September 2023

Digital Payments in E-commerce

Embracing digital payments not only enhances efficiency and trust but also promotes financial inclusion, benefiting all stakeholders.

Pakistan’s e-commerce industry is rapidly growing, with a rise in the number of online businesses and shoppers entering the market. However, one major challenge faced by the industry is the predominance of Cash On Delivery (COD) as a payment method.

For online shoppers in Pakistan, COD is the most preferred payment method due to reasons such as trust issues, lack of access to digital payment tools, and a preference for physically inspecting the product before paying for it.

However, COD comes with various challenges for both customers and businesses, such as increased transaction costs, higher return rates, and delayed payments. Moreover, the high rate of fraudulent activities also affects the customers, sellers, and other players in the e-commerce value chain.

Digitization can efficiently solve for these challenges by offering convenient and secure payment options, such as mobile wallets, payment gateways, and credit/debit cards. Digitization can also help businesses reduce costs and increase customer trust and convenience.

The overarching theme of this report is the need to nurture electronic payments to facilitate stakeholders in the e-commerce value chain, increase the banked population of the country, and promote financial inclusion.

The Scale of E-commerce in Pakistan Today

Despite being an Agrarian country, Pakistan’s economic growth has over time been supported by industrial production and the growing services sector.

Advanced economies are characterized by a strong services sector that promotes cross-border trade, attracts foreign direct investment (FDI), gives greater export avenues to service suppliers, and lowers costs for imported services.

5 th

Largest Country

$ 376 B

Total Nominal GDP

In Pakistan’s case, the COVID-19 pandemic caused the e-commerce industry to grow exponentially, placing it ahead of Iran and behind Israel. This amounted to only 1.7% of the overall GDP for 2021.

Pakistan’s e-commerce market is dominated by a few large marketplaces, followed by multiple small to medium-sized e-commerce businesses across different categories including electronics, automotive, real estate, fashion and apparel, personal care, and food and perishables.


Food & Perishables

Fashion & Apparel

According to the data released by Small Medium Enterprise Development Authority (SMEDA), there are more than 3,000 registered e-commerce merchants in Pakistan as of 2021. As the country focuses on tapping into this space, one key contributor could be digital payments.

The E-commerce Value Chain in Pakistan

Types of E-commerce

E-commerce does not only comprise of door-to-door services. Buying tickets for a holiday or a football match, purchasing an e-book or software, and online services like event management all come under e-commerce.

We conducted a survey to understand consumer behavior and perception regarding e-commerce, and over 80% of respondents indicated that, to them, fashion and lifestyle is the most popular category.

There are different types of business models that firms follow when it comes to identifying “participants of the transactions”. In the event of entities selling their products to individual customers, the following models apply:

Business to Consumer (B2C)

Consumer to Consumer (C2C)

Government to Consumer (G2C)

When the customer is another business entity, the following models are applicable:

Business to Business (B2B)

Consumer to Business (C2B)

Government to Business (G2B)

Key Components of the Value Chain

Michael E. Porter, from Harvard Business School, posited that there are two core concepts of an e-commerce value chain: Primary and Support. Essentially, all activities being conducted aim to support the primary activities of the value chain.

The following figure represents the value chain of e-commerce, based on a consumer’s journey:

The attributes of the value chain vary based on business models. This document considers Pakistan’s (and the world’s) most prevalent e-commerce business model: the B2C model and the role of its key stakeholders:


Suppliers provide required raw materials/finished goods to the merchant. Payment terms vary based on the nature and volume of the commodity; industry norms often also drive the arrangement.


Merchants (sellers) are the primary actors in the supply chain. Other than inventory, a merchant's key areas of concern are business financials, product marketing, and branding. Merchants either use marketplaces like Daraz or, or set up their own online stores.

E-commerce Platform

E-commerce-enabled Content Management System (CMS) is used to catalog products, register purchases, and provide customer services (e.g. Daraz, Meta (Facebook/Instagram), and Amazon).

Logistics Company

Third-Party Logistics (3PL) includes partners or services that help e-commerce merchants manage their distribution chain. This includes warehouse and inventory management, order fulfillment, shipping, retail distribution, exchanges and returns. Businesses can also provide any/all of the aforementioned services in-house.


The core stakeholder of an e-commerce value chain is the consumer. A supply chain’s optimization aims to ensure a satisfied pool of customers and repeat orders, thereby growing the bottom line of businesses. In a COD-based market, among all players, consumers are often at an advantage.

