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E Commerce Industry Challenges in India

Via LinkedIn : E commerce industry continues to be a darling of investors. Almost 5 Bn $ of investments was committed to this sector in 2014 alone and 2015 is not lagging behind. Technology has been something always very close to me heart and e commerce very fascinating. I am today going to talk about my perspective of challenges faced by this industry:

  1. Logistics: Last Mile delivery:

While major multi-nationals like DHL and Fed-Ex operate in India, goods are normally shipped through smaller and much cheaper third party carriers. Different carriers are used for different regions of the country. For orders sourced outside the major cities, individual couriers often are hired to make last mile deliveries from drop-off points by bicycle.

To tide over the logistics issue, many big players are backward integrating on their own, acquiring logistics companies and using services of new startups focusing only on logistics for e commerce space. Delhivery an e commerce focused startup started in 2011 today has 950+ ecommerce companies as its customers and is the largest e commerce focused logistics company today. Other players in this space now are E Com Express founded in 2013 by former employees of Bluedart, Locodel Solutions founded in 2014, Quickdel Logistics founded in 2011

last_mile_delivery

The fast growing e-commerce sector will drive the $167-billion domestic logistics industry going forward and the

Introduction of the Goods & Services Tax slated for roll out next year which will unify the markets, will be the biggest push for the sector

2. Cash on Delivery: Preference for cash and high return rates:

Unlike electronic payments, manual cash collection is laborious, risky, and expensive. Courier companies generally hold the money for upto two weeks, which means that the e-commerce company has to restock inventory before the cash from its last sale has arrived. Some couriers charge upwards of 3 percent for this service. But the biggest hit comes from the much higher return rate—sometimes up to ten percent as the company has to pay for reverse logistics as well. The adoption of newer payment methods is slow but combined efforts of the industry and the government’s vision of a cashless economy could well tide over this challenge in the next few years.

3. High Failure Rates in Online payments and low penetration of debit and credit cards:

For most e commerce sites, the success of online payments is around 65%. This coupled with the low penetration of credit and debit cards and the reluctance of Indian consumers to put payment information online are major challenges.

The three big players in online payment gateways are BillDesk, TechProcess and CCAvenue. However, they are being challenged by a host of newcomers-Citrus, Zaakpay, PayU with superior technology

These new players are reducing the eight separate hops or fresh web pages that a customer usually has to go through before completing a transaction, thereby reducing failure rates. Citrus has reduced the hops to one while Zaakpay has reduced this to two.

To overcome the lack of trust that often keeps customers from making online payments, players in this space are setting up wallets and trying new methods to build customer trust. PayU for example has set up a facility called PayU Paisa. It keeps the payments made by customers in a nodal account and the money is transferred to the e-tailer only after the item purchased reaches the customer

4. Increasing trend of payments through mobiles:

In 2014, Rs 1.2 lakh crore worth of Digital payments were done in India, out of which, 20% were accomplished on mobiles. With mobile becoming a preferred mode of E commerce transactions, payments gateways have a fresh challenge to reduce payment failure rates and cater to security of transactions.

Digital wallets and M wallets are coming as solutions.

Only 3% of digital payments in 2014 were through wallets but this is likely to be 20% by 2020. 2011 saw launch of google wallet and Nokia money wallet, in 2012 came Ypaycash, M Pesa from Vodafone and ICICI and Infibeam launching their own wallet.

payment

From 2014 onwards several players have integrated mobile wallet payment mechanism into their service offering. HDFC bank which controls 40% of all ecommerce transactions in our country, as they are both card issuer and processor of card based payments is the latest to jump into the wallet space.

5. High cost of customer acquisitions:

With huge investor funding in this space, the sector is faced with intense pressure to acquire new customers at irrational costs and show valuations. Focus in not on repeat sales from same customer to increase loyalty and profitability but discounts and marketing spends to acquire new customers. In addition there are at least 4-5 players in every segment increasing competitive pressure and most of the players are running after valuations rather than profitability with many not even able to meet operational expenses from revenues generated today. However, this is soon going to change with

Investors now pushing startups to rethink business models, trim teams and control their “cash burn rate”.

In the last 2 months we have seen pink slips being handed over in startups like TinyOwl and Zomato.

6. Regulatory Challenges

E commerce industry being relatively new and growing at blistering pace, the change in mindset in the government and law enforcing agencies to understand the uniqueness of this industry is time consuming. The sector is highly dynamic with frequent changes in business model as it is evolving. The current regulatory challenges faced by the industry are as follows:

Regulator: 9 ministries regulate E Commerce:

With all the recent news items, there will be as many as 9 government agencies who might regulate e commerce sector. The Information Technology Act names online marketplaces as a form of intermediary and therefore governed more under the safe harbor provision, that if any wrong has been done by a third party, you will not be sent to jail. A low understanding of the law enforcement agencies has cases like if someone has posted something bad on facebook, should Mark Zuckerberg be put in jail.

Under the government’s new startup India scheme, the department of Industrial Policy and Promotion (DIPP) is currently deliberating details of a policy that proposes exempting startups from 22 federal rules and regulations. These proposed reforms reportedly include exemption from company and labor laws until a startup’s turnover reaches a certain level, exemption from certain taxes for a specified period, and liberalizing the system for raising capital globally and this new policy is expected soon.

7. Taxation Challenges: Clarity on VAT and implication of Sec 79 of IT Act:

E Commerce companies allow sellers to sell on their platform and are not sellers themselves. Who therefore is responsible for VAT payments continues to remain an ambiguous area with not many states having clear legislations except Delhi, Rajasthan and Kerala where they have legislated that E commerce companies are not sellers but only service providers.

Section 79 of the Income Tax Act states that If you have more than 50% of your shareholding changing hands, your accumulated losses cannot be carried forward next year. Most consumer Internet companies have their lifecycle. For the first 10 years, they do very heavy investments in team, promotion and technology, without much income. With multiple investors changing hands in the funding life cycle, these companies have to be very careful while raising capital to ensure the capital structure does not change by more than 50

8. Security: 2 step cards verification and cyber crime:

Whenever you use credit card offline, say, in a petrol pump, you have to use a PIN. If you use your card online, you have to use a code which comes on your mobile phone. The government is looking to promote offline usage of credit cards, by saying that up to Rs 2000-3000, you don’t need a PIN. However, inspite of a 128 bit encryption in online payments, these initiatives to promote e commerce business is still some time away. Similarly for hardcore data theft, trade secret issues and other such challenges our police and judiciary is not sensitized enough on the impact and need for immediate action.

With E Commerce becoming a buzz word and growing at blistering pace, the eco system is continuously finding solutions to the industry challenges. With the Prime Minister’s Digital India initiative, I am sure that appreciation of these industry challenges will be faster and new solutions will emerge for the sector to continue growing exponentially.

The excitement continues…

Rupak Agarwal is an alumnus of IIM Bangalore and currently works as a Business Head with Godrej Properties Ltd. He is a turnaround specialist with multi industry expertise across technology, consumer, media, telecom and real estate.

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