Online retail in Bangladesh is still very much cash-on-delivery (COD) dependent. COD in digital commerce remains as high as 60%-80% of total transactions, depending on who you ask.
It’s a surprising phenomenon in Dhaka’s ecommerce scene.
Credit cards and MFS penetration have accelerated over the past several years. Digital commerce has gained mainstream awareness. But people still prefer cash-on-delivery payment for online orders.
More interestingly, many people who choose COD as a payment option have MFS accounts and some have credit cards. Of people who order online, almost 100% of them are likely to have an MFS account.
You can explain this phenomenon. Part of it is of course cultural. We’re, compared to many other nations, a low-trust society. eCommerce gets the short end of this low-trust stick. While people are probably willing to pay online to reputed companies like Daraz, Chaldal, and AjkerDeal, they don't want to take the risk of paying in advance to Facebook page-based sellers.
Several incidents of fraud in ecommerce, where customers neither got products nor their money back, in the last two years have contributed to an additional decline in confidence in the sector. People getting cheated by various frauds is a common social phenomenon. More dangerously, people rarely receive justice in these events. Culprits often go unpunished or get punished in a manner that does no good to the ones who suffered in the first place.
This brings us to why in many instances merchants also prefer COD. This happened mainly after the above-mentioned ecommerce scandal fiasco by a number of shortsighted players. As a countermeasure and to stop similar events from happening in the future, Bangladesh Bank introduced a new rule that ecommerce merchants can’t get payment from the payment gateways until product delivery is confirmed. This creates an additional delay on part of the payment gateways in disbursing the money causing undue challenges for the merchants. Customers made the payment but the payment gateway companies take one or two weeks in many instances to pay the merchants. So many merchants are willing to try COD to avoid delay.
Overall, COD as a method of payment has received further reinforcement.
Now, COD payment comes with its own challenges for merchants. When logistics companies collect payments, they maintain their own payment schedule which takes 2-10 days to pay out to the merchants.
For deliveries within Dhaka, merchants usually get the money in 2-3 days. But for outside Dhaka deliveries, it takes much longer, usually 3-7 days because it goes through multiple touchpoints. Delivery agents deliver the product, collect the payment, and deposit the payment to the logistics company’s bank, the logistics company aggregates all the payments, and finally disburses the money. The entire process naturally takes multiple days. Even if logistics companies want to pay merchants quickly, they can’t. Logistics companies have nothing to do here. The entire system is littered with holes. And sometimes logistics companies tend to take advantage of these holes.
While several logistics companies are looking to bring down this payment delay, it’s a major challenge for small merchants.
For big commerce companies, this may not be that big a problem, working capital is a big challenge for small merchants. If they get their money quickly, they can reinvest it in the business. In many cases, it can make or break their business.
This is where InstaCOD, a spinoff of logistics company Delivery Tiger, comes in. InstaCOD looks to digitize the COD payment for ecommerce merchants. InstaCOD defines itself as an “alternative payment receiving method for an online seller where customer pay after receiving delivery (cash on delivery), but the seller gets the payment either at the time of delivery (PoD) or at the time of shipment (PoS).”
If it works, InstaCOD could become an interesting example of taking advantage of systemic inefficiency to build solutions. Classic entrepreneurship.
The thesis is simple, COD payment is not going anywhere in the near future. The cultural setting of Bangladesh makes it inherent to our digital ecommerce landscape. In fact, payment delays are everywhere in the digital commerce ecosystem, of which everyone is aware. From ride-hailing drivers to food delivery restaurants, COD is everywhere.
Now, how can we address the challenges merchants face because of the COD or the offline nature of payments?
InstaCOD says it has cracked the problem. InstaCOD wants to increase the speed of money in the digital commerce ecosystem.
Fahim Mashroor, Founder and CEO of BDjobs, Ajkerdeal, and Delivery Tiger, explains the service to me: “Merchants face a lot of challenges in a COD-dominant ecommerce payment landscape. We introduced InstaCOD to address those challenges. One key challenge is a delay in payment, which happens due to how the system currently works. We’re solving it in two ways. We pay merchants in real-time when the delivery happens regardless of the money coming to our bank — the moment the delivery man delivers the product to the customers and collects the payment, we pay the merchant. Second, we pay the merchants when the logistics company picks up the product from the merchant's place. We then collect the payment from the logistics companies according to their schedule.”
The idea is that the merchant has already delivered the product, why should he wait for 3-7 days to get paid? He has already earned the payment and he should be able to access it now.
InstaCOD takes a transaction fee of 1%-2% for the service, akin to what MFS/Payment gateways charge for payment processing.
All transactions take place digitally. InstaCOD sends money to the merchants via banks and MFS accounts. Merchants can choose how they want to receive the money.
Mr. Mashroor says small merchants are willing to pay the fee to get the payment early. It makes sense because many merchants are used to paying up to 1.5%-2.5% payment to payment processing companies, be it a payment gateway or an MFS, or a card company.
