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ONDC aims to create new opportunities and support micro, small and medium enterprises (MSMEs) and small traders to become hyper-local.
In brief
- ONDC is a set of protocols built on open network systems.
- It aims to provide equal opportunities to MSMEs to enter the digital commerce space.
- Increased digital transactions will unbundle credit and supply chain.
- Data security will be maintained by ensuring most of the data available in the open data framework is anonymized.
The Government of India recently launched the ambitious Open Network for Digital Commerce (ONDC). The interoperable network has started its beta testing process with small retailers in Bengaluru and will unbundle the existing closed network of digital commerce to democratize e-commerce.
ONDC, conceived by the Department of Promotion of Industry in Internal Trade (DPIIT) under the Ministry of Commerce, offers an opportunity and a natural business compulsion for everybody to be a part of the network. T Koshy, CEO, ONDC, chairing the EY Convene Digital Roundtable on 27 September 2022, said the network's business impact and IT readiness will enable massive digital transformation.
“We are creating a digital commerce area, what we call the democratization of commerce. We are not trying to create a super app or a super platform; we are creating a network and a protocol that will enable any platform to interact with any other platform,” he explained, dispelling some of the issues in the minds of businesses around ONDC.
Wider reach
The open network aims to create new opportunities to curb digital monopolies and support micro, small and medium enterprises and small traders to become hyper-local by getting them online. ONDC is expected to redefine ecommerce by addressing the most significant challenge faced in India and worldwide, which is the walled garden model of platforms that leads to a few large entities and domains and also practises that are against the larger economy.
The diversity of products available in India is much larger than what is available online.
“There are many possibilities that are at present not available online. ONDC may lead to new advertising options as well. The scope of innovation and specialization is huge,” T Koshy, said, adding that in 5-7 years, everyone may have a digital catalog built on the ONDC protocol.
The community-led network’s main aspects are buyer-side apps, seller-side apps, and logistics providers. Elaborating on the network, Koshy highlighted that ONDC is not a platform but a list of protocols enabling the exchange of products and services. There is no central platform; it only allows multiple platforms to talk to each other. Anybody who has a product or service to sell can make it available in the open network that any smart buying platform can access. It is not restricted to B2C and will include B2B, with which the impact could be even higher.
He added, “the biggest opportunity that ONDC offers is unbundling credit and supply chain.”
At present, the relationship between a retailer and a wholesaler has two aspects: products and credit. This restricts the retailers’ reach as they need to establish their creditworthiness with each wholesaler. With digital transactions, retailers may have improved access to credit, which expands their reach of wholesalers, and vice versa.
Uniformity in approach
ONDC will develop an agreement among all participants on interaction protocols. This is an essential step as about 12-13 entities are already in the advanced stages of integration, and another 10-15 on the buyer side have been actively discussing with the network.
“The list includes telcos like Airtel, Vodafone and fintech firms such as PhonePe and Spice Money. PSU banks are also in active discussion for onboarding. As of now, close to 500 entities are in the different stages of discussion with ONDC, though the agreements may take some months to finalize.,” said T Koshy.
Given the wide scope of ONDC and the high number of expected participants, it is important that rules of engagement are well established.
“Rules of engagement have been protocolized. Each transaction will have its rules of trade,” added Koshy.
“Moreover, we expect that the market will find its own price. There was a discussion in the early stages that since there are only one or two large buying platforms, and if an upper cap should be put to ensure that they do not take advantage. However, with the response, we have realized that the market will take care of itself.”
In the past, for instance, OEMs have collectively opposed the practise of some monopolies deep discounting popular products.
ONDC’s attraction lies in the higher number of commodities it will offer versus the existing marketplaces and lower intermediary costs for the same visibility. Moreover, existing payer conditions may not be acceptable to all sellers. In fact, ONDC could lead to pressure on the premium that large aggregators charge based on their captive buyers or sellers and data exclusivity.
System costs are expected to be lower for ONDC as it is not locked to a captive ecosystem and does not run proprietary protocols. The lower system costs would benefit buyers and sellers.
Secure interactions
With larger number of participants, data security is bound to attract greater importance. In ONDC, however, intermediaries have the power over data and very little data reaches the end points.
“ONDC does not get any data,” added T Koshy. “Moreover, as a collective we have an open data policy and there will be significant amount of anonymized information available in the open data framework that can be made available to all the participants. The IT team is working to ensure that even the source of performance aggregated information is anonymized”, he said.
Participants on ONDC will have to be KYC compliant and full testing of the protocol is mandatory. Every network participant needs to sign an agreement with ONDC, which implies that they will adhere to the existing as well as evolving policies. Failure to adhere to the policies will lead to penalties and suspensions.
“Moreover, the loss of reputation and getting blacklisted is a deterrent. Therefore, this is a self-correcting model,” added T Koshy.
Similar scenarios had played out when the capital markets transformed from physical to digital about 20 years ago.
Elaborating on the compliance and redressal system, Koshy underlined, “We are creating and implementing an online dispute resolution mechanism that will look into issues based on the evidence that is heavily trackable and give a decision on it.” Digital enablement will make compliance easier.
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Summary
While these are still early days, as ONDC expands its operations and onboards SMEs and MSMEs, it is expected to disrupt the e-commerce industry while giving impetus to innovation in related areas such as credit, payments, data storage, advertising and more.
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