India’s Cash Commerce Problem

India is a country where the stats show consumers want more eCommerce, despite the physical barriers — which include a poorly designed delivery infrastructure and a cash-driven economy. Still, the country might just have the best and worst case examples of how to develop an eCommerce structure.

India seemingly has the perfect audience for driving online shopping with its roughly 300 million active Internet users, coming in second behind China. But there’s one hitch creating a lot of friction with the eCommerce marketplaces that’s bigger than the delivery speed logistics — the fact that 80 percent of eCommerce transactions are paid out in cash upon delivery. And the fact that access to credit card remains slim as a Wall Street Journal report said just 1.8 percent of those over the age 15 have access to or have a credit card just underscores that point.

The lack of online transactions, despite the growing eCommerce popularity in the region, points to only one thing: India’s current cash-based system is not only creating friction with a lot of merchants who have to wait for their payments, but it’s creating a fragmented economy that may be preventing the growth of a potentially burgeoning online shopping market.

“As the digital economy expands and more business activities are affected, it becomes more important for governments to consider policies that can help to harness eCommerce for sustainable development,” United Nations Conference on Trade and Development Secretary-General Mukhisa Kituyi said in a statement given to WSJ.

While most of the eCommerce development, like seen in the U.S., is focused on getting people to use a “buy button,” one-click ordering, and mobile payments, India hasn’t quite solved how to address its cash-focused commerce system. Whether it’s because of a lack of banking infrastructure or a population that just has little interest in having credit cards, cash is still king in India and the marketplaces must find a way to help the purchasing process evolve so merchants can bank on a more reliable payments system. 

In the meantime, India has relied on a motorcycle-driven deliverymen system that’s filling in the gap for the lackluster postal delivery service. Flipkart and Snapdeal — two of India’s largest eCommerce platforms — are relying on these deliverymen to provide speedier options than trucks can offer in the heavy traffic populations. This system is also much quicker than the postal service in India, so more and more merchants are relying on these otherwise unconventional options to get their goods into customers’ hands. Flipkart and Snapdeal dominate India’s eCommerce share as they account for 44 percent and 32 percent of the market, respectively. 

“Stuff needs to get to people. If stuff doesn’t get to people, eCommerce would not have grown the way it has,” said Rohit Bansal, the chief operating officer of Snapdeal, told WSJ. 

The other problem with relying on deliverymen is that items often get damaged in the trip and then the merchant is out of luck since the consumer isn’t going to pay for the broken goods. That’s another point of friction between the buyer and the seller when they have to rely on a middleman to handle getting the goods into the customer’s hands — there’s always room for error. Still, it seems to be the best option in place for now. 

But the delivery option is like putting a Band-Aid on a leaking pipe — eventually the system may bust. Without digital payments to drive the eCommerce system, the current delivery model leaves the payments process between the consumer and merchant delayed. And that delay leads to more friction in a region that needs financial growth. But until the lack of electronic payment options gets resolved — a problem much larger than the delivery issues —  the eCommerce market may not be able to grow to the level that consumers and merchants are seeking. 

Still, despite its current problems with online retail, a recent retail survey in India predicts that by 2019, eCommerce will pass physical store sales by 2019. According to the report, eCommerce will grow by 11 percent by 2019, while modern brick-and-mortar retail is expected to decrease by 13 percent over the same time period. But unless the cash-driven commerce problem gets fixed, will these estimates be hit? There’s a lot riding on India being able to modernize its digital shopping economy.

Currently, modern retail accounts for 17 percent of the economy, largely concentrated in India’s seven largest cities like the National Capital Region (Delhi, New Delhi) and Mumbai, while online retail sits at just 2 percent. Taken together, modern retail has a penetration of around 19 percent, which may grow to 24 percent by 2019 as “disruption” from sites like Amazon, FlipKart and Snapdeal continues to grow. A Morgan Stanley analyst projects that India’s eCommerce market will grow to $100 billion by 2010, which would be a massive increase from the $3 billion that analyst was comparing when looking at 2013 figures. 

While growth in eCommerce is expected, a retail eCommerce index compiled by the United Nations indicates that India is falling behind many countries when it comes to having the infrastructure to deliver and serve the needs of its online customer base. The U.N. Conference on Trade and Development B2C eCommerce index indicates that India ranked 83rd out of 130 countries in the index that ranks countries by Internet users, server infrastructure, credit card penetration and postal delivery. 

As more mobile money schemes work to enter the unbanked populations like those seen in India, and national ID payment cards are being invested in across the region, there’s still a gap in how consumers in India are able to pay for their goods — despite the many mobile payment startups and payment schemes trying to enter the area. This is not only creating frustration for merchants who need those consumers buying in order to keep their doors open, but also sparking frustration for consumers who have limited means to access and pay for those goods. 

While the brigade of motorcycle deliverymen may be the best solution for now, India surely cannot continue to rely on its cash-focused consumer economy forever. For India to build its longstanding global economy that’s going to deliver the much-anticipated eCommerce growth, the region is going to need a system where consumers can turn that cash into credit, or another electronic payment method, and put those payments directly into the hands of online merchants and marketplaces who are keeping the digital economy in the country running.