Payment Gateway Providers

Seamless integration of payment gateways with platforms is an integral component of the e-commerce value chain. One of the key drivers of COD is the dearth of payment gateway adoption due to its high transaction fees (Merchant Discount Rate/MDR).

The Cash Conundrum

Why is E-commerce in Pakistan stuck in a Paper Money Rut?

Key actors (and flow of cash) in the COD e-commerce value chain:

The Predominance of a Cash-Centric Payments System In Pakistan

Despite the significant growth in e-commerce, the industry is faced with a plethora of challenges hampering its potential to reach its zenith.

There is a general preference for using cash instead of digital money, across Pakistan. People do not fully understand how to use digital payment methods such as mobile apps or online banking, which leads to mistrust and a preference for traditional methods. Additionally, the physical nature of cash provides a sense of tangibility and control that digital money may not offer. Moreover, for those with bank accounts, the act of withdrawing cash and using it for transactions can help them manage their finances and budget more effectively. It allows them to keep a clear mental record of their spending and helps them monitor expenses closely. Any amount kept in the account is seen as their savings that they don’t want to risk by transacting.

Although digital payment methods have the potential to offer convenience and efficiency, the cultural preference for cash in Pakistan persists due to a lack of understanding, the sense of control it provides, and the ability to track expenses more easily.

More than half of the survey respondents who currently use COD have used digital payments in the past but chose to return to COD despite the convenience.

Reasons for reluctance to switch to digital payments
Lack of trust in unknown brands

One of the main reasons why consumers prefer COD is that they do not fully trust small/unknown businesses. These brands may not have established a reputation for delivering quality products or services, so customers hesitate to pay before receiving the order to ensure that they receive what they are paying for.
COD also validates the identity of the e-vendor. According to a survey by the Centre for International Governance Innovation, 49% of the 25,000 internet users’ surveys indicated that they do not feel comfortable disclosing personal information due to a lack of trust.

Reliance on parents’ cards

According to estimates, only 21% of Pakistan’s population in the documented economy has a bank account. Moreover, Pakistan’s currency-to-deposit ratio is 40%— one of the highest in the world. Extensive documentation requirements to open bank accounts discourage the need to have a bank account. Therefore, younger individuals who do not have their own credit or debit cards prefer COD as a payment method. In some cases, these individuals may use their parents’ cards to make online purchases, but the added step of waiting for an OTP to be sent to their parent’s phone and then requesting the OTP can be a hassle.

Sense of control over transaction

Another factor that influences consumers to choose cash on delivery is the satisfaction they feel when they have the product in hand before they pay for it. This provides them with a sense of control over the transaction and helps them feel more confident about their purchase decision.

Lack of transparency

There is a lack of implementation of consumer protection regulations. Moreover, there is an absence of a “National Level Retail Policy” and partnerships, between regulatory bodies and financial institutions, to promote transparent, cashless transactions.

Fear of advance payment

Some consumers fear that they may not receive the right product or be sent a substandard item. This fear further reinforces their decision to opt for cash on delivery instead of paying for it in advance, as this assures them that they will not be cheated.

Lack of payment gateways

Local merchants have very limited access to Internet Payment Gateways (IPGs) provided mostly by global market players such as Visa and Mastercard. The complex process of registration and a dearth of digital literacy on both the supply and demand side pushes the merchants to also prefer COD. According to the regulations provided by the SBP, all licensed and registered banks can offer payment services and gateways to e-commerce firms. However, only 4 commercial banks (UBL, Bank Alfalah, MCB, and HBL) and 2 Microfinance banks (JazzCash and easypaisa) provide these services as of now.

Security concerns

COD offers security against online scams like identity theft and misuse of financial information. Consumers worry that their passwords may be stolen or that their money might get deducted without their knowledge if they put their card information online. In comparison, COD provides them with a greater sense of security and peace of mind.

Poor customer service

Many individuals are reluctant to pay online for their purchases due to their past experiences with poor customer service. Instances of no delivery or receiving damaged products leave them frustrated and dissatisfied. When faced with such issues, reaching out to customer service often proves to be a daunting task, with long wait times or no response at all. This lack of efficient support exacerbates the reluctance to pay online in advance. As a result, individuals prefer cash-based payment methods like COD, which provides a sense of security, as they can withhold payment until the product is received or checked for any damages.

Technical knowledge deficit

Many individuals do not have the necessary skills to access and navigate online payment systems. The lack of familiarity with technology can be due to age, location, or lack of exposure to digital platforms. 53% of Pakistan’s adult population remains financially excluded as a result of lack of awareness of financial products.

