In the two weeks since the government announced its demonetization initiative, India’s internet commerce industry has scrambled to adjust. Internet entrepreneurs have applauded the move, ostensibly for its long-term payoffs, although online marketplaces and logistics startups have been hit hard because of the cash crisis that has followed the shock anti-graft measure. Digital payment companies and on-demand delivery firms, though, have benefited both from the cash shortage and the government’s push towards cashless transactions. For online retailers that have been collecting a huge slice of their payments in cash against deliveries, order volumes have halved since the November 8 announcement recalling Rs 500 and Rs 1,000 currency bills, according to industry analysts.
Gross sales are expected to drop sharply, wiping out much of the gains earned during the festival season sales last month. While Prime Minister Narendra Modi’s proclamation drove millions to the banks to exchange the invalidated notes, payments companies Paytm and Freecharge saw a surge in adoption of their digital wallets. For hyperlocal delivery companies, demonetization has come as manna from heaven. The sector, which was collapsing as disenchanted investors began moving out, is flourishing again as customers strapped for paper money take to ordering daily essentials such as food and groceries through their platforms. But will this sustain? Will digital payments become a way of life? What will change for online retailers? Biswarup Gooptu, Payal Ganguly and Mugdha Variyar assess the likely impact the currency recall will leave on four key ecommerce segments—online retail, payments, logistics and hyper-local delivery.
Over the past two weeks, digital wallet companies Paytm and MobiKwik have been proudly showcasing on social media local vegetable shops or paani puri vendors displaying signs asking for digital payments. One such post said a temple in Gurugram was now taking cashless donations through a digital wallet. Financial-technology firms in the digital wallet and payment segment have been a clear winner post the demonetization announcement. MobiKwik CEO Bipin Preet Singh called it the “opportunity of a lifetime” to capture the market. Digital wallet and payment companies now have the chance to reach out to a demographic that never had been seduced to try cashless transactions before. Makers of point-of-sale and credit and debit card-swipe machines such as Mswipe and Pine Labs are seeing a beeline for the products, while payment gateways such as PayUBiz are seeing record transactions in terms of both number and value.
Taxi aggregator Ola’s digital wallet, Ola Money, said wallet recharges had increased by 1,500% since the announcement. This rapid adoption of digital transactions has given a massive push for the growth of these companies as well as the industry. “The industry impact has been hugely positive. The payments industry has grown twofold,” said Naveen Surya, chairperson of Payments Council of India. The growth is likely to sustain rather than wither away in a few weeks because of the push by the government for cashless transactions, aggressive strategies by companies as well as an expected change in the consumer behaviour, say experts. “With the action taken by industry players, regulators and the government, we can sustain the momentum,” Surya said. “The focus is that demonetisation transcends into digitisation. At the end of the day, the growth will depend on how well we do our jobs to ensure the customer does not go back to cash.” Neha Punater, head of fin-tech at KPMG India, agreed:
“This growth in digital payments is surely going to move northwards and will be there for good. This is definitely not a short-term phenomenon and more and more people will adopt it in their daily behaviour.” Fin-tech experts say the growth of digital payments and wallets is the first phase of the impact of demonetisation, and that the second will see a big boost to lending and credit as the digital records of merchants expand and more demand is created. “Increased use of digital payments by consumers and small businesses opens the door for acceleration in many areas— consumer lending, small business lending, trade finance, point-of-sale financing, and even areas like insurance,” said Bala Srinivasa, partner at venture capital firm Kalaari Capital. “This is because digital transaction and payments data help build consumption, credit and behavioural profiles that are often not available today for the vast majority of consumers and businesses.”
Big win for digital wallets, which are witnessing massive increase in transactions and adoption by customers and merchants. Companies and experts believe the push to digitisation is here to stay
Makers of point-of-sale machines seeing surge in demand. B2B marketplace IndiaMart said demand for POS systems through its platform increased 2,000%
The online payments industry is seeing a behavioural shift to digital payments among customers as well as merchants, which they expect will be a sustained change
Demonetisation has definitely boosted the scope of fi n-tech adoption. More and more institutions are realising the importance of fin-tech and are trying to leverage them in some way or the other. The entire fi n-tech ecosystem will see a boost because of this. —Neha Punater, Head fin-tech, KPMG India
LIVING ON A PRAYER
On the night that Prime Minister Modi scrapped the two high-value currencies, India’s top consumer internet entrepreneurs took to Twitter to hail the move. Over two weeks later, the mood is not as buoyant. While the entrepreneurs continue to support the Central government’s announcement on public forums, their businesses have been hit by the crackdown on cash transactions, which accounts for about 60% of the payments for orders placed online in India. “Ecommerce has seen a 30-40% reduction in (cash-on-delivery) order volumes. Our initial estimate was that we would see about 10% reduction in (gross merchandise value, or gross sales) estimate, but in the last two weeks we have seen it reduce by 10-15%,” said Anil Kumar, chief executive of RedSeer Consulting.
