Cash on delivery: Benefits, types & risks

Online shopping has evolved over the years, especially with the introduction of online marketplaces such as Amazon and others.

The success is partly owed to the diverse payment system for eCommerce. Some options include PayPal, Global Pay, or cash on delivery (COD), where a consumer only pays for goods after they are delivered to their location. 

Integrating the COD payment model improves brand reputation due to its customer-friendly service.

Learn more about this increasingly marketable payment method and how it works.

What is cash on delivery (COD)?

Cash on delivery is a payment model where a client only pays for the goods after delivery but not in advance. ‍

COD is common in eCommerce strategies, where the consumer pays the delivery fee after receiving their goods.

If they refuse to pay for the goods, the delivery agent will return the commodities to the seller.

This payment option is renowned in areas where online shopping is not prevalent or where there is distrust between retailers and clients.

7 Benefits of cash on delivery for businesses

1. Increases sales and market reach

COD is a burgeoning option for clients who lack trust in online shopping sites and those who prefer to purchase products that they are sure are of high quality.

Online sites that integrate this payment model can woo a broader audience.

Cash on delivery offers security for customers who are unsure of the quality of online products, thus leading to better conversion rates. 

2. Builds customer trust

COD cultivates trust among customers who have experienced fraudulent retailers. Most customers bank on online stores that allow them to pay after receiving a product.

Statistically, retail eCommerce sales in 2024 are estimated to transcend 6.3 trillion U.S. dollars worldwide.

Online stores that offer cash on delivery options build trust among clients because they overcome the need to commit to online payment methods.

3. Competitive advantage

The online market is quite competitive, and stores that have not found their footing may find themselves out of business. Retailers offering COD often stay in the market for a long timeframe.

Given that digital payment methods are still in the infant stages, businesses that integrate this option appeal to emerging markets.

4. Reduces cart abandonment rates

According to Statista, 25% of customers in the US don't trust a site with their credit card information.

By offering Cash on Delivery (COD) as a payment option, companies can reduce cart abandonment rates, as it eliminates the need for customers to enter sensitive payment information online, making it easier for them to finalize their purchase without hesitation.

5. Encourage impulse purchases

The “pay later” option reduces any perceived risk linked to online shopping.

Many clients are willing to shop if they know they only pay after delivery.

According to statistics published on Statista, Global buy now, pay later (BNPL) transactions are predicted to increase by nearly 450 billion USD between 2021 and 2026

Paying later puts the client's mind to rest since they have equity over their finances until they receive their goods.

6. Reduces chargeback and refund risks

Although COD refunds are more complex than online payment refunds, they reduce the risk associated with fraudulent claims since the client pays after product delivery.

With payment on delivery options, businesses rarely succumb to chargebacks.

7. Cash flow management

Immediate cash from the client boosts the business' liquidity, ensuring they have funds at hand during fluctuating market conditions.

Top 8 Risks associated with cash on delivery

1. High return rates

When a client returns a product, the drawbacks to the seller include processing refunds, reverse logistics, and restocking, which reduces profit margins.

Clients may decide not to receive the product or refuse to pay before accepting their package.

Usually, the delivery personnel has no option but to return the product to the seller, a disadvantage especially for products that cannot be returned to inventory.

2. Cash handling risks

Sometimes delivery agents handle large amounts of cash, placing their lives and the business’ progress at risk.

Some delivery teams mismanage cash collected, impeding the seller's success. 

3. Delayed cash flow

Logistical companies may deliver products at the wrong location, affecting and straining the retailer's business operations, particularly if they rely on COD payments to run daily operations.

Cash on delivery options impede business cash flow since the seller only receives the funds after delivery, which may take weeks or even days.

4. Higher operational costs

COD is an intense process for delivery companies since they have to guarantee all products are delivered to the correct location and in good condition with efficient payments.

Usually, this increases delivery costs, which may affect startups and small businesses that hope to expand their operations.

Some delivery companies charge an extra fee for handling cash on delivery payments.

5. Order cancellations and failed deliveries

Even after confirming when and where they want the goods delivered, some clients may not be available.

Further, this causes the seller to reschedule the delivery, plunging their business into payment delays and operational costs.

Some clients cancel their orders at the last minute after they leave the inventory and are routed for delivery, causing unprecedented shipping costs to the seller.

6. Complex refund process

The refund process for COD transactions is a hustle since the seller must initiate the process through bank transfers or cheques, most of which are time-consuming.

Longer refund processes cause customer mistrust and affect the company image, especially for those who feel the process is taking longer than expected.

7. Inventory and stock management

Dead stock cannot go back to inventory for repackaging and reselling.

Such a situation occurs when clients return products due to damage or delivery issues, hampering cash flow and binds up significant storage space.

8. Geographical limitation

Most delivery companies do not offer COD services in certain regions due to logistical issues.

Such cases affect service delivery for companies looking to expand their reach.

COD deliveries often take longer in some areas due to payment processing and collection.

What are the types of payments for cash on delivery?