“We're saying you give us the same fees, we give you the same benefits,” he says. “But we're not dealing with any cash, we’re paying them through banks or MFS. And we're making the payment 24/7 and merchants can use the money as soon as they get it into their account.”
The entire premise is fast access to money.
Logistics companies usually have their scheduled payment time. They collect the money, aggregate it, and pay them at once. So it usually incurs a delay. There are also banking hour issues, says Mr. Mashroor. Say, for example, if you send money through BFTN on Thursday afternoon, by the time the money hits the receiver account it’ll be the next Sunday morning.
InstaCOD is all about eliminating this delay.
Merchants get the money in almost real-time — in a few minutes be it in their bank account or their MFS wallet. It improves merchants’ capacity to access capital and gives control back to the merchants in terms of where and when they want the money.
Conceptually, the service in many ways can be called a combination of earned wage access services and MFS companies for the digital commerce market.
What earned wage access services do is they allow employees to access their salary throughout the month. So what usually happens is that you get your salary at the end of the month but what if you need cash in the middle of the month? You usually borrow from someone else.
Earned wage access companies say wait, this is a problem, particularly for the people who don’t earn a lot. So we’re going to put together a system where companies will be able to pay their employees throughout the month and employees can access their salary according to their needs, even if it’s in the middle of a month.
The challenge we mentioned earlier that ecommerce merchants face when it comes to getting their payment is quite similar. They have provided the product. The product is being delivered to the customers. Customers paid the money but they still can’t get the money because the system has a certain lapse and it takes several days to weeks before they can get the money for the product they sold.
InstaCOD says wait, this is not right. This creates a ton of challenges for the smaller merchants. So we’ll put together a system that will work with logistics and ecommerce companies and ensure that merchants get paid in real-time as soon as they deliver the product to the logistics company.
The similarity with MFS companies is that it increases the velocity of money and unlocks additional value in the economy.
The service was initially launched for Delivery Tiger merchants. Today, over 90% of Delivery Tiger clients use the service and they’re super happy with the service, Mr. Mashroor says.
That’s when it occurred to the Delivery Tiger team that this is not a problem for Delivery Tiger merchants alone but a common problem for every merchant, mostly small ones, who trade online.
Big merchants usually enjoy better capital access and can wait. But smaller players are interested because they’re always in a working capital crisis.
The market response has been exceedingly positive.
Currently, the service is mostly used by Delivery Tiger customers. However, InstaCOD has since been spun off of Delivery Tiger and turned into a separate company.
“Until now it was an embedded service for Delivery Tiger merchants,” says Mr. Mashroor. “It was only available through Delivery Tiger. We have since spun it off and launched a separate app for InstaCOD. Now merchants won’t have to work with Delivery Tiger to use InstaCOD, they can work with any logistics company and still use InstaCOD.”
Theoretically speaking, the product works like any payment app. For example, you’re an ecommerce merchant and you work with the X logistics company. When you send a delivery through X, you’ll get a code from the logistics company, you enter the code into the InstaCOD app, InstaCOD system checks with the logistics company on the backend whether the delivery has been made or the delivery person picked up the parcel. If yes, then InstaCOD makes the payment. InstaCOD later collects the money in bulk from the logistics company.
That’s broadly how the product works.
However, InstaCOD doesn’t yet have established partnerships with other 3PL companies. The company has been in discussion with several 3PL companies.
It however has already worked out partnerships and integration with several banks and MFS players.
“We don't have an arrangement with logistics companies as yet,” says Mr. Mashroor. “But we're in conversation with a few logistics companies. We'll have integration with all the 3PL companies. Merchants can take logistics service from anyone. They just enter their delivery code into our app, we verify on the backend with the logistics company and pay them if everything is alright. We then collect the money from the logistics company later.”
InstaCOD also offers an incentive to 3PL logistics companies in the form of revenue sharing.
“We'll share a cut from the revenue with the logistics company,” says Mr. Mashroor. “We charge merchants a fee and we'll share a part of it with the logistics company.”
Mr. Mashroor sees a big market for InstaCOD. While the company initially plans to work with ecommerce logistics companies, it plans to gradually expand into markets that suffer from similar merchant payment delays such as food delivery, ride-hailing, and so on.
He offers the example of ride-hailing drivers who prefer cash over card or bKash payments because of the same delay in payment.
He says InstaCOD can be a solution in those cases. It can pay the driver when they complete a ride, and collect the payment from the company on their scheduled payment time.
For the food delivery companies, it sees similar openings with restaurant partners of food delivery companies.
The thesis makes the service relevant across digital services where there are delays in payment.
InstaCOD essentially uses the existing financial services infrastructure to make the service happen. It has built high-level integrations with several MFS providers and banks that enable it to execute the solution.
Mr. Fahim says it is a marriage between digital payment and cash payment.
“We had to do high-level integration with banks and MFS companies in order to execute the service,” says Mr. Mashroor. “For instance, we can make 24/7 banking transactions which you can't do in a normal setting.”
