E-commerce sites are working hard to wean Indian shoppers off their addiction to cash-on-delivery

India’s Rs 1,00,000 crore – and booming – e-commerce sector suffers from a serious flaw: its over-reliance on cash payments.

As a result, the transformation in the country’s shopping scene is still half-baked. For all the digital boom, Indian online shoppers make between 60% and 65% of their payments through the cash-on-delivery mode, which is even potentially illegal, if the Reserve Bank of India’s stance is anything to go by.

The popularity of this mode is the result of a range of hurdles, including weak cellular infrastructure and the absence of robust cyber laws.

Yet, cash on delivery remains an inefficient mode of payment for e-tailers who are desperately trying to wean shoppers away from it. “Ask an entrepreneur if they want COD – absolutely not. At the end of the day, the cash is not directly on your balance sheet. Digital payments almost immediately come to the bank account while COD may take over a week,” said Sampad Swain, CEO and founder of payment gateway Instamojo.

Besides, handling cash involves additional costs. Typically, returns are the highest for cash on delivery products which adds to the cost of delivery and is an added pain point for the e-tailers.

“There are factors like delivery failure, accountability issues, follow-ups to ensure smooth delivery, delay in returning the cash collected by courier companies etc, which remain discouraging factors for the e-commerce companies as the risk is on their side,” said DD Mishra, a research director at the global research and advisory firm Gartner.

Then, there is also the possibility of theft and leakage.

Therefore, e-tailers are trying to convert cash on delivery orders to prepaid with cash backs, discounts, and smoother return policies. Despite limited success, they are taking heart in the fact that cash on delivery’s share of the payments pie is shrinking.

“Our prepaid numbers have strengthened. This is for two reasons – our customers trust us, and the convenience of digital payments,” said Gaurav Tejwani, vice-president of product at Nykaa.com, the Mumbai-headquartered beauty e-tailer. “To help users with digital payments, we have improved our products, educated users about the benefits, and opened up newer payment options that either increase the reach or reduce the friction from the prepaid process.”

The war is on

The cash crunch that followed demonetisation, when prime minister Narendra Modi declared high-value currency notes illegal in November 2016, forced a large number of Indians to shift to online payments. But soon cash made its way back to the system, a trend witnessed by e-commerce firms, too.

That’s because handling cash is the easiest.

“In a world where two-factor authentication [for online payments] is required, nothing can beat the convenience of COD,” Sanjay Sethi, CEO and co-founder of online marketplace Shopclues. “Then, [some of the] consumers coming online are new and interacting with e-commerce for the first time. It will be some time before this behaviour is changed.” Most first-time shoppers are more comfortable using cash on delivery while the repeat and experienced buyers opt for plastic money, he added.

Considering the challenges involved with cash-on-delivery, some companies made the bold attempt of phasing it out completely. But customers weren’t ready for it and the e-tailers were forced to do u-turn.

“This [cash on delivery] is something that drives a majority of sales and hence it can be discouraged gradually by giving better choices to consumers and incentivising alternative modes of payments,” said Gartner’s Mishra.

So e-tailers have been offering a “pay on delivery” option, which involves the use of cards, for cash-on-delivery shoppers. In fact, firms like Amazon are even setting targets for delivery agents. “We have been told to ask customers to swipe their cards instead of giving cash and we need to do it for at least a certain number of orders. If we don’t, then we are even penalised for it,” said a delivery executive from Amazon, requesting anonymity.

Change is coming

These steps have yielded some results as experts Quartz spoke to say that cash on delivery has been gradually declining. “Higher trust on the e-tailing platforms and increasing penetration of digital payments platforms have helped reduce dependence on COD,” explained Ujjwal Chaudhry, associate director at the market research company RedSeer Consulting.

The government also has a part to play by slashing fees associated with digital payments. “The cost of a prepaid transaction has dropped substantially. The net cost variation is not very high for COD and prepaid,” Nykaa’s Tejwani said. “This in turn allows us to pass some benefits to the consumer, which in turn helps us get additional prepaid orders.”

While shoppers in metros are digitally savvy, consumers in smaller towns and cities are also slowly warming up to e-payments. “We have seen people from tier-2 and smaller cities opting for digital payment more than earlier. As a result, COD is becoming just another cog in the wheel and not the only medium,” said Chaitanya Ramalingegowda, co-founder of e-tailer Wakefit.co, which specialises in selling mattresses and beds.

Yet, it will be another decade before cash on delivery’s preeminence reduces significantly, say experts.

This article first appeared on Quartz.