Cash on delivery delinquents threat to India e-commerce

Indian e-tailer Flipkart's decision to stop the COD option for orders above US$185 to the state of Uttar Pradesh could reflect the challenge of high return rates and fraud, according to an Forrester analyst.

Flipkart's decision to stop cash on delivery (COD) for orders over US$185 (10,000 rupees) to the state of Uttar Pradesh may be the first sign that online retailers are pushing back against the popular payment method.

While COD is essential in a nascent e-commerce market, it can have a large negative impact on business margins, said Vikram Sehgal, vice president and research director at Forrester Research. He was writing in a blog post on Monday, called "India's e-commerce woes: managing logistics challenges in India," which explores the impact the cash on delivery model.

He pointed out given the challenges of high return rates and fraud, especially for COD goods, Flipkart recently announced that it was not going to be fulfilling orders of more than 10,000 rupees in certain areas of Uttar Pradesh.

Flipkart stopped the COD option for orders above US$185 to the state of Uttar Pradesh.

"This is exacerbated in a nascent market where consumers are testing this new medium of ordering goods , as the return rates can be quite high," he said. Return rates, for when items are not paid for at the time of delivery, ranges between 5 and 25 percent, depending on product category, customer demographics, and their online experience.

Managing deliveries

Sehgal said the ban was the right move. "I believe Flipkart's decision to stop delivering goods worth more than 10,000 rupees in certain areas of India is the right strategy for Flipkart, as it looks to manage this challenge while ramping up its top-line (revenue) growth," he said.
According to a report in the Times of India, Flipkart customers would order expensive goods "just for fun", and refuse to accept them upon delivery.

"It takes a minimum of 10 days to ship a product to a customer and back to the company if it's not purchased. It causes loss to sellers, selling through Flipkart, as their products get blocked in transit," a senior Flipkart executive told TOI. The report added  ransportation and insurance costs were typically proportionate to a product's value.

Cash on delivery (COD) is a highly popular payment method in a country where consumers are scared, or don't have the means, to transact online.
Last week Amazon launched an online marketplace for India , where shoppers can pay for goods using the COD option with no limitations.
Sehgal said Amazon's decision to offer COD was not risky, but to be successful it must carefully manage: the order sizes; minimize returns via customer analytics and barring repeat offenders; and category selection.