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Jolly's Volley: Key E-commerce Headache — Payments

21 November, 2011

Recently, I had the opportunity to speak at an Assocham event on e-commerce (well, everyone has to follow VCCircle’s lead, I suppose). The topic of the panel discussion was around challenges (and therefore, opportunities) that exist in the entire e-commerce payment ecosystem. Let me start by saying that in my humble opinion, there are two significant problems that e-commerce players are facing which are usually out of their control but critical for the business – payments and logistics. The purpose of this submission is to focus on the former as we have already discussed logistics.

India has given the world the number ‘zero.’ And that’s precisely the amount most Indian consumers would like to pay for virtually anything and everything they consume or order online. I was actually joking with the panellists (a little tongue in cheek), saying that since Indian consumer doesn’t actually want to pay, I am not sure why we have a panel on payments. But if one is able to convince the consumer of paying for a particular product or service, Indians would surely want and actually receive the most diverse payment options on the planet, including debit cards, credit cards, Net banking, stored value cards, mobile payments, cash on delivery (COD) and I wouldn’t be surprised if barter and IOU’s enter the stream at some point in the near future. On a serious note, payments are a challenge but I have often said that as a VC, same challenges are the flipside of opportunities.

Let us take COD, for example (by the way, at the time of writing this, I was on a Jet flight to Delhi and staring at a small Flipkart insert on the back of the tray table pushing its COD service). Let me first take a stab at what is driving COD as a key payment mechanism for the industry. In no particular order, these are the three key reasons. First, non-white money (there are several hues of grey and black in India) that is extremely large in magnitude. Ironically, if black money was not prevalent in India, I would argue that e-commerce would not be taking the uptick that it is today. No. 2: First online transaction. Indians are the most value-conscious people on the planet, and especially if they are new to the Internet, and are buying from a brand/site that didn’t even exist six months ago and is selling Rs 20,000 phone, I would think long and hard before simply providing my credit card or remote payment credentials online. It’s the trust factor (something that I will come back to a bit later). And finally, touch and feel. Indians are so used to being overpromised, under-delivered and taken for a ride. For instance, when the Kent RO AMC guy says he will be at my house at 2 pm today, I know there is no way he will be there at 2, and is unlikely to come today. No one really expects the delivery of a product that actually looks and feels like the glossy ad with Katrina Kaif. The bottom line: Seeing is believing in India and hence, COD is a natural result.

Now, think about the following. If a company can actually make money in a COD world with the relatively high return rate, issues around cash collection/pilferage, logistics and reverse logistics nightmares in tier 2 and tier 3 towns, then it should do that much better from a gross and net margin perspective as and when trust gets built into the system and people move away from COD to credit/debit/Net banking options. COD may also be a blessing in disguise for e-commerce companies. On the same panel at Assocham was Vivek Nayak, COO of CCAvenues that has the lion’s share of the e-commerce payment intermediary business in India. To be honest, given the number of payment failures that e-commerce transactions experience, I used to point the finger at CCAvenues, thinking that its systems were simply not scalable and able to meet the demands of growing online transactions. What I discovered was that it wasn’t necessarily CCAvenues, but rather the banks, many of whom still have fairly archaic systems that simply added band-aid solutions to enable online transactions. And these band-aided solutions are simply not capable of handling the amount of transactions which are now starting to happen in India, much less the volume which will happen in the future. Again, imagine if COD was not an option. The number of failed transactions would potentially skyrocket, leaving a ‘less-than-thrilled’ first-time transacting customer base which either may not come back to transact online or definitely delay their e-commerce forays, at the very least, for a long time. In other words, COD is actually the saving grace (close to God) for e-commerce, allowing both e-commerce players to fine-tune their logistics and expense/margin management, give banks time to upgrade their technology infrastructure to be able to handle the future onslaught of online transactions and finally, engage in the required handholding and education of consumers transacting online for the very first time.

