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What is 'Cash on Delivery (COD)'

Cash on delivery (COD) is a type of transaction in which the recipient makes payment for a good at the time of delivery. If the purchaser does not make payment upon delivery, the product is returned to the seller. The accepted forms of payment vary according to the terms of the purchase agreement.

BREAKING DOWN 'Cash on Delivery (COD)'

Cash on delivery, also known as collect on delivery, allows a seller and buyer of a mail-order product to minimize the risk of fraud or default. COD allows the purchaser to pay at the time of delivery rather than in advance/at the time of purchase. If payment is not made at the time of delivery, the product is returned to the originating company with no further obligation from the buyer. 

Advantages and Disadvantages of COD Transactions

Some customers do not own credit or debit cards; therefore, COD provides them an avenue by which they can order products online or through mail-order services. The risk of the transaction lies with the merchant and/or shipper until received and paid for by the customer. COD transactions also protect consumers against fraudulent activities, such as identity theft and credit card theft by fraudulent merchants.

Alternatively, COD can be disadvantageous to some consumers.  For example, impulse spending and compulsive shopping may increase when cash on delivery is an option.  Because payment is not made at the time of purchase, some consumers focus only on the benefit of the purchase rather than the cost.  Significant COD purchases can present consumers with insurmountable costs at one time or within a short window of time.  Because the costs have not been considered, some may not budget for the purchase and have no means to pay upon delivery.  The potential benefit of the purchase to the consumer is gone, and the merchant must absorb the costs of shipment and forgo profits from the sale.

Regarding merchants, offering a COD payment option may enhance consumer confidence in a new company that does not yet have strong brand recognition.  Also, merchants save by not paying fees assessed by credit card companies; as a result, these savings can be passed to consumers in the form of reduced prices.  Like customers, COD reduces fraud and abuse, such as buyer identity fraud (e.g., customer purchasing goods using a stolen credit card), stop payments, and fraudulent credit/debit card disputes.

However, cash on delivery presents disadvantages to the merchant as well.  For unfulfilled orders, the merchant absorbs the costs for delivery, and they forgo any profits that could have been realized on the sale.  Typically, companies with this form of payment realize a significant increase in returns compared to comparable merchants that do not accept this form of payment.  

In some countries, including India and Pakistan, cash on delivery transactions are boosting internet commerce. COD transactions are also popular with young consumers who do not have credit cards, established credit, or alternative means for paying for goods.   

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