38. Industry — eCommerce

eCommerce — one of the most visible sectors with small, medium, big and gigantic merchants with different types, flavours and business models. Today without stepping outside the house, I can buy things that I need, things that I don’t need and things that no one needs… and all thanks to eCommerce.

There are various types of eCommerce companies

• Own Inventory (merchant owns the inventory) Vs. Market Place (merchant sells inventory of other vendors)
• Horizontal (sell all types of products e.g. Flipkart where you can buy toothpaste to washing machine) Vs. Vertical (sell specialized types of product e.g. Pepperfry that sells home décor items)

Again, these companies can be B2C (common people like us are main customers e.g. Amazon) or B2B (other business entities are the customers e.g. Indiamart)

Each of these models are complex and fascinating when it comes to its sellers, inventory management, logistics, returns etc. We are not here to talk about those things or their profitability model (if they have one !!!) but to talk about how the money is moved

Illustration — Requirements

Requirement 1: Use Cases

• Mainly to purchase products
• Other things (e.g. wallet top-up or membership fees etc.)

Requirement 2: Channels

• Website, mobile Apps, m-Sites

Considering mobiles are the most prominent engagement channels, so these companies give special attention to mobile payments.

Requirement 3: Payment modes

Literally, most of the merchants follow ‘more the merrier’ rule. All payment modes are welcome to the party (CC, DC, NB, UPI, pay later products, EMIs, wallets etc.). And if payment provider is ready to give cash back or discount then it is ‘cherry on top’

Note: Only the practicality (fitment, conflict, rate, integration & operation effort) dictates whether mode is enabled or not. E.g.: Furniture merchant will not need wallets but require more EMI products. On the other hand, mobile accessory seller would need wallet or UPI but not card EMIs. Also, to increase the payment coverage and avail good commercials, merchants work with multiple payment players (Banks, Aggregators, wallets etc.).

Requirement 4: Payment flow & Integration

Customer acquisition cost is high and once the customer made her mind to purchase then payment flow should not create any hinderance/hassle for her to complete the transaction. So the checkout page, position of payment modes, save card option, placeholder for discount coupons etc… all these things matter.

• So merchant expects the payment provider to support flows as per their requirement (Seamless — checkout page is hosted by merchant, non-seamless — redirected to aggregator’s page)
• Considering mobile is important channel so would require mobile SDKs for Android and iOS
• If merchants are use eCommerce platform (e.g. Shopify, Woocommerce) then would require plug-ins

Although we live in land of software developers but still everyone wants to spend least effort on integration. So expectation is APIs/SDKs should be simple and easy to integrate

Requirements 5: Performance

• Availability: payment systems should work every time and all the time.
• Scalability: payment systems should handle the transaction spikes (transactions tend to spike when merchants run promotional sales campaigns)

Note:

• To process one card transaction, multiple parties are involved (Aggregator, Acquiring bank, issuing bank, ACS, Card scheme). Every entity has certain capabilities and weakest/unstable link in this will impact overall performance. Some entities are designed for scalability (auto-scalable or on-demand) but some are not. Such things to be factored in while testing for scalability and availability
• Although it is complex system but few things can be managed (e.g. if an aggregator is down then route it through other aggregator or if an acquirer is down then use other acquiring bank) but somethings cannot be managed (e.g. if an issuer or card scheme is down then nothing can be done except for waiting)

Requirement 6: Success Rate

Super crucial as a failed transaction can be considered as loss of revenue as user may differ the payment or purchase from other merchant (unless you are selling something exclusive)

There are various ways to optimise the success rate (refer this chapter)

Note: I keep iterating this and will do it again… Before jumping into analysing success rate, merchant needs to factor in its customer demography, intent of purchase… these factors also can impact the success rate not just entities involved in processing the transactions… Also, the failures can be attributable to merchants own system and payment flows.

Requirement 7: Charges

• For B2C merchants, charges will be in percentage of transaction value (higher than what merchants of insurance, education or utility sector get)
• B2B merchants can enjoy flat fees on net-banking

Commercial model: In almost all cases, the charges will be deducted upfront from the transaction amount. Few B2B merchants, may pass the charges to buyer as surcharge or convenience fee.

Requirement 8: Settlement

• In case of upfront deduction model, settlement amount = transaction amount — PG charges — GST amount — Refund (adjustment) — Chargeback (Recovered)
• Typically standard settlement cycle of T+2 will do but expectation would be earlier settlement (just because settlement is done earlier doesn’t mean merchant is paying out to its vendors immediately… They will have their own TAT/SLAs for such pay-out). Surely, early settlement increases merchant’s access to cash.

Note: In market place models, funds are settled to nodal account and then paid to various vendors and commission amount will be moved to marketplace operator’s account. Big merchants have built this model but smaller merchant can start with off the shelf market-place solutions offered by few payment aggregators

Requirement 9: Refund Management

Refunds are another important reason for growth of eCommerce. A user can confidently buy if she knows that product can be returned easily. But refunds are big hassle and expensive

• Expensive: E.g. @1.8% MDR, merchant would bear Rs.21.24 PG charges for product worth Rs.1000. When refund is done then merchant not only lost Rs.1000 worth sale but also have to lose Rs.21.24 extra as customer would want entire Rs.1000 back (plus whatever it cost to collect the item from user)
• Hassle: Refunds take their own sweet time without clear TAT as it may vary from 1 day to 7 days or in some cases more than that. Also, in standard refund process, PG won’t get to know whether refund is credited to the payment instrument (Card or Bank A/C) or not.

Note: Refund management is important as it is part of customer experience. Alternative to standard refund is Instant refunds that can be done by processing refund via Visa Direct, MasterCard Money Send, UPI, IMPS and NEFT rails.

Important Requirements: Cash on Delivery

All said and done about online payments, still cash (on delivery) is the king. COD helped eCommerce companies grow in India. Consumers prefer cash for various reasons (lack of knowledge, comfort, lack of trust, security concern etc). That is the reason, still there are more than 50% of transaction goes through COD (in some sectors such as e-Pharmacy it can be as high as 70%). If you think cash collection is complex & expensive then wait till you have to do refund for such orders. <Refer next chapter about Cash>

Indian eCommerce is an amazing story… started with Indiaplaza in 1999 and today we have eCommerce companies of all types and sizes and with complex models which involves inventory & fund movement within and across borders… And still eCommerce share is in single digit of overall commerce… so it will be long journey ahead with interesting problems and fascinating business models.