I have often said that if one can create a profitable business in India, given the price-sensitive consumer and unique on-the-ground challenges, then one can be hugely profitable almost anywhere else globally. Think of India as the training ground for the equivalent of the US Navy Seals of entrepreneurship. The success of a particular business has less to do with curve-jumping technology, but everything to do with the team’s execution capability and overcoming the ‘unknown unknowns’ here. When it comes to payments, there is no shortage of innovation in India, especially in the arena of business model innovation, which several companies are embarking upon. Cleartrip, for example, has recently introduced EMI payments, which several other sites are now offering. Some sites, when selling high-ticket items, ask COD customers to pay a nominal amount up front (typically 10 per cent or so) and the rest on delivery. That way, the chance of a complete rejection perhaps reduces a bit and there is marginally more commitment to the transaction from the customer. The 30-day money-back guarantees are now entering the ecosystem. Yet others are thinking about their best customers, and rather than have those customers go through a multi-factor authentication process, e-tailers are considering taking the credit risk on that customer and actually removing the friction (Verified by Visa, one-time password, etc.) from the transaction.

Now let me come back to the point of trust that I mentioned briefly earlier… The entire game of remote transactions is about trust. In a physical environment, the touch-and-feel is there to make sure that the quality of a product is as expected. The physical infrastructure of offline retail gives the customer comfort that in case something does go wrong, he knows exactly where to go and scream or beat someone up (okay, threaten to do so, since I am a pacifist, although India, at times, does push me to the edge when steam oozes from my turban). An online environment, to the first-time transacting cynical Indian customer, is a scam. He/she doesn’t know the seller, doesn’t trust the product or service, doesn’t know or understand what to do and where to go if things go wrong. From an e-commerce start-up standpoint, there are also trust issues with suppliers who can often be shady characters, logistics providers who tend not to meet their service level agreements and cannot be trusted with meaningful amounts of cash for high-ticket COD items, for example. Think of it as a blind date (at least with an arranged marriage, there is a trusted referral source). What the e-commerce industry is trying to do today is go from millions of blind dates to hopefully millions of strong marriages. And that’s easier said than done (not speaking from experience, by the way).

My hope is that companies are not getting into the ‘fat, dumb and happy’ mode of catching flying pigs in an e-commerce tornado. What I mean by that convoluted sentence is: There seems to be incredible euphoria around attracting customers, often at highly subsidised prices, so that the Gross Merchandise Value (GMV) numbers and hence, valuation for the much-needed cash to continue the subsidies, can increase significantly. My hope is that companies will either think about ‘retention’, ‘stickiness’ and ‘loyalty’ up front rather than as a reactive step or transition quickly from a customer acquisition strategy to a customer retention strategy. The ‘fat, dumb and happy’ phrase refers to a previous submission where I had talked about banks and telcos primarily being focused on attracting new customers in a business that is growing organically at 30-50 per cent (‘in a tornado, even pigs can fly’ metaphor) rather than focusing on retaining customers. For example, if the Internet population truly goes to 200 million and then to 300 million and beyond in India, my fear is that most companies will focus on getting a piece of the incremental 100 million-200 million pie rather than focus on those customers who have already made the effort to transact, and should, therefore, be courted and retained (I am not advocating only focusing on existing customers and not acquiring new customers, by the way). I think loyalty programmes, reward points and other known mechanisms will and should be used to ensure brand recall around a certain product or service set. Then again, it remains to be seen whether the online Indian customer will be brand-loyal or deal-loyal. That’s the big long-term bet that investors and companies are making with all their marketing spend today.

Bottom line: As someone told me when I moved to India four years ago (hard to believe), “embrace India for what it is.” With respect to payments, there are significant challenges. But then again, the Indian Navy Seal entrepreneurs, through their business model innovations, and tackling challenges like COD head-on, are on the cusp of e-commerce greatness. I, for one, am looking forward to the ride over the coming years.


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Jolly's Volley: Key E-commerce Headache — Payments

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