InstaCOD has integration with several banks, but the company says it can send money to any bank. Merchants don't need to have accounts in any particular bank, they can have an account in any bank and still use InstaCOD.
InstaCOD essentially pays merchants in advance once the product is delivered. For now, the company makes the advance payments from its working capital. It has also partnered with several banks for this purpose. The company says it has enough capacity to deal with high demand if so happens.
It is a complex product to build. Technical and capital need both are high.
“The reason we have made it a standalone product is because we want to build the product as best as we could and to open it up to other players,” says Mr. Mashroor.
Building fintech products are not easy. You can't leave anything to chance. You have to build a perfectly secure product, he adds.
While it is relevant for ecommerce companies and logistics companies to consider a similar service for their merchants, it is a different problem than the one they’re solving. It’s neither a logistics challenge nor an ecommerce challenge. Building and running such a product would require separate management, operational strategy, and focus.
To that end, in a broad sense, while anyone can build it, it doesn’t make sense for the ecommerce or logistics companies to go that route. Instead, a partnership with a dedicated service provider makes better sense.
“We believe that companies would be more comfortable partnering with us than otherwise,” says Mr. Mashroor.
“We're helping them monetize their data and they can instantly roll out the service to their merchants,” explains Mr. Mashroo. “It also makes sense from the merchants’ satisfaction point of view. For these companies, merchant satisfaction is an important metric and this product can significantly improve it.”
InstaCOD already has a growing user base. The company says it currently handles between BDT 10-15 lakh transactions daily. It can handle much higher transaction numbers.
“We have worked out solutions for financing needs in collaboration with banks,” says Mr. Mashroor. “Now if our daily transaction needs go to one crore daily, we can meet that. We have the capacity to scale both technically and financially.”
As the company grows, InstaCOD has other ambitions. “Once we scale, we'll have a digital footprint of which merchant does how much business’, says Mr. Mashroor. “This is verified financial data which merchants can use to get loans from banks and financial institutions.”
Banks struggle to serve many of these SMEs because they don't maintain their data. InstaCOD aims to turn the whole thing on its head. Digitizing SMEs has become a hot trend in several emerging markets in the past several years. Dhaka has several companies that are looking to bring offline SMEs online.
Mr. Fahim says InstaCOD is a kind of collateralizing data, creating credit profiles for these small merchants, and making them bankable. Banks can use these profiles to give loans to these merchants.
The company also plans to introduce new features in the future. “We're not a logistics company or an e-commerce company, we're a fintech company that improves the velocity of money for the small business”, says Mr. Mashroor. “We unlock money stuck in the supply chain for SMEs and MSMEs.”
InstaCOD is quite a unique service. The company doesn’t quite fall under any existing financial regulatory framework.
When asked about regulatory requirements, Mr. Mashroor says the company doesn’t require any particular license. Since delivery companies already have licenses to collect cash, there is no legal barrier or additional requirements. The company sees it as logistics companies outsourcing their cash collection service to InstaCOD.
InstaCOD has found an obvious but overlooked inefficiency in the digital ecommerce ecosystem of Bangladesh. An effective solution can unlock a big market opportunity for the company. It can also unlock new economic opportunities for small merchants.
But no market is devoid of challenges. InstaCOD will have to achieve the trust of both logistics and ecommerce companies and the merchants to make the business work.
In some instances, logistics companies may see InstaCOD as competition to their own businesses.
Many logistics companies themselves are trying to reduce the delay in payment for their merchants because it is a major source of merchants' dissatisfaction.
Many new logistics companies are using fast payment as a differentiator factor to attract merchants. If logistics companies can figure out a mechanism using the existing solutions for making real-time payments to merchants, it’ll render InstaCOD’s service irrelevant.
On the part of merchants, they already pay a commission to ecommerce marketplaces. In many cases, they offer discounts at the request of marketplaces. Many merchants also subsidize logistics fees. They pay logistics companies a delivery charge for doing the deliveries. So selling on ecommerce marketplaces is already quite expensive for these merchants. Now on top of that, if they have to pay an additional charge to get the money faster, many merchants may find it difficult to accommodate.
That said, people do pay an additional fee to get money faster in the case of MFS. And MFS has enjoyed an incredible penetration in the country. And COD is a real challenge in ecommerce.
How InstaCOD tackles these challenges will weigh on its success in the coming days.
That said, Challenges and uncertainties are inherent to the business. To that end, while InstaCOD builds its business, the company will equally have to focus on building a sustainable moat for the long term.
For now, the company has its job cut out — scaling across the digital commerce ecosystem in the country.
“We wanted to solve the problem small merchants face when it comes to receiving payments when they sell their products through digital marketplaces,” says Mr. Mashroor. “We launched InstaCOD. Tested it with Delivery Tiger merchants. Merchants liked it very much and we realized that it has a broader appeal. We now want to take it as many marketplaces and logistics partners as possible where there is a delay in payment for the sellers.”
Thank you Ayrin Saleha Ria for reading an early draft of this essay.