I have penned down my thoughts on the digital economy eco system and its potential that we are missing out on as precisely as possible.
This blog post comes from the perspective of a small e-commerce company that has slowly scaled up, and is finding its issues in the missing eco-system grow more as the business grows. I have taken a look at the current nearly finalised e-commerce policy and it worries me because it addresses none of the issues mentioned below. These are the pain points from an e-commerce business perspective and much of this perspective is missing from the proposed e-commerce policy framework being floated around. To change the e-commerce eco system, a concentrated effort will be needed from the Commerce Ministry, FBR, SBP, Pakistan Post and the Kamyaab Jawaan program. Here goes:
This suggestions framework on e-commerce policy changes that are the urgent need of our economy in Pakistan is based on personal experience operating a small B2C business and scaling it up to the size of an SME against many odds in the local eco-system. It also comes after months of observations on entrepreneur groups, where majority of the problems of the e-commerce sector revolve around logistics and payments issues. With the massive potential in digital commerce, and the digital trade economy which can give a level playing ground to every small business in Pakistan, the true potential of this economy and its ability to rise has been stagnated in the market due to bad business practices by some of the bigger players who pumped money in but never failed to develop a real technology driven eco system which would be beneficial to all. A massive dependency on Cash on Delivery, no protection for sellers, expensive logistics, no trade agreements on e-e-commerce exports with other countries, and massive difficulties in accessing payment gateways especially for international sales have completely stunted the growth of this sector which could have generated a few billion dollars, if not more for our exports had the relevant eco system required for it been given enough attention, and infrastructure status the way other countries in the region have done. To this day, except for the big textile companies which are a handful, the real documentation and numbers of the e-commerce market in Pakistan remain unknown because more than 80% of the local economy is operating on cash on delivery, and a big chunk of the international payments are coming in through non banking channels making it very difficult to monitor exactly what the potential of the size of this economy is. In the following suggestions, I will divide the issues faced by both small and large companies between local eco-system issues and international eco-system issues.
1. Dependency on Cash on delivery, 3rd party logistics and cash flow issues: The way e-commerce entered the local market in Pakistan was primarily on a cash based system. Someone ordered from your website, you used a third party logistics company to send them the parcel, they collected cash from the customer on your behalf, deducted a delivery charge, a cash handling fee, and gave the remaining amount back to you. Ideally; this could have been a very good way to build trust in the market, and to increase confidence in e-commerce, but many logistics companies decided to build an alternate business model out of this. This is to collect cash once done with a delivery, and then keep the cash collected on behalf of multiple small companies doing business in their own accounts to earn interest on the float. This in turn has ruined the cash flows of small businesses, who are helpless since they have to depend on such logistics serviced, and have no other way of doing their business. A lot of small logistics players keep entering the market with the promise of quicker reconciliation, but the minute these companies scale up or sign up more users, their bandwidth to do so decreases and the eco-system stays in the same rut of delayed payments and cash flow issues for most small e-commerce companies. Logistics companies say that this is because most of their accounting reconciliation done is manual, and so it takes time to reconcile the volumes that they are doing daily. However, with some of the biggest logistics companies in Pakistan doing volumes upwards of a few billion in cash on delivery sales, there is now simply no excuse for them not to invest in the technology required to speed up on spot reconciliation. With the technology available that is used by electronic money transfer services, it is one that can be phased and adopted and eventually should become a legal requirement in the logistics sector. A logistics last mile delivery person can also be a money transfer agent, and should be able to do live reconciliation once cash has been accepted on a clients behalf. Logistics companies must develop the mindset that the growth of small e commerce companies will lead to much bigger growth for them in the long run. At the same time, because logistics companies are dealing with such massive volumes of cash, they need to come under financial institution regulations, and should by law not be allowed to hold on to any companies funds after an order has been fulfilled for more than three days. Currently the landscape allows big logistics players to exploit smaller sellers, and anti monopoly laws must be developed to prevent this from happening. There are needs to be more technology based nurturing and grooming of new logistics companies by the government. This can happen under a combined umbrella of Pakistan Post and the Kamyaab Jawaan program which must have some percentage of funds allocation towards the development of a better local eco system.
2. Problematic Last Mile Fulfilment and High Rate of returns: This is again an issue connected directly with the problem of Cash on delivery. The lack of an advance payment by a customer means that the seller is taking a risk by sending the parcel. There is a certain percentage of orders that get rejected for every seller because the customer does not feel accountable since no advance payment has been made. This results in sellers bearing both the cost of sending the parcel to the customer, and also the cost of the return parcel. While there has been much talk about consumer protection (and rightfully so), seller protection from bogus orders is an issue that has not been discussed on any forum, and actually adds up to big volumes in losses for many small businesses. At the same time, there is also a big divide between the last mile expectations that e commerce companies have and what the logistics companies end up offering. One of the repeated complaints against big logistics players in the market across entrepreneurship forums has been that often no delivery attempt has properly been made, customers complain that the delivery company never reached out to them, or returned the parcel after one attempted delivery. By promise, delivery companies are meant to make three attempts to delivery since last mile Fulfillment for cash on delivery is much trickier; where with an advance payment parcel one simply has to drop a parcel off at the shipping address, with cash on delivery the last mile involves finding the consumer at the said location with the right amount of cash in hand at the given time. The only workaround towards this is to eventually phase out cash on delivery, make a much larger concentrated effort towards digital payments and QR codes, and get the eco system off the dependency on Cash on delivery. The problem is becoming more pronounced as the e-commerce sector grows. It is an issue afflicting everyone from small companies to the big e-commerce giants, and is very unhealthy for the eco-system at large. E-commerce is all about making the last mile easier; that’s what differentiates it from ordinary retail, and with cash on delivery this remains a constant problem for sellers and logistics companies both.