Other issues

Some consumers anticipate issues like no delivery, no cashback, or unresponsiveness by customer service. These issues further reinforce their decision to opt for COD. They feel that cash on delivery gives them a greater sense of control over the transaction, and they can address any issues before they make the payment. Moreover, delays and the cumbersome process of reversing e-payment transactions discourage consumers from using digital methods.

Challenges of Using Cash on Delivery as a Payment Mechanism
Delays in cash flows

COD transactions create a delay in the cash flow for businesses, as they have to wait for the product to be delivered and payment to be collected before they can receive their revenue. According to a survey conducted by the Chainstores Association of Pakistan (CAP) in 2021, 33.3% of the retailers complained that they faced delays in payments made to courier companies as part of cash on delivery payments, along with some via payment gateways as part of digital payments. This delay can cause cash flow issues, particularly for small businesses with limited resources. It could also delay payments made to suppliers which can threaten supplier-merchant relationships. One of the merchants interviewed in Pakistan said that her delivery partner is TCS and due to TCS having 3 or 4 payment cycles, she receives her payments every 10 days and not immediately.

Risk of fraud

COD transactions are susceptible to fraud; customers may refuse to pay, or pay with counterfeit currency that riders are not equipped to recognize. The CAP survey also finds that 38.3% of orders placed were fake in the period between July 2020 to December 2020. This increases the risk of losses from fraudulent transactions for businesses operating online. Another type of fraud is done by riders. For larger payments (electronics, other expensive items) riders sometimes go missing with the goods or mark a delivery as completed without having made the delivery. Additionally, there is also an added insurance cost involved in cash handling.

Increased risk of returns

Cash on delivery transactions may also increase the risk of returns for businesses, as buyers may order products without fully understanding their features or quality, and then return them when they do not meet their expectations. Buyers may even change their mind without any major reason when the order is already shipped. The CAP survey of 2021 also finds that retailers reported a high frequency of order cancellations of ~46.7% while the frequency of returns reached 40% during the period of July 2020 and December 2020. This can result in additional costs for businesses, as they have to bear the cost of shipping, handling, and restocking the returned product.

Possibility of tax evasion

Cash on delivery transactions also facilitate tax evasion. This can be due to the lack of documentation for cash on delivery transactions. According to the Sustainable Development Policy Institute, COD transactions contributed roughly 60% of e-commerce transactions in Pakistan where most of these were undocumented. This presents an opportunity for businesses to report less earnings and avoid falling under higher tax brackets.

The lack of documentation also makes tracking and sales difficult for retailers.

Limited financial inclusion

By encouraging cash-based transactions, e-commerce players slow down the adoption of electronic payments and limit the growth of the financial sector of Pakistan. The availability of COD also takes away opportunities for consumers to access formal financial services such as credit, savings, and insurance. This can have broader implications for the economy, including reduced financial inclusion, limited access to credit, and decreased investment.

The Power of Digitization

Unlocking its Potential for the E-commerce Market

The Role of Digital Payments in Reducing Reliance on COD

Digitization can encourage customers to adopt digital payment methods, such as credit/debit cards, digital wallets, and online bank transfers. This will make it more convenient for customers to make payments and reduce the reliance on cash on delivery. More than half of the survey respondents who chose to pay for their orders via digital payments chose to pay via bank cards, followed by an equal split between digital wallets and bank transfers. In this section, we highlight the different ways in which digital payments can be encouraged.

Many customers prefer online shopping because it saves them time and is more convenient, especially if they have busy schedules or if traffic is bad. They appreciate being able to order items before they go out of stock, and be able to avoid the hassle of going to physical stores.

In the past years, there has been an increase in the adoption of digital payments. According to the Payment Systems Review for the fiscal year of 2022 by the State Bank of Pakistan, Pakistan had:

Rs 387 Million

Mobile Banking Transactions

100% Growth by Volume

Rs 11.9 Trillion

Value of Transactions

141% Growth by Value

How digital payments can reduce reliance on COD
Offering multiple digital payment options

Integrating e-payment gateways on websites, allowing customers to save their payment details on the platform and make payments directly through the platform can speed up the checkout experience. This also increases the likelihood of customers completing the purchase. However, it is crucial to ensure that customer data is stored securely to prevent any potential breaches. 
Direct bank transfers or QR code payments as a payment option is another way of ensuring a secure payment system for the user. Users can directly send money to the merchant’s account without disclosing their personal bank information. Mobile wallet providers such as JazzCash, easypaisa, or other payment platforms also allow customers to make payments through their mobile apps

Mechanisms like Buy-Now-Pay-Later, mPOS, and POS are other digital payment options that allow customers to pay in installments or via card readers, making the process hassle-free.

