Demystifying ONDC: All You Need To Know About Govt Plans To Take On Amazon, Flipkart

Demystifying ONDC: All You Need To Know About Govt Plans To Take On Amazon, Flipkart

SUMMARY

Touted as the next UPI in ecommerce, ONDC would reset the rules and create a level playing field for even the smallest players

Is it really fair to call it the next-UPI moment when the transactions are purely utilitarian and the consumer commands an experience in commerce?

If nothing else, ONDC will push existing platforms to become more innovative in order to retain and grow their business

A pandemic-fueled digital economy has got the Indian ecommerce industry in its hypergrowth state. As digital penetration increased, so did online-first shopping behaviour. Consumer spending prior to the pandemic was primarily on products from legacy brands such as HUL, P&G, Dabur, ITC, and so on. That is no longer the case. 

Approximately 66% of India’s population is under the age of 35 and spends at least 5 hours per day on their smartphones. India witnessed 25.5 Bn real-time online transactions in 2021, the highest globally. 

A robust digital infrastructure, cheap data, and an increase in the number of smartphones aided the growth. Additionally, it has fast-forwarded disruptions in industries such as digital payments, warehousing and logistics, last-mile distribution systems, and customer engagement. The Indian ecommerce market is expected to reach $200 Bn by 2026, accounting for approximately 11.4% of the total Indian retail market. 

Amazon and Walmart-owned Flipkart, which now control a large part of the ecommerce market, are duopolising the ecosystem in an organised and bundled manner. These platforms provide shoppers with a one-stop-shop to search-compare-buy-receive, making it convenient and seamless for them. 

This raises a number of questions. How does a shopper buying from these platforms today learn about a hyperlocal store? Or how can shoppers who aren’t transacting yet get access to their favourite hyperlocal store via an open network? 

The Indian government’s solution to this is ‘Open Network for Digital Commerce’ (ONDC). Touted as the next UPI in ecommerce, it would reset the rules and create a level playing field for even the smallest players. 

Is it really fair to call it the next-UPI moment when the transactions are purely utilitarian and the consumer commands an experience in the commerce? If so, is the foundation being built on the proper frameworks, or are all castles in the air? 

Let’s find out.

The Genesis Of The Government’s ONDC Initiative

ONDC, a commerce ministry-led initiative, was established on December 30, 2021. Spearheaded by T Koshy, a former partner at consulting firm EY along with a nine-member advisory council which includes names such as Infosys’ Nandan Nilekani and National Health Authority’s RS Sharma.

The initiative aims to democratise digital commerce through an open network. This is done by empowering small merchants and retailers to compete with the behemoth platforms like Flipkart and Amazon.

Currently, the Indian ecommerce sector is ruled by the duopoly of Amazon and Flipkart with little competition from:

  • Social Commerce platforms such as Meesho and Trell
  • Platforms taking local stores online such as Paytm, eSamudaay, Neomart, and KiranaLinker
  • Hyper-local and Quick Commerce platforms like Zepto, Blinkit, Dunzo, and Instamart

While these platforms provide everything under one roof while delivering a better experience to consumers and larger markets to sellers. They also become walled gardens and the sellers have to play by their rules. Sellers not only have to pay hefty commissions to these platforms, but they also do not get any consumer behaviour data to learn from and build consumer loyalty. 

Of late, it’s become even worse as these platforms are driving ad sales aggressively and anyone who doesn’t spend significant ad-spend with them often does not make it to the top searches. These platforms also use their massive data sets comprising users’ intent, purchasing power, and keywords to launch competitive products under their label and title them ‘best seller’, ‘most recommended’, ‘our choice’. 

This forces other sellers to pay a hefty price to sponsor products for visibility. This is a win-win for the platforms and a lose-lose for the sellers or consumers, as margins are squeezed or prices are raised to remain profitable with high margin erosion.

Unfortunately, sellers have found themselves between a rock and a hard place. On the one hand, sellers cannot live without these platforms due to their reach, but on the other hand, they cannot sustain the ever-increasing commissions and ad costs posed by these platforms.

This is the conundrum that ONDC seeks to solve by providing sellers with an open platform, as opposed to walled gardens, through which they can easily reach out to consumers without paying an arm and a leg.

To promote micro and small sellers, ONDC acts as an infra layer, based on the Beckn protocol of 2018. In contrast to marketplaces and intermediaries, which include the buyer, seller, and third-party logistics (3PL) as nodes in their networks, ONDC aspires to be an open protocol-based network that broadcasts demand to various nodes for supply and fulfilment. 