3. Lack of access to online payment gateways: With all the talk of digitisation, and moving towards online payments, the digital payment eco system in Pakistan is still not even beyond its infancy stage. The true success of a good payments eco system is when multiple payment options are available to a large variety of businesses, not just the big players, and that are ready to plug and play into easy to use e-commerce eco-systems like Shopify and Woocommerce. Taking Shopify as an example since I have personally used it as a seller, it is one of the easiest to use e-commerce platforms in the world, not developer dependent, can be run by an average person with basic tech know how, but no payment service provider in Pakistan offers ready to plug and play solutions for platforms like shopify. The KYC process of banks to give documentation access to their payments API is long and cumbersome, and accessible to a select few, and in the end they don’t have the technology that easily plugs and plays into easy to use platforms. The advent of mechanisms like PayPal and Stripe globally changed the face of digital commerce. Anyone with a bank account and a taxation registered number can easily access a payment solution that works best for them; and start trading in hours once their e-commerce store is set up. Here; we are doing everything that is possible to make it difficult for companies to set this up. This is a huge loss to the local economy, and the drive towards documentation of businesses. The solution to this problem would be for the SBP to speak to one of the payment service providers internationally; if a local switch is still not developed and available; and Make a concentrated effort to at least develop one easy to plug and play payment platform that any small business can use for integration upon providing their business id, bank account details and an ntn number. With so many businesses looking to export currently, this is a no brainer and can be a watershed in how commerce is done from Pakistan. Currently there are sporadically available international gateways that exploit markets such as ours operating in the economy; they charge high transaction fee in foreign currencies and all of this is added up forex staying out of Pakistan. This change will have to be implemented from SBP side. It is time to take the banks into confidence on initiatives that go beyond loans, and tell them to develop technology and processes that are easy for small businesses to access. The vision must be big and global and it must be driven from SBP. At the same time; regulation must be eased up for more innovative thinking in the digital payments arena with so many new fintech players trying to enter the market. The policy framework around this is a massive detriment and barrier to entry, but to put things in perspective it was not banks that globally changed the face of e commerce. Rather it was the coming of age of new companies like PayPal and stripe that completely disrupted the banking model and have taken e commerce to where it is today globally.
4. Expensive Logistics: If we look at e-commerce trends globally, one of the biggest incentives that online retailers are offering their customers is free shipping and returns. It is an incentive because shipping costs are a deterrent that customers psychologically do not justify to themselves. Where e-com companies like Amazon, Asos and the likes are developing smarter and hyper local warehousing and delivery options to make logistics cheaper, Fulfillment is still a massively expensive process in Pakistan both to local markets and to international markets. To put things into perspective; a small parcel from Ali Express makes its way to Pakistan at a shipping cost of under 99 cents. That same parcel sent from Karachi to Lahore via our local logistics companies will cost double the amount. This problem increases multiple folds when we talk of exporting B2C parcels to international locations. Often; the product cost will be less than the shipping cost and this becomes a huge deterrent to be able to reach the international market. The best case study for this is the Chinese logistics model and how they repositioned their system for the e-commerce global economy. To give industry wide incentives, they have provided the biggest subsidies on international logistics via their e-packet service for small parcels up to 2 kg and this is why China is dominating world trade. It goes down to how the Chinese government has enabled the small seller regardless of which industry he/she operates in to penetrate the global market and has been the cause of much trade war pain to the Trump administration in the US. The immediate suggestion here would be to develop a subsidy system for small B2C parcels based on the Chinese model via a national logistics carrier like Pakistan post that makes smaller parcels and their shipping more feasible for the international customer. This will go a long way in making Pakistani products competitive in the global market. It is a time when we can take advantage of the devaluation since our products are already cheaper in the international market, but this will not be possible unless we subsidise international logistics. This change needs to be implemented from the commerce ministry; they must give new age businesses a fighting chance in the international market.
