns – This is hands down the biggest issue with COD.  The incremental cost of COD is about 1 to 3%.  That’s not insanely high, but without a paid commitment there are a lot more returns (often increasing costs by 30% on each item).  As markets mature, consumers are taking advantage of COD to buy multiple versions of the same item and then refusing the ones that they don’t like.  Returns are the major factor eroding margins at start-ups like Flipkart (who just raised another $1 billion USD), but when 40 to 60% of your sales are on COD and you need to grow like crazy…
  2. Logisitics – There are a few companies that build out shipping logistics themselves, but typically global merchants work to setup relationships with local carriers, etc.  Imagine the operational headaches that come with getting product to the logistics company, bringing cash back into your accounting systems and then dealing with a large number of returns to your COD partner and then back to your warehouse.  It’s a headache.
  3. Black money – One of the other reasons (and probably relatively minor compared to the first two) that consumers choose COD is to have an outlet to use their black money (money that comes from the black market where taxes, etc. have not been paid).  While not necessarily the concern of the merchants, it adds another layer of dubious characters to the mix.

This combination of returns, logistics and black money make COD a necessary, but highly complex/painful topic for eCommerce professionals working in these markets.  The end of COD in many of these markets is many years away, so if you want to play, it’s worth taking a good structured and strategic approach.

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Filed under Local, Payments