In theory, ONDC is a three-legged tool that stands on, 

  • Discoverability: This means easy discoverability for both shoppers and sellers.
  • Interoperability: The UPI-style unbundling of digital commerce platforms plans to list delivery partners, aggregators, customers, restaurants, logistic providers, and so on.
  • Transparency: Clear visibility and price comparison so that shoppers are not caught off guard and sellers can ensure innovation and scale. This means that silos will be broken down and businesses will eventually be transformed.

To date, the initiative has raised more than INR 155 Cr from India’s largest banks such as PNB, SBI, HDFC, Bank of Baroda, Axis, and Kotak Mahindra Bank along with financial institutions such as NSE, NABARD, SIDBI, and NPCI. 

Pilots have begun in selected cities with market players in seller platforms, buyer platforms, payment gateways, and logistics platforms signing up. Walmart-owned Flipkart, Reliance-Retail-backed Dunzo, and Alibaba-backed Paytm are already on board while Amazon is eager to join

The Hype Around ONDC

Why is ONDC compared with UPI?

The comparisons with UPI began because, in theory, ONDC is based on the same concept.  Additionally, UPI is a successful breakthrough for commerce and ONDC expects to achieve the same. 

Several payment applications, for example, have been built on top of the unified payment interface, which is linked to bank accounts on one end and merchants on the other. Several buyer and seller applications that interact via the ONDC could be set up on a similar basis. 

On the surface, the initiative is admirable — trying to save small and mid-sized stores from rapacious Goliaths like Amazon and Flipkart, as well as providing open-source code software built for like-minded enterprises to foster competition. And while it is true that openness among different interacting entities is unquestionably necessary to ensure interoperability in the commerce ecosystem, is it appropriate to call it the next UPI moment? 

This year (FY22 till March 20), UPI transactions were valued at over INR 81 Lakhs Cr, with the number of transactions soaring to 8193 Cr. These four factors explain why India experienced such a significant “UPI-moment” in just six years: 

  • Favorable demonetisation conditions combined with smartphone penetration and online adoption
  • Constant push from the government and regulators in every budget session
  • Integration of multiple intermediaries on the remitter and beneficiary sides
  • Giant players entering the field, validating it, and developing user-facing apps to support it

Due in large part to UPI, convenience is unlocked at the customer end, which hastened India’s transition to a “cashless economy.” Customers who previously had to juggle multiple windows, remember a long account number, and type it in to transact online could now do so with just a few clicks. 

But ONDC is far more complex. It’s not just about moving money digitally in a way that is safe, secure, and swift, it’s also about moving physical goods enabled through a seamless experience of discovery and a complex supply chain to different parties. 

Even for walled-garden platforms, this is no easy task. They have invested several years in developing their current capabilities after taking complete responsibility for buyers and sellers. It will be difficult to replicate this with multiple players involved in each transaction.

While the core idea of ONDC is to democratise digital commerce for small sellers who are at the mercy of large marketplace platforms, there is little information available on how it will address the consumer experience with this model. 

Without a great user experience and convenience, which are standard fare for today’s platforms, this may be a great idea that fails to capture consumers’ interest. Today’s consumers have an attention span shorter than that of a goldfish. They do not care whether this is a better platform for sellers. All they care about is whether they like the experience and convenience. 

Apart from this, there are a few other questions that still need to be addressed:

  • Will the ‘algorithmic fairness’ policies of ONDC be truly fair?

While algorithmic fairness is a noble thought, how is it going to be implemented practically? Any algorithm will have some inherent bias because it considers not only your search terms and the assumed relevance of sources related to those terms, but also things like your previous searches, personal preferences, and location, as well as what other people have searched for and clicked on. 

How will this algorithm distinguish between sellers who have the same products with the same price and other attributes but come from different seller platforms? Several such scenarios need to be explored before designing an algorithm that is fair for most. Some algorithms work better for larger sellers because they give more weight to history, but they can also be unfair to small sellers who are closer to the buyer. 

This raises a number of questions that must be answered. Who decides on these algorithms? Will the large network participants or the investors (banks) not influence this?  

  • Who will own the data?

While ONDC has stated that they will not own any consumer data and will instead implement a governance layer, it will be interesting to see how this plays out. Without harnessing consumer data, ONDC cannot give the same level of personalisation and experience to consumers as the platforms do today. 

But if they leverage this data, the question is who benefits from this? Will this not also create a favourable situation for certain influential network participants or investors?

  • Who will own the responsibility when things go south?

