Cash on delivery (COD) is a mode of payment chosen by customers when shopping online in which they pay when they receive the good(s) that they ordered. COD is one of the most used payment options in Pakistan. Typically upon receiving an order shipped via COD, the consumer pays cash when he gets the parcel. This article discusses why COD is chosen as a form of payment and the problems associated with this business model.
Let’s analyse why COD is the most chosen form of payment.
Many customers do not have access to debit/credit cards to complete their payments. Apart from the low credit and debit card penetration, customers are also hesitant to use their debit cards to make online payments from the fear of being scammed. Customers prefer seeing the physical product before paying for it, similar to how shopping is done in brick-and-mortar retail stores.
A majority of e-commerce store owners in Pakistan are small-scale. Many of them do not have a payment gateway integrated on their website. The only mode of acceptable payment for them is cash on delivery. A majority of payment gateways have a setup fee and sometimes charge a percentage of the sale value. Many e-commerce store owners are reluctant to pay this fee. Cash on delivery does not have any set-up fees. Since their businesses are small, cash on delivery is the most convenient option for such stores, and customers do not have any other choice but to select this mode of payment.
A significant number of online customers are wary about paying upfront due to distrust. There have been various occurrences where customers were deceived by being shown a quality product online but delivered an inferior one. As a result, customers want to check the product first and then pay in cash. Most first-time customers are sceptical of how their shopping experience will be as they usually do not have adequate access to the information related to the brand. As a result, many customers opt for COD as it is the safest option with the least risk involved.
Even though COD is one of the most used payment method, there are problems associated with using it as a mode of payment. Here are some pain points in the COD collections process that are cause for concern today:
Suppliers using COD as a payment method for their customers will find themselves in a predicament regarding payment acceptance. There is a delay between receiving funds from customers and the funds being received by the e-commerce store owner. Logistics companies often take the responsibility of collecting cash payments from customers. However, they take around 7-10 working days to transfer the payment to the bank accounts of the e-commerce store owners. This restricts the cash flow and affects business. Small businesses are the ones most affected by this impending cash flow as it decreases their capital, so they are unable to re-invest quickly.
E-commerce store owners using COD as a payment solution also need to ensure that they put the right systems in place to manage their working capital. For instance: sometimes logistics companies might be late in delivering the orders due to unavailability of the customers, shortage of riders, bad weather conditions, remote locations etc. As a result, payments to the store owners get delayed and they need to manage the cash flows in the online business accordingly.
Using COD as a payment method, the logistics companies bear much of the risk. It becomes a huge responsibility for the logistics companies to deposit the funds in time and also ensure that they don’t lose the cash while doing so. If they lose the cash, it might turn into a loss for both parties. Logistics companies need to ensure their riders are honest and will deposit the entire amount that they collect. Any failure from their end can result in loss of business for e-commerce merchants.
Riders cannot leave orders at the door since they have to collect cash from the customers. COD proves to be a time-consuming process as the rider has to wait at the customer's doorstep for a longer duration for their customers to bring out cash. In addition to that, while using COD if the customers are not present at their homes or do not receive calls, the rider cannot leave the parcel at the entrance. This becomes a nightmare when they have to make several trips to the same location. Moreover, there is a chance of human error when collecting and counting cash from the customer and depositing it later on.
Many large e-commerce stores are promoting contactless payments in which the riders leave the parcel at the door if the customer has a made a pre-payment online. Using COD as a mode of payment, rider shave to face the person who is receiving the parcel, which is a risk as it can lead to an increase in COVID19 infections among riders and the customers. With the rise of the new COVID Omicron variant, it is essential that business activities do not come to a halt so e-commerce stores need to try their best to curb the spread of the virus. Some companies have started giving discounts to users who opt for contactless payments to minimize the spread of the virus while orders are being delivered.
When customers have made a pre-payment, they are naturally more eager to receive the parcel. The return rate is more when customers have opted for COD as a mode of payment. In addition to that, customers are more likely to forget that they placed an order if they have not made a pre-payment. When money is involved, customers will try their best to receive the parcels on their first attempt. If the customer placed a COD order and do not receive the parcel at all, the level of concern is much less. However, if they have paid cash they will check with the eCommerce store and/or the logistics company to learn when their delivery of parcel will be made. Therefore, it can be said that customers are less serious when they choose COD as a payment method.
Overall, COD is one of the most expensive ways to collect payments for suppliers as it involves more costs. The cost is high for the e-commerce store owners who have to bear the delivery costs if the parcel is returned and/or the customer is not available to receive it. E-commerce store owners find it beneficial to accept online payments as it improves their cashflows, there is a reduction in the delivery attempts due to the increase in interest from the customers and the overall risk in spreading of COVID-19 is also reduced.
For using online payments, the e-commerce store owners will have to make an initial investment to setup the payment gateway. Similarly, the customers will have to pay the bank charges for online payments that are most charged annually. Other than that, the advantages of using online payments outweigh the benefits of using COD.