#Asia Indian e-commerce facing crunch time. Can it survive?

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From legislation to logistics, e-commerce is facing many challenges in India. Turnaround specialist Rupak Agarwal proposes solutions to some of these issues

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

The Indian e-commerce industry continues to be a darling of the investors. Almost US$5 billion worth of investment was committed to this sector in 2014 alone and 2015 is not lagging behind. Technology has been something very close to my heart and e-commerce, very fascinating. I am penning my perspective of challenges faced by the industry:

1. Logistics — last-mile delivery

While major multi-nationals such as DHL and Fed Ex operate in India, goods are normally shipped through smaller and cheaper third-party carriers. Different carriers are used for different regions of the country. For orders sourced outside 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 the services of new startups focussing only on logistics for the e-commerce space.

Delhivery, an e-commerce-focussed startup started in 2011, has 950-plus e-commerce companies as its customers and is the largest e-commerce-focussed 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, and Quickdel Logistics founded in 2011.

This fast-growing sector will drive the US$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.

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2. Cash on delivery — preference for cash and high return rates

Unlike electronic payments, manual cash collection is labourious, risky, and expensive. Courier companies generally hold the money for up to 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 three per cent for this service.

But the biggest hit comes from the much higher return rate — sometimes up to 10 per cent 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 per cent. 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 with superior technology — Citrus, Zaakpay and PayUMoney.

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 mobile payments

In 2014, INR1.2 lakh crore (almost US$18 billion) worth of digital payments was done in India, of which 20 per cent was done on mobiles. With mobile becoming the preferred mode of e-commerce transactions, payment gateways have a fresh challenge to reduce payment failure rates and cater to secure transactions.

Digital wallets and m-wallets are fast becoming acceptable solutions. Although only three per cent of digital payments in 2014 were done through such wallets, this figure is likely to increase to 20 per cent by 2020. The year 2011 saw the launch of Google Wallet and Nokia Money wallet. In 2012 came Ypaycash, M-Pesa from Vodafone and ICICI and Infibeam launching their own wallets.

From 2014 onwards, several players have integrated a mobile wallet payment mechanism into their service offerings. HDFC bank (which controls 40 per cent of all e-commerce transactions in our country as it is both card issuer and processor of card-based payments) is the latest to enter the digital wallet space.

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5. High cost of customer acquisition

With huge investor funding, the sector is faced with intense pressure to acquire new customers at irrational costs and show valuation. The focus is not on repeat sales from the same customer to increase loyalty and profitability, but discounts and marketing spends to acquire new customers.

In addition, there are at least four-five players in every segment increasing competitive pressure. Most of these players are running after inflated valuation, not 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 two months, we have seen pink slips being handed over in startups like TinyOwl and Zomato and many more will follow in times to come.

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6. Regulatory challenges

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

Regulator — nine ministries regulating e-commerce

According to recent news reports, there will be as many as nine government agencies who might regulate the e-commerce sector. The Information Technology Act names online marketplaces as a form of intermediary and, therefore, governed more under the safe harbour provision — if any wrong has been done by a third party, you will not be sent to jail. A subpar understanding of this provision has law enforcement agencies bogged down with cases like if someone has posted something bad on Facebook, should Mark Zuckerberg go to 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 labour laws until a startup’s turnover reaches a certain level, exemption from certain taxes for a specified period and liberalising the system for raising capital globally. This new policy is expected to be put into effect soon.

Taxation — clarity on VAT and implications 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 (value added tax) payments continues to remain an ambiguous area with not many states except Delhi, Rajasthan and Kerala having clear legislation. These states have stipulated 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 per cent of your shareholding changing hands, your accumulated losses cannot be carried forward next year. Most consumer Internet companies have this lifecycle: For the first 10 years they invest heavily in team, promotions 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 per cent.

7. Security — two-step card 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 for up to INR 2,000 (US$30) – INR 3,000 (US$44), you don’t need a PIN. However, in spite of 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 judiciary is not sensitised enough on the impact and need for immediate action.

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With e-commerce becoming a buzzword and growing at a blistering pace, the ecosystem is continuously finding solutions to the industry challenges.

With Prime Minister Narendra Modi’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 views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, please send us an email at writers[at]e27[dot]co

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