Cash on delivery – Ecommerce in the Middle East

The Middle East has been a late bloomer when it comes to the arena of e-commerce but innovative payment methods like cash on delivery (COD) are opening up the region to growth in E-commerce revenues.  Given that many consumers in the Middle East don’t have or use credit cards, COD in the Middle East has become a popular payment method that allows Arab consumers to buy products online.

cash on delivery ecommerce in the middle east

Cash on delivery isn’t new in the Middle East as many traditional retailers and shipping services have accepted this form of payment for decades if not centuries.  What is new is the idea to use this payment method in combination with e-commerce which traditionally has been done primarily through the use of credit cards.

The Middle East isn’t the first region to have success with using cash on delivery for e-commerce transactions.  India has been making headlines for the past few years due to the success of e-commerce retailers like FlipKart who have been achieving massive growth in revenues through using COD.  FlipKart even employees their own couriers to deliver packages and collect payments all over India.  This business model has opened up online shopping to the Indian masses that previously wouldn’t have been able to make online purchases.

Ecommerce Growth

Cash on Delivery can be attributed as one of the main factors that helped promote growth in ecommerce in the Middle East in 2011.  According to the COO of Aramex, Iyad Kamal, a regional logistics company, the Middle East saw a 300 percent increase in Ecommerce transactions in 2011.  Some say that as much as 70% of the transactions in the region can be attributed to COD which implies that much of this 300 percent growth was due to cash on delivery payments.

accepting money for a package

Early Starters

Though there are still very few ecommerce sites in the Arabian Gulf and the Middle East there have been some early ecommerce successes in the region.

MarkaVip is one Ecommerce company in the region that has received a lot of press.  The company has a flash sale Ecommerce model similar to that of Gilt which is based in the US.  The site requires membership and sells products for a very limited time period to its members.  The company accepts COD in the Middle East and is even starting to use their own delivery couriers in countries like Jordan.

Souq.com is another Ecommerce company based in Dubai that accepts COD payment.  The company currently operates in 5 Middle East markets Jordan, Saudi Arabia, Kuwait, The UAE and Egypt.  It sells a wide range of products from mobiles to games to clothing.

The challenges of COD

Despite the success of COD in many developing regions there are some clear challenges to this business model that need to be addressed.

  1. Cash flow – Since payments are only received once the product is delivered, the cash flow of the ecommerce business is tied up during this period.  With credit card transactions this is not the case.  Merchants can be paid quickly and receive funds before the product is shipped.  Receiving payment before shipping has allowed many companies in the US for example to create ecommerce sites around the business model of drop shipping.  Currently it appears drop shipping sites might have a difficult time getting their business model to work with cash on delivery payments.
  2. The cost of delivery and collection – Though delivery is a normal part of the sale of any physical product online the in-person collection of payment isn’t.  In an article titled “Cash on Delivery Doesn’t Work for Companies” in Forbes India the author of the article points out that COD customers are more “Fickle” than those who prepay by credit card.  COD customers can refuse to accept delivery of a product because there is no cost associated with the product until they accept delivery of the product.
  3. Product Returns – Returns can be much more costly with COD orders. The increased cost of a return for a COD order can be due to the fact that the cash must be delivered back to the buyer when a product is sent back. In addition the return of a product can be up to 4 times more likely to happen with these types of orders than they are with credit card orders.

Possible alternatives to Cash on Delivery in the MENA region

If credit card usage doesn’t increase in the region there may be some other payment solutions that could be less burdensome than COD for online merchants in the Middle East.

Prepaid Credit Cards

Gaining popularity in many regions of the world prepaid credit cards offer the convenience of regular credit cards without the risks and the challenges associated with a normal credit card.  If institutions in the Middle East were able to make affordable prepaid credit cards more available we could see a rise in online sales in the region through this payment method.

Mobile Wallets or Payment Solutions

Countries like Kenya in Africa have benefited greatly by the spread of mobile payment solutions.  Given that many Arabs spend more time on their smart phones than on a desktop computer mobile payment solutions could be ideal for the Middle East.

 

For now it is clear that Cash on delivery is opening the Middle East to new levels of ecommerce.  What remains to be determined is whether this payment model will open the region to the wide array of ecommerce sites from small to large that have done well in the United States and other countries around the world.