5. E-commerce parcels not recognised as an export from Pakistan: Even with the volume of trade being done by companies like Gul Ahmed, Sana Safinaz and others to name a few, where at peak times small parcels are leaving the country by the thousands, there is still no recognition of e-commerce parcels under official exports from Pakistan. The mindset at customs and the commerce ministry is archaic in this regard, and requires massive documentation which are simply not possible for this volume of small packages. The traditional landing bill and weboc approach has to be changed when it comes to e-commerce parcels leaving the country. The advantage of a digital trail is that the documentation is already in place, and if certain pre decided parameters are met digitally, the long drawn process of paperwork must be abolished. E commerce is all about speedy delivery, and if we get products stuck in bureaucratic processes, we will never make Pakistani businesses competitive in the international market. At the same time, many countries, like the UK for example give VAT exemptions on certain sectors for B2B exports from Pakistan. There has been no concentrated effort from the commerce ministry or the government to now extend these trade agreements to B2C commerce. In the process; clients from the UK to quote an example end up paying both local GST and 20% VAT in the UK. This in turn becomes a deterrent to them buying, and is once again a loss to the forex potential of the country. To date, these is also no GST refund policy on e-commerce exports which makes it all the more problematic. We need to once again learn from the Chinese model who under their e-packet e-commerce service have treaties extended to 30 plus countries that allow their parcels under 2kg to easily pass through customs without massive paperwork involved. As we speak of making trade deals globally and across the region, we must also not underestimate the power of B2C commerce which has changed the way trade is done globally with a whole generation now connected online. Another option that can be explored is the idea of sharing logistics in this regard under CPEC agreements and taking advantage of the connections China has with the world. A conversation around this will have to be initiated with regards to CPEC and Pakistan Post can play a massive game changer role in this regard.
All the issues highlighted above and the suggestions given are from the perspective of a small e-commerce player operating in the market and facing these issues on a daily basis with local eco system problems and issues with accessing international markets. Having observed multiple entrepreneur forums over the last few months, I have seen that this problem exists across the board. Most e-commerce policy recommendations made so far have either been done by big logistics companies, who benefit from the current eco system but damage the smaller sellers in the process, or then massive e-commerce companies who are getting huge amounts of funding and operating despite losses; but this is a luxury that smaller businesses and the majority SME sector in Pakistan doesn’t have. Add to this mix consultancy firms that are only talking theory and thesis, and don’t have actual experience on ground, and you get e-commerce policy recommendations that do not address majority of the problems highlighted above. Any e-commerce policy framework has to take the pain points of the majority of small businesses into account and put an end to the monopolisation of this sector. This is where the true trade potential of Pakistan lies, but by not giving it the right infrastructure status, we are doing a massive disservice to the potential of the youth of Pakistan. The current SBP figures of e-commerce in Pakistan put the industry somewhere at 1 billion dollars. This is based primarily on the data of card transactions, which make up a very small percentage of this economy, and the fact that a chunk of the payments from international transactions are coming through unofficial channels. With 80% of e-commerce in the industry still undocumented, there must be a concentrated effort towards the logistics companies to declare the volume of trade that is happening and to have a law in place that in a few months prohibits deliveries for any seller without an ntn. While tax exemptions and the works for newly registered sellers can be offered, the process of documentation must begin as the volume of these businesses is no less than Shaalmi market or Jodia bazaar to quote some offline comparisons. Only then will we be able to realise the full potential of this market, and prep a whole new generation of businesses to come into the tax net fromThe get go.
At the same time, by not providing an easy enabling environment; we are losing out on the global potential of our cottage industries and the potential to expand them into modern trade rather than just remain stuck in local markets where the value of the products is not fully realised. The potential from this sector is unrealised, it’s massive and can play a huge role in lifting Pakistan’s exports. However, it’s infrastructure And the policy requirements needed for it need to be given an emergency status by the Government of Pakistan. We have seen previous mistakes made when we developed digital skills in Pakistan but never developed a proper payments infrastructure for our freelancers to get paid; this led to freelancers in Pakistan who are extremely skilled to losing jobs to their counterparts in India and Bangladesh where easier and globally connected gateways were available. It’s time to fast track the required changes in the e-commerce and digital sector to give a level playing field and an economy that gives everyone an equal opportunity in the digital era.
Once we have fixed these basics, we can work towards seller training to help them position their products for international markets and to improve the presentation and perceived value of what they sell. At the same time; training them in seller ethics and developing a global rating system for sellers from Pakistan so as to protect the reputation of the country, and other businesses from suffering a fallout of bad business practice by a few must be developed. It has to be a step by step process, but it must develop from the grassroots, realising the potential of the sector and developing the right infrastructure for it and then moving towards disbursement off loan programs and training. Without the right eco system changes and infrastructure, loan programs will fail repeatedly and only get people stuck in a debt trap.
At the same time, I have to point out the power of Pakistan Post that continues to be underestimated both as a logistics base and as a fintech. If we look at regional examples, in India; eBay and Amazon both partnered up with Indian post which has the biggest network in the country to develop their local logistics. Pakistan Post should be looking to float an RFP in both logistics and fintech investments and is bound to attract global investor attention with the Pakiarani market now hitting close to 300 million people. A simple workaround the fintech issues can be to partner younger fintech players with Pakistan post since it already has all the banking and fintech licensing in place to be a digital bank. This area must be explored to combine technology already developed by young companies and plug and play it with Pakistan Post to develop a much larger payments system. At the same time, the tracking and tracing capabilities and technology on logistics in this institution must be invested in to become a catalyst for much larger eco system impact. We have all the systems and basics in place, we just need to now fast track the focus on it, bring in investment in logistics and payments, enable the right policies and the entrepreneurs and young companies will do the rest in lifting this entire sector.