Here are various types of payment methods for COD:

1. Cash payment

Cash payment is the most common COD transaction. The buyer will give the delivery agent the total amount for the order after receiving the merchandise.

Also, the mode is predominant in areas with poor digital and banking payment options.

The benefit of this COD is that it cushions clients from fraudulent shopping activities.

2. Debit/credit card payment

Debit/credit card payment offers a conventional twist to traditional payment options, gratifying clients who bank on the security of digital transactions.

For this method, delivery companies offer their shipping agents portable card readers to streamline payment after goods delivery. 

Debit and credit cards streamline COD, including better tracking and reward points.

Additionally, it is convenient for clients who may lack the required funds.

3. Mobile payment

Mobile payment has improved with the widespread integration of digital payment applications.

As a client, you can access this service through various apps stores, including Apple Pay, Google Pay, and others that support COD. 

This payment option is secure and reduces the hustle of cards or cash.

Retailers, through their delivery agents, use a payment link or QR code to initiate payment, after which the client will scan to finalize payment. 

Mobile payment is ideal for those who prefer convenience and tech-savvy ideas. Ultimately, it aligns with the ongoing migration to contactless transactions in eCommerce digital transformation.

4. Bank transfer

Although bank transfer is less common nowadays, it is beneficial where the client prefers security over their funds. The customer will only have to initiate payment to the seller’s account.

The only downside to this method is that you must have a bank app or access to online banking services.

Once the client finalizes the payment, the delivery agent will wait for the seller to confirm the funds. 

While bank transfer is a lengthy process, it is perfect for security purposes for high-value goods.

5. Cheque payment

Cheque payment lost its glory with the introduction of debit cards, digital payments, and banking systems.

Here, the client will write a cheque after receiving their goods, after which the retailer will go to the bank to cash it. 

While this mode is prevalent among the older generation, with 43% of this demographic paying bills via cheques, it is shrouded in foreseeable delays and risks. 

For instance, the delivery agent cannot release the goods until the bank clears the check.

Why? The bank may reject the cheque, or the client’s account may have insufficient funds.

Waiting for payment confirmation is lengthy for the delivery agent and seller.

How does cash on delivery work for eCommerce?

1. Order placement

As soon as a client finalizes their online shopping spree, they proceed to checkout, which requires them to add their preferred payment option.

Most sites have diverse options, including COD, and selecting it means that you will only pay for the goods once they arrive at your doorstep. 

Most customers prefer COD, as the payment is processed once you have assessed the received items.

Usually, this option is followed with clear communication, including any additional fees for delivery or service charges.

2. Order processing and shipment

When you have placed an order for desired goods and selected your payment option, the seller will start processing your request, which involves picking and packing in readiness for shipment.

The seller marks the package as COD to alert the delivery and logistics company that they must collect after service delivery.

The order is handed to delivery agents who support COD delivery. 

3. Delivery and payment collection

After the delivery team arrives at the destined client's address, they must hand over the goods and finalize the transaction.

The client then initiates payment through their preferred model to receive their package. 

The delivery agent must ensure the client makes the correct payment and may issue a receipt once funds are reflected in the seller's account.

What's the difference between cash on delivery vs. cash in advance?

Cash on delivery and cash in advance are different payment options that eCommerce and B2B companies integrate into their operations.

Below is how the two differ:

Payment timing

Cash on delivery (COD)

• The client pays for the goods after delivery, not before.
• Businesses risk closing down if the client refuses to pay for the goods or refuses to avail themselves during delivery.
• It assures clients that they are not receiving sub-standard products.

Cash in advance (CIA)

• The client must pay for the goods before delivery.
• Buyers put their finances at risk because they only hope they receive their goods on time and in good condition.
• CIA cushions the seller against losses because there is a reduced risk of order cancellations.

Risk management

Cash on delivery (COD)

• The seller puts their business at risk with issues such as failed deliveries and delivery returns.
• The buyer is not at risk since they only pay after receiving their goods.

Cash in advance (CIA)

• The customer is at risk of receiving sub-standard products and delayed shipping.
• The seller encounters less risk since they receive upfront payment.

Impact on cash flow

Cash on delivery (COD)

• Businesses experience delayed cash flows.
• The buyer has total equity over their funds until product delivery.

Cash in advance (CIA)

• Immediate cash flow ensures the seller caters to daily business operational costs that require funding.

Trust and relationship dynamics

Cash on delivery (COD)

• Builds trust between the client and seller, especially in regions with fewer online transaction systems.
• High product return rates and payment issues may affect the relationship between the customer and seller.

Cash in advance (CIA)

• The CIA strengthens the relationship between sellers and consumers since both sides fulfill their end of the bargain.

Need seamless cash flow for your eCommerce business?

Cash on delivery is a safe payment method for online shoppers who prefer a risk-free payment process.

On the other hand, eCommerce businesses suffer from unpredictable expenses, slow-paying customers, overhead costs, inventory management issues, and recurring fluctuations. 

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