ONDC - A Blessing for Digital Commerce & Retailers

The ambitious Open Network for Digital Commerce (ONDC), which has been launched in five pilot cities, could completely transform eCommerce in India. Like the Unified Payments Interface (UPI), the ONDC is developing an open digital network with an architecture designed to let all types of e-retail apps and platforms “talk” to each other in the same way that the UPI allows every payment app to seamlessly transfer funds. The ONDC has many implications for the digital ecosystem and its data flow. While it could flatten access for buyers and sellers, there could also be concerns about data management and data protection in this system. Besides, as and when the ONDC is running at scale, there would be a logical case for removing many of the current restrictions imposed on overseas groups running e-marketplaces.

A pilot soft launch of the ONDC was rolled out on April 29, 2022, in five cities in India – Delhi National Capital Region, Bhopal, Bengaluru, Shillong, and Coimbatore. So can Open Network for Digital Commerce (ONDC) be the next UPI and Aadhaar, which have been hugely successful government-led initiatives and are counted as great technology-driven innovations from India? Only time will tell.

E-commerce boom in India

The Indian E-commerce industry has been on an upward growth trajectory and is expected to surpass the US to become the second-largest E-commerce market in the world by 2034. India’s e-commerce sector is expected to reach US$ 111.40 billion by 2025 from US$ 46.20 billion in 2020, growing at a 19.24% CAGR, with grocery and fashion/apparel likely to be the key drivers of incremental growth. The Indian online grocery market is estimated to reach US$ 26.93 billion in 2027 from US$ 3.95 billion in FY21, expanding at a CAGR of 33%. Covid 19 accelerated adoption of E-commerce platform in Inia.

As Indian E-commerce booms, the Indian Government is keen to level the playing field for e-commerce operators and widen the digital market access for millions of small businesses and traders in the country. To meet this objective, the Indian Government has established the Open Network for Digital Commerce (ONDC) as an alternative to platforms like Amazon and Flipkart, which have thus far monopolized India’s e-commerce landscape.

ONDC is not pitched as yet another “platform”, and its objective is to match the online consumer’s demand with the nearest available source of supply. Consumers can thus find any seller, product, or service via any compatible application or platform – offering real freedom of choice. Despite the government’s bullishness, it remains to be seen how the ONDC will be implemented and whether it will reach its objectives. Leading online retail aggregators are also on wait-and-watch mode.

Background

On December 31, 2021, ONDC was incorporated as a private sector, non-profit (Section-8) company to democratize e-commerce in India and offer alternatives to proprietary e-commerce sites. ONDC was incubated by the Department for Promotion of Industry and Internal Trade (DPIIT) at the Quality Council of India.

A nine-member advisory council, including Nandan Nilekani from Infosys and National Health Authority CEO RS Sharma, has counseled the government on the measures required to design and accelerate the adoption of ONDC. The initiative has been touted as necessary to end the dominance of behemoth platforms like Flipkart and Amazon that have been accused by the government of exercising monopoly, contrary to the law.

How does the Open Network for Digital Commerce (ONDC) work?

The ONDC is expected to provide equal opportunities to all marketplace players, including consumers. It is a neutral platform that will set protocols for cataloging, vendor match, and price discovery on an open-source basis, like the Unified Payments Interface (UPI).

This means that buyers and sellers can transact on ONDC irrespective of whether they are attached to any specific e-commerce portal. For instance, even if seller A is registered on platform X, while the consumer is registered on platform Y, the consumer can directly purchase products of seller A without registering on platform X from the ONDC network.

What does ‘Open Source’ mean?

To make a process or software ‘open source’ implies that the technology or code deployed for the process is freely made available for everyone to use, redistribute, and modify. For instance, while the operating system of iOS is closed source (it cannot be legally modified or used), the android operating system is open-source, making it possible for smartphone manufacturers, such as Samsung, Nokia, Xiaomi, etc., to modify it for their respective hardware.

ONDC aims at fostering open networks developed on open-sourced methodology, using open specifications and network protocols, and independent of any specific platform.

Who owns ONDC?

Twenty government and private organizations have confirmed investments worth INR 2.55 billion (US$33.34 million). Several public and private sector banks, such as HDFC, Kotak Mahindra, Axis Bank, State Bank of India (SBI), and Punjab National Bank (PNB), have picked up stakes in ONDC. Axis Bank, HDFC, SBI, and Kotak Mahindra has acquired a share of 7.84 percent each, by individually investing INR 100 million (US$1.3 million) to purchase 10,00,000 equity shares of the face value of INR 100 each. Earlier in November 2021, PNB had announced its plans to buy a 9.5 percent share in ONDC.

Around 80 firms are working to integrate market players with the ONDC platform. These firms are making enterprise software and apps for sellers, buyers, logistics platforms, and payment gateways.

ONDC Benefits

ONDC is expected to digitize the entire value chain, standardize operations, foster inclusion of suppliers, usher in inefficiency in logistics, and augment value for consumers.

  1. Boost to smaller online retailers: Once the ONDC gets implemented and mandated, as is expected by August 2022, all e-commerce companies in India will have to operate using the same processes, akin to Android-based mobile devices, irrespective of the brand. This would provide a boost to smaller online retailers as well as new entrants by ushering in discoverability, interoperability, and inclusivity.

  2. Empower Suppliers & Customers: ONDC will empower suppliers and consumers by breaking the monopoly of giant platforms to drive innovation and transform businesses in sectors like retail, food, and mobility.

  3. Benefits to Businesses: Businesses are expected to benefit from transparent rules, lightweight investment, and lower cost of business acquisition. It is also expected that the time-to-market, as well as time-to-scale, shall also be substantially reduced.

Challenges for ONDC

  1. Will Large e-commerce companies join ONDC? Large e-commerce firms have protested as they have already invested heavily in the R&D as well as deployment of their own processes and technology. Amazon and Flipkart alone have poured a cumulative US$24 billion to capture 80 percent of the Indian e-commerce market through their aggressive discounts and by promoting preferred sellers. Indian retail giants like Reliance and Tata have also launched retail platforms and shopping apps and super apps.

  2. Data Privacy Concerns Remain: If the ONDC works as advertised, it would be managing huge volumes of very sensitive personal and commercial data, and data security will be absolutely crucial. The sections on data privacy are broadly worded and need urgent elaboration, especially in the context of data protection legislation, which is still pending. The strategy document says transaction data will reside only with the buyer and seller applications, and will not be visible to the ONDC itself. The ONDC will not be storing or viewing transaction data. Data policies will be “consent-based and bound by the limitation of purpose”. The ONDC will ensure the data security of transactions and safeguard the personally identifiable information of users and the “seller data critical to trade”, which will be protected from third-party access. Exactly how the ONDC ensures this level of security will be critical to the network’s credibility and, hence, the uptake of this system.


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