Raast payments

In addition to the payment methods mentioned above, merchants can also make use of RAAST payments. RAAST was launched by the State Bank of Pakistan as an end-to-end digital payment system that aimed to address common payment challenges faced by people (complicated processes, poor user experience, lack of security, and limited interoperability among financial institutions). RAAST onboards customers efficiently by seamlessly issuing RAAST IDs and allowing fund transfers to other bank accounts via mobile numbers.

Some of RAAST’s strengths include having no transaction costs, no need to memorize bank account details, no delays in payment transfer, compatibility with all bank accounts, and security. As a result of the convenience provided by the platform, the total transactions completed via RAAST in the fiscal year of 2022 peaked at 7.9 million with a total worth of PKR 102 billion.

Building trust with customers

E-commerce platforms can build trust with customers by partnering with trusted payment providers to provide reliable and secure payment methods. Moreover, 68% of the consumers in Pakistan agree that making payments using biometrics is more convenient than using a card or a device and over two-thirds also agree that biometrics technology is more secure than two-factor authentication.

Customers rely on product descriptions and images to make informed purchase decisions while shopping online. Therefore, brands should also take steps to ensure that the products they deliver are accurately described and of good quality.

Another effective way to build brand reputation online is by making customer reviews available on the platform. Businesses should respond to feedback, address concerns, and leverage positive reviews to build brand advocacy and retention.

Incentivising digital payments

E-commerce platforms can offer discounts, cashback offers, or loyalty points to customers for choosing digital payment methods. Incentives can encourage customers to adopt digital payments and reduce reliance on COD. Daewoo Pakistan offers incentives to passengers upon paying for their tickets in advance via digital payments instead of purchasing the tickets at a Daewoo stop. Upon purchasing their tickets online, customers are given the option to either avail a 5% discount on their ticket fare or a cash back option. A passenger can also earn points on online purchases and redeem them later.

Providing cash withdrawal facilities

E-commerce platforms can partner with banks or payment providers to offer cash withdrawal facilities to customers who have received a refund or canceled an order. This can be done through ATMs, mobile wallets, or other payment methods.

One example in our local landscape is Foodpanda. If a customer places an order on Foodpanda and pays for the order using their card or Foodpanda wallet and receives the wrong item, or if they decide to cancel, Foodpanda refunds them within a day or two in their Foodpanda wallet. The customer can then pay for their next order using that amount rather than opting for COD or paying via debit/credit card.

Offering reliable customer service

Focus on providing excellent customer service to increase customer satisfaction and loyalty. Brands need to have responsive and helpful customer service teams to address any issues that customers face. This can include having multiple channels of communication, such as phone, email, and chat support as well as having self-service bots to register customer complaints in a more efficient manner.

Educating customers about digital payments

E-commerce platforms can educate customers about digital payment methods and their benefits such as avoiding the hassles of not being at home when the delivery rider arrives, not having the exact amount of cash and so on. This can be done through blogs, tutorials, or webinars. Educating customers can help build trust and confidence in digital payment methods, making customers more likely to use them instead of relying on COD.

Beyond COD

Exploring the potential of technology in Pakistan’s evolving landscape

Digital payments have the potential to revolutionize the e-commerce industry and address several challenges faced by businesses and consumers alike. One of the most significant benefits of digital payments in Pakistan is the potential to expand financial inclusion, especially since the majority of the population in Pakistan remains unbanked. Digital payments have emerged as a game-changer for e-commerce, solving multiple challenges that the industry faces. The rise of digital payments has reduced the reliance on cash on delivery, enabling a seamless and secure transaction experience for both buyers and sellers. Moreover, digital payments have improved the transparency of transactions, reducing the chances of fraud and disputes. The benefits of digital payments are not just limited to e-commerce businesses, but also extend to customers, who can enjoy the convenience and flexibility of paying for their purchases through various channels. By adopting digital payments, businesses in Pakistan can improve their operational efficiency, reduce costs, and provide a better customer experience. Finally, digital payments can also help to drive economic growth by facilitating cross-border trade and enabling businesses to access new markets. As the government of Pakistan continues to promote the adoption of digital payments, it is expected that the use of digital payments will continue to grow, offering significant opportunities for businesses and consumers alike. There is potential for digital payments to show a compound annual growth rate (CAGR) of 14.12% from 2023 till 2027 resulting in a forecasted total value of USD 18.66 billion by 2027. As the world becomes increasingly digital, it is clear that digital payments are here to stay, and e-commerce businesses must continue to adapt and innovate to provide the best possible experience for their customers.

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