Allied to that is the number of online purchases that return undelivered to the country’s top three ecommerce companies, which has shot up by more than 50% since the demonetisation announcement, as per industry estimates. Returns are typically pegged at 20-30% of all online retail orders. GMV is overall sales on an e-tailer’s platform excluding returns, discounts and cancellations. Gross sales for the domestic ecommerce sector was estimated at about $4.5 billion for the traditionally lucrative October-December quarter, according to industry forecasts. Post-demonetisation, gross sales in November alone is expected to drop by $200 million-$300 million. Even so, online retailers insist the impact will be temporary and marginal. “We do not foresee any long term impact on our sales in this (fiscal) year,” said a spokesperson for Flipkart, India’s largest online marketplace.
“We see a great opportunity and responsibility to move customers from COD to prepaid channels… We expect the situation to stabilize rather quickly.” There are growing concerns, however, that the final calendar quarter of 2016 may not be as bountiful for online retailers as earlier. “At this point, I doubt that the (winter) sales will be at the same level as that in 2015. The consumer does not have the mindset to spend right now… I think this impact (of demonetisation) will last through March,” said Satish Meena, analyst at Forrester Research. Ecommerce firms such as Snapdeal and Flipkart have recalled curbs on cash payments as they look to win back consumers. Analysts, however, say the situation will not improve much for the industry, which will likely remain dependent on cash payments. “This is not going to be a short-term issue for them,” Meena said.
Keeping with the present struggles of online retailers, ecommerce-focused logistics firms have taken a hit as people conserve cash for essentials. A week after the announcement, about 20% of cash-on-delivery orders were cancelled, hurting logistics companies as well as online marketplaces. According to a report by Google and AT Kearney on India’s online retail industry, COD accounted for 57% of all online transactions in 2015. Other estimates peg COD orders at 60% or above. “It is too early to call. COD volumes have fallen by 20% but we see them coming back to normal,” said Sahil Barua, CEO of ecommerce-focused logistics company Delhivery. “We have been accepting card payments on delivery and have started accepting other modes of payment such as (payments by digital) wallets on delivery.”
The time taken to deliver a COD order is higher than for a prepaid order, as are the number of delivery attempts. Some logistics companies charge a premium transaction fee of 2-3% for each COD order due to these reasons. The aftermath of demonetisation also saw the number of attempts required to deliver each order go up. “Around 30-40% of the orders are being returned back to delivery centres,” said K Satyanarayana, director of Ecom Express, which serves multiple online marketplaces. Options such as accepting payments by credit or debit cards and digital wallets on delivery require a different workflow as well as additional time to complete each delivery.
“At present, we don’t offer payment services through card devices. We believe cash-on-delivery option is here to stay and will continue to contribute a significant part of ecommerce sales as new currency notes roll out,” said Satyanarayana. “The volume of COD was close to 65% of the orders processed by ecomme rce companies before the demonetisation, which has now dropped to 15%,” said Manish Saigal, managing director of consultancy firm Alvarez & Marsal India. “While this would increase as money supply improves, the new level for COD may might be lower than earlier. This can impact yields adversely and put pressure on sustainability of the business.”
CRUISING IN A CRISIS
The on-demand delivery sector has emerged a clear winner, with grocery and food delivery firms seeing a surge in prepaid orders over cash payments on delivery. On-demand or hyperlocal delivery firms supply groceries, household items and food from neighbourhood stores or restaurants to customers—and capital-intensive business model that forced some firms to fold. The tide has now changed. “The number of new customers has shot up. Earlier, 15-16% of all monthly orders was by new customers. That has shot up to about 25%,” said Hari Menon, CEO of BigBasket.
For the IFC and Abraaj Group-backed online grocery store, business grew by 20% in terms of sales and the company is preparing for December based on this rate of growth, he said. For online food ordering platform Swiggy, demonetisation helped increase transactions as more customers opted to buy food online by paying electronically. “(Previously) as much as half of our users preferred CoD. After demonetisation, almost 50% of our users who ordered in during this period had never paid online before,” said Srivats TS, vice president of marketing at Swiggy. Online restaurant booking and food ordering platform Zomato, too, reported an increase in transactions.
“We have since seen a huge spike in our online order volumes, with a 200% increase in online payments,” said a spokeswoman for Zomato. “The business as a whole continues to grow at a healthy 20% monthon- month.” Some experts foresee the change in fortunes for on-demand delivery companies to be long-lasting. “Food and grocery are probably the only verticals in ecommerce that would have benefited from demonetisation. All other online discretionary spends with CoD has taken a hit,” said Sreedhar Prasad, partner for ecommerce at KPMG. “The move has also seen a large number of first-time customers moving to buy grocery online. The impact is more due to the ease of using online payments for the ‘already online’ shopper.”