What will it take for the ONDC to be as successful as the UPI?

One of the most notable catalysts of India’s digital revolution has been the UPI (United Payments Interface), which is expected to cross the Rs 100 trillion mark soon. A similar move is on the horizon for e-commerce. The ONDC (Open Network for Digital Commerce) is envisaged as the IPU of e-commerce, as the Minister of IT recently reiterated this ambition for the platform. However, to be an IPU, the ONDC must position itself and communicate its advantages to the various stakeholders.

The popular perception, at least among the mainstream media, is that the ONDC is an “Amazon-Flipkart Killer”. Often viewed as a separate “competitor” platform, most media seems to suggest that ONDC is aiming to enter a direct confrontation with the major e-commerce platforms. This misconception must be consciously corrected by actions and statements by the ONDC and the government, otherwise the ONDC will be a non-dubium est.

The Ministry of Trade and Industry defines ONDC as “an initiative to promote open networks for all aspects of the exchange of goods and services over digital or electronic networks. ONDC must be based on an open source methodology, using open specifications and open network protocols independent of any specific platform”. Which would technologically mean that it is vendor-neutral and its job is to promote open networks for e-commerce. Which would mean interoperability and standardization across all platforms.

This means that the ONDC is not a platform, just like the UPI is not a wallet or a bank. Technically, these are digital public goods; rather, it is a set of open standards and protocols in open source software that enables seamless interoperability of different platforms.

What does interoperability mean? When a buyer searches for a product online, they need to be able to access options not only from Amazon, but also from Flipkart, local sellers, and anyone in the network who can provide the product needed. Currently, each platform is a walled garden of proprietary protocols, standards, and technologies and does not communicate with each other. This walled garden inhibits the overall growth and penetration of e-commerce in the country. It also leads to all sorts of accusations of oligopoly, supplier manipulation, price distortion and opacity. These fees create the market weakness that ONDC is meant to address, just as UPI has taken on the challenges of a global credit card duopoly controlling merchants and users.

Mainstream media describe ONDC as a threat to large e-commerce companies. On the other hand, UPI managed to position itself as an integrative solution that connected bank accounts to wallets and increased the speed of transactions with merchants. UPI was therefore correctly viewed as a back-end technology infrastructure that was not in direct competition with any holding company or bank.

Amazon and Flipkart should see ONDC as a catalyst that will facilitate their next phase of growth. UPI’s acceptance by leading internet wallets like Paytm, PhonePe and GooglePay and banks, both public and private, has been key to its success. Together, the market that the UPI enabled was larger than anyone could do individually with individual ties to banks or through credit/debit card networks.

Compare that to the inconclusive or rocky relationship between Amazon, Flipkart, and ONDC: integrating these platforms with ONDC will be critically important to ONDC’s success.

How does ONDC enable the ecosystem so that existing platforms are incentivized to join and participate in ONDC? The ONDC currently seems to be integrating local vendors and unorganized retailers and it rather seems to follow the dictate of what the government wants it to do. The crucial question at this point is whether this is enough or if adding sellers will cause them to expand the market.

An e-commerce market like any other market needs buyers and transactions. Unlike UPI, execution involves logistics infrastructure in the field. Getting buyers on board is an even tougher proposition because it requires consumer incentives such as reduced prices and free deliveries. For daily consumption, FMCG products, consumer durable goods and current marketplaces have already arrived at discount prices from manufacturers. This pricing even cuts out distributors and the traditional network of small shops. Amazon and Flipkart have pumped billions into warehouses that stock manufacturers’ products. They promise the buyer zero shipping costs. Although it is debatable who pays for deliveries, as this cost is opaque to the buyer.

Negotiating communication breakdowns between different agents working to deliver the goods to the consumer could increase costs and reduce efficiency for both buyer and seller. Recourse mechanisms and reimbursement policies are an important part of any market. The e-commerce giants claim that they settle any return and damages disputes always in favor of the buyer, thereby incurring a much higher cost of goods sold or GMV.

ONDC’s attempts to integrate local vendors will not lead to better prices; currently, the ONDC does not have a solution for the logistics or to cover the costs.

ONDC’s hyperlocal search engine and strategy currently prioritizes the interests of local sellers over those of buyers; large platforms prioritize buyer preferences based on platform data, popularity, and profitability. This focus on small local sellers to the detriment of buyers prevents the creation of a real market. This ONDC anomaly or strategic gap must be resolved for it to succeed.

Data defines

The algorithms used by major e-commerce companies now have tons of data to set not only better prices for the consumer, but also future needs. These are, by design, refined by the large amounts of consumer data collected by them. The results the customer receives when searching for a product are intuitive and convenient, thanks to the data the platform accesses and stores about the consumer. These also include purchase history, preferences, and patterns outside of the platform. These terabytes of data are the differentiator of these platforms and this is where the walls also come in to block access to this data even to sellers on the platform.

While sharing it with the sellers belonging to the platform, they help them with pricing, logistics, inventory and even structuring the offer of new products. Currently, under the ONDC, the use and storage of data is restricted and minimal; there must be a regulatory change for data exchange because it is the key to interoperability. Until such an exchange of data takes place, interoperability will remain a chimera.

Another advantage of UPI was that it had the blessing of the regulator RBI, although it was managed by the National Payment Corporation of India (NPCI). This advantage allowed banks to understand that the payments roadmap set by the UPI was also a regulatory roadmap. Currently, this is missing from the e-commerce landscape. It is due to the lack of consensus among incumbents that regulation of e-commerce is constantly delayed. Until these regulations establish operating rules, it is difficult for the ONDC to succeed as the creator of a broader market system for e-commerce.

Yatish Rajawat is a public policy researcher at the Center for Innovation in Public Policy. Research contributions were provided by Gouri S Nair and Aditi Srivastava. The opinions expressed in this article are those of the author and do not represent the position of this publication.

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