Returns, breakages, lost shipments, fraud, and other problems are all common in the ecommerce industry. The platform takes on all responsibility and is the single point of contact for everything. The buck stops at them. 

How will this pan out in an open network where every transaction will have several network participants and how will the accountability and responsibility be fairly levied? Who will the customer call for any delay or dispute? Who will the seller contact if the product was damaged due to the logistics partner’s mishandling of the shipment? Will this not result in a mountain of disputes with no central authority to resolve them? 

Solving problems at such a large population scale necessitates a paradigm shift from an operator-driven monolithic platform-centric model to a facilitator-driven, interoperable decentralized network. However, at the moment, this appears to be heading toward an operations-dependent model, with critical algorithms still being conceptualised. 

There are additional concerns about key ONDC advisors’ conflicts of interest. It got off to a rocky start when Praveen Khandelwal resigned from the advisory board due to a conflict of interest with his portal Bharat eMarket being one of the seller platforms on ONDC. This has drawn attention to other board members’ interests as well, given that Nandan Nilekani supports Amazon and Adil Zainulbhai serves on the board of Reliance. 

ONDC Could Disrupt Certain Sectors

When a customer makes a payment through UPI, the interface is unimportant; they choose the option that is more lucrative, whether it is cashback or a discounted rate. That is not the case with commerce. A customer will never abandon a brand that they are loyal to, subscribe to, and enjoy being a part of. 

ONDC in its current form is far from reality, failing to account for the fact that experience drives commerce. However, given ONDC’s interoperability and openness, some areas may flourish.  These design principles can help you identify such areas:

Seller-Side

  • Any small- to medium-sized business that isn’t digitalised or isn’t using the internet as a direct channel for sales is putting their operations at the mercy of aggregators.
  • In services where there isn’t much of a price difference between sellers such as taxis, eateries, and kiranas, bidding wars are prevented when they are listed on ONDC. 
  • In order to unlock value from serving the customer directly, these sellers want the democratization of digital networks on an equitable basis. 

Buyer-Side

  • Buyers who are mostly hyperlocal and frequently use the key phrase ‘near me’ to search for services.
  • Buyers who have an immediate need to meet. Need to go to the market? Call the nearest cab. Need grocery? The order is from a hyperlocal store that can deliver. Hungry? Call for the nearest restaurant serving favourite food.
  • Customers on the lookout for local services based solely on price. If seller A charges even 1% less than seller B, they will choose seller A. However, these buyers suffer from the poor experience provided by aggregators and as well as the uncertainty of price hikes or quality drops.

Nature Of Business

  • Transactional: in which the buyer pays in exchange for a service and is willing to try other service providers for better service or lower prices.
  • Utilitarian: to meet an urgent need with a product or service that is readily available.
  • Businesses that do not experience seasonal demand issues or inventory stocking problems.

ONDC may not be able to slay Amazon or Flipkart, but it is capable of slaying Ola, Zomato, Zepto, or eSamudaay. ONDC has the ability to take power away from all of these incumbents, thereby leveling the playing field for SMEs. If implemented correctly, ONDC can be a huge success in three use cases:

  • Cab Service: Whether it’s an Ola or Uber driver or rider, both dread the experience they get from the company and would be more than happy to have a better way. Local independent drivers can sign up on the platform, and riders can find them via a variety of buyer-side apps such as Paytm or messaging apps that people use on a regular basis.
  • Food Delivery: Local restaurants have been at the mercy of Swiggy and Zomato, paying hefty commissions. They attempted to deliver directly, but were largely unsuccessful due to consumer discoverability. This could be a fantastic opportunity for both them and their customers.
  • Quick Commerce: Kirana stores were the original quick commerce players but lost out due to the lack of digitalisation giving space to Zepto,Blinkit, and Instamart. They now have a great opportunity to serve the local consumers at the touch of a phone.

Imagine if all the restaurants, kiranas, taxis, and bike rides are listed on ONDC. They could all gain loads of business not just individually but also from other businesses. A bike ride can always serve a customer who needs to be dropped off at their destination while also delivering groceries or food at times when the platform is showing idle.

Conclusion

While ONDC is an idea whose time has come, it is not the silver bullet that the media portrays it to be. There’s a lot to do here, and it won’t be as quick or as simple as UPI. Unlike financial transactions, ecommerce requires operational solutions on the ground, solving much larger problems. 

This includes issues with the supply chain, cross-border shipping, last-mile deliveries, frauds, returns, and flawless quality checks. It also includes issues with delivery, complaints, and returns