Impact of Demonetization on Indian E-commerce Sector

Date:   Friday , March 03, 2017

On evening of 8th November 2016, after leaving from office I did a transaction of rupees 15,000 from ATM to give to my wife for her household works (all 1000 rupees notes). As I reached home all that money became just useless. This was the effect of demonetization on an individual. Even if I try to understand its effect for an e-commerce company it will be really unfair on my part.

An uncalled raid on black money led by Prime Minister Narendra Modi was duly accepted by most of the Indians. However, as cash gets rationed businesses and industry that depend on cash have been directly impacted. A surprise in this list was fast growing e-commerce industry in India and the main reason was over dependence on Cash on Delivery as payment method.

Every e-commerce company either you talk about Amazon or Flipkart or Snapdeal, each of these companies faced a great loss.

Why the Fuss on demonetization?

Indian e-commerce relied heavily on cash on delivery. According to a report by Google and AT Kearney on India’s online retail industry, 57percent of the ecommerce transactions were made via Cash on Delivery (COD). Apart from logistics and ensuring delivery across almost all pin codes in India, the biggest innovation has been COD. COD was truly innovative in multiple ways as:

1.Reduced trust barrier for online transactions.

2.Built an alternate payment channel for people with now access to plastic money

3.Great way for people who deal only in cash to buy stuff online bringing cash economy on the e-commerce bandwagon

A week after the announcement, about 20 percent of cash-on-delivery orders were cancelled, hurting logistics companies as well as online market places.

Who were at the receiving end?

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 hyper local delivery firms supply groceries, household items and food from neighborhood stores or restaurants to customers—and capital-intensive business model that forced some firms to fold. The tide has now changed.

Amazon India appears poised to win share from other players, in part because it has the deep pockets to support strong discounting and the cost of merchandise returns, which are a common feature of developing e-commerce markets.

The predicted value of the ecommerce industry has been reduced. American market research company eMarketer has noted that the earlier approximation of 75 percent of growth in the Indian ecommerce industry was now cut to 55.5 percent. With this current currency ban on Rs 500 and Rs 1000 notes, the businesses that are solely dependent on cash payments are bound to suffer. Whereas, the businesses like eCommerce that offer other online payment options will have a limited impact. So, it is entirely your business decision to choose which side of the fence after this demonetization step.

hyper local delivery firms supply groceries, house hold items and food from neighborhood stores or restaurants to customers—and capital-intensive business model that forced some firms to fold. The tide has now changed.

Even we discussed a lot of its benefit for the Indian economy or the bigger picture. Still many fronts are at the losing end.

1.Knowing most of the Indian ecommerce were leveraging cash on delivery. All COD orders were badly hit.

2.With cash rationing, consumption dropped and people spent less which caused impact on non-COD orders as well.

3.When there is less cash one always stop discretionary expenses first, so categories like fashion, wellness, gifting etc. were impacted more than stuff like accessories, daily utility, baby products and electronics.

4.Big ticket items like high-end mobile phones, which were popular on COD, were hit more than smaller ticket items.

5.On the flip side returns and order cancellations were reduced creating better order economics.

This new system has lead more people to use traditional banking services like credit cards, which is a key factor in allowing consumers to buy online but it will take time for this kind societal change to take effect, so the forecast numbers for the coming years can be considered still lower than the previous estimates.

Winners in Demonetization

Big win was clearly for digital wallets who witnessed increase in transactions and adoption by customers and merchants. Makers of Points of Sale (POS) machines are seeing surge in demand. IndiaMart released a figure saying demand for POS systems through its platform has increased 2,000 percent.

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 percent of the payments for orders placed online in India.

“Ecommerce has seen a 30-40 percent reduction in (cash-on-delivery) order volumes. Our initial estimate was that we would see about 10 percent reduction in (gross merchandise value, or gross sales) estimate, but in the last two weeks we have seen it reduce by 10-15 percent. 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 percent since the demonetization announcement, as per industry estimates. Returns are typically pegged at 20-30 percent of all online retail orders.