The cards problem
For Indians, the idea of credit isn’t second nature (yet) and the adoption of electronic payments has been slow. India remains a cash-driven economy with over 95% of retail transactions still carried out through cash. The “carded” population is significantly lower than the global benchmarks, creating challenges for e-commerce players.
Unlike most other infrastructure issues faced in India, where the trend lines are generally positive, credit card penetration has actually seen a decline of late. This is due to the tightening of norms by banks for the issue of credit cards, after delinquency rates shot up in 2009.
There are 18 million active credit cards in circulation and an estimated 8 million unique credit card holders. This translates into an abysmally low credit card penetration of 0.7%. There is an argument that the growth of debit cards helps offset the low penetration of credit cards. Data shows that the number of debit cards in use is more than 10 times the number of credit cards in use, but the total transactions through credit cards in the year 2010-11 accounted for Rs 75,500 Crore ($16.8 billion) while transactions through debit cards accounted for just Rs 38,700 Crore ($8.6 billion). This clearly shows the significance of the credit card number.
Payment gateways space well-developed
Despite the low penetration of credit cards, the payment gateway space in India has seen significant development. In recent years, several local payment gateways have emerged, and a few of them have been able to offer reliable services and appropriate solutions to the Indian e-commerce players. CC Avenues, EBS (now acquired by Ogone) and BillDesk have led the way, while the bank payment gateways – ICICI Bank’s Payseal, HDFC Bank and Citibank have not been far behind. Recently, Nasper (MIH) Group’s PayU has rolled-out its India services. Global leader PayPal’s India presence has been restricted on account of regulatory issues. The presence of multiple players and increase in e-commerce volumes has helped rationalize payment gateway charges to 2.5-3.0% that used to hover around 4-7%.
Key differentiators amongst various payment gateways are Merchant Discount Rates (MDR), failure rates, settlement days, fraud management, integration support and lead time. The flexibility of independent payment gateways seems to give them an edge over Bank led payment gateways.
Drop-off rates in e-commerce websites hover around 30% at the payment page
Payment gateways are often blamed for the high consumer drop-off rates, but in reality, there are several other factors that contribute to this. Some of these include:
Long checkout process, which requires the user to re-enter most details every time they transact. Contrast this with Amazon’s one-click payment process
Introduction of OTP and two-factor authentication, though improved the security features, have also added to the length and complexity of the payment process
Connectivity issues and the power scenario in the country often impact transactions, preventing them from being completed seamlessly
Many e-commerce sites have not addressed integration issues with their payment gateways, adding to the problem. Global players typically undergo more than 6 months of testing with their payment gateway systems before launching the service. Indian players on the other hand are known to do the testing post launch
Technical and connectivity issues apart, there is also the issue of lack of consumer trust in online transactions. Results of IMRB’s I-Cube 2009 survey shows that 99% of the active Internet users who do not shop online, do not trust online transactions. While global players like PayPal have strong consumer protection initiatives, Indian players have not yet made too many attempts to improve consumer perception of online payments.
Chinese players faced similar issues, but have found respite in COD and Alipay
China has a credit card penetration of around 15% as against an Internet penetration of around 30%. Even though debit card penetration is far higher, they are used primarily for withdrawing cash from ATMs. Like Indian consumers, the Chinese too lack trust in online transactions.
Fortunately for Chinese consumers, other forms of payment mechanisms have emerged. And even after becoming one of the largest e-commerce markets in the world, China 7 continues to have low penetration of pure online payments. Cash-on-Delivery (COD) still plays a major part in China with the COD’s share of transactions of 360buy, the largest B2C e-commerce player, estimated at around 80% in 2011.
The other interesting innovation is Alipay – a payment service from the Alibaba group that owns Taobao, the largest online marketplace in China. Alipay is an escrow service, wherein the consumer’s payment gets passed on to the supplier only after the consumer confirms that he/she has received the right product (and in the right shape) from the supplier. Alipay has gone on to become the biggest third party payment gateway with a near 50% share in the Chinese online payment market.
Indian players following the Chinese path, embracing COD as the solution for payment problems
Almost all of India’s leading e-commerce companies have begun pushing COD. Across categories, players are reporting between 40-60% of their overall transactions coming through COD.
Benefits of Cash on Delivery
Eliminates consumer drop-offs which occur due to long/complex payment processes
Mitigates the primary disadvantage of e-commerce – ‘lack of touch and feel’, by giving the consumer the choice to touch and feel the product before paying for it
Empowers the consumer by transferring the risk from the consumer to the supplier, in case of delivery failures
Provides a back-channel for reverse logistics, in case consumers choose to return the goods
COD coverage by courier companies has been increasing at a decent pace – and today covers most of the required areas. Also, VPP services from India Post are seen as a reliable means to deliver products on COD to the areas not covered by private courier companies. Third party COD models like Gharpay which enable physical cash collection through agents, have also been gaining traction.
However, as noted previously, COD also has its own set of issues. First, it comes with a cost – which is often higher than that of an online credit card payment (due to the collection charge of Rs 35-65 per transaction and a delayed cyclical settlement period that stretches from 2-3 weeks). Second, it adds another level of complexity to the supply chain in the form of cash handling. Third, and perhaps most important, it often is indicative of lower buyer commitment – and causes a higher level of returns. Notwithstanding these issues, COD is a “necessary evil”, that is playing a significant role in making consumer comfortable with transacting online.
Multiple payment options, the future
Today, most of the Indian e-commerce portals offer multiple payment options – credit, debit and cash cards, net banking and cash-on-delivery (COD). Some portals also offer Cheque/Demand Draft facility and EMI options (especially for electronic goods that have a higher purchase value). We expect this trend to continue, with players adding more and more payment options to their websites as these evolve.
Net Banking could help fill the card penetration gap
There is a silver lining in the growth of Internet banking users that account for 7% of bank account holders today. This figure was a mere 1% in 2007.
With increasing confidence amongst consumers to pay online for their purchases, Internet banking could fill up for the lack of cards. The same is substantiated by the success of online travel, where customers are comfortable paying online – 96% of MakemyTrip’s total transactions were carried out online in 2010-11.
Players will incentivize online payments
Various e-commerce players have been able to influence payment mode choices through carrot-and-stick approaches. An electronics retailer was able to improve the share of online transactions from 45% to 85% by offering an additional discount of Rs 200 for online payments. Some portals limit the use of coupons and discount codes to online payments only, thus dis-incentivizing the consumer from using other payment modes. Additional promotional offers by credit/debit card issuers also help in making online payments more attractive. We expect the trend to pick-up with more and more players encouraging consumers to move towards cheaper payment modes, especially online payments.
Innovations in the Payments landscape can help turn the tide
The development of a plethora of alternative payment methods has come to be regarded as a response to the drawbacks associated with online credit card transactions.
PayPal and Authorize.net emerged during the last dotcom boom in late 90s. Since then, the stakes have only grown, with the world payments industry revenues pegged at $590 billion in 2010 as per the BCG Global Payments report. With increased complexities in terms of multiple payment options and demands from the merchants, a wave of new generation payment applications are emerging to address the evolutions in Web 2.0.
Today, one-fifth of global e-commerce is conducted via Paypal. It is estimated that PayPal processes over $315 million in payments per day clocking over 5 million transactions daily. Mobile payments have also seen a sharp increase with the advent of smart phones, improved technology, better consumer offerings and increased awareness. According to Gartner, worldwide mobile payment users will surpass 141 million in 2011, a 38.2 percent increase from the 102 million base in 2010. Worldwide mobile payment volume in 2011 is estimated to grow to $86.1 billion, up 75.9 percent from 2010 volume of $48.9 billion.
Given the level of mobile penetration in India and the motivation of regulators and stakeholders to increase the adoption of electronic payments, India could witness tremendous growth in mobile payments as soon as the appropriate regulatory framework is put in place for the same. The introduction of Interbank Mobile Payment Service (IMPS), revised RBI guidelines around prepaid instruments and pilots on mobile payments/wallets from telecom operators and Banks are positive steps in this direction. Beyond Banks, we believe telecom operators will play a significant role as has been witnessed in the case of M-Pesa (Safaricom/Vodafone) in Kenya and GCash (Globe Telecom) in Philippines.
The Prepaid instrument (card, mobile, virtual) has had varied degrees of success across the globe. Octopus (HongKong), EZLink (Singapore), Ukash (UK), GreenDot (US) and PaySafeCard have demonstrated the efficacy and scalability of the Prepaid solution. Even in India, prepaid/cash cards have been leveraged well around the online rail ticketing system, with ItzCash leading the show.
Players that are able to leverage technology and offer suitable mobile retail payment solutions that meet the regulator requirements are set to emerge as leaders.
Our analysis shows that 80% of leading Chinese e-commerce players offer 5 or more payment options, while that number remains at 50% in India. We expect the multiplicity of payment options to increase in India in the near future
Besides credit card which is the most common mode of paying electronically, net banking is expected to play a significant role in increasing the penetration of online payments. Demographics favor such a shift as a large part of the young population has had early exposure to transacting (retail/non-retail) on the Internet
Mobile wallets and prepaid instruments hold immense potential, but it is still early to comment on the pace of their adoption. A lot would depend on the aggression of mobile operators and banks, and the evolution of a robust regulatory framework
COD will continue to be a prominent payment mode in India in the near future, but ecommerce players will continue to encourage/incentivize consumers to move towards other payment modes. Increased consumer confidence in online buying, trust in portals, awareness and improved consumer protection measures will help accelerate such a shift
Considering the costs incurred on payments and its criticality in the e-commerce value chain, it won’t be surprising if Indian e-commerce companies closely collaborate with or even acquire payment solutions companies – as has been seen globally in the case of eBay and Alibaba
In coming times, the complexities in online payments are bound to increase. Innovative payment modes like Facebook Credits, BillMeLater (PayPal), Ukash, PaySafeCard, Square, etc. could be the way of the future in India.
(Aashish Bhinde is an executive director at Avendus Capital. Excerpts taken from “India Goes Digital- A Birdseye view of the Indian Digital Consumer Industry”, a report by Avendus Capital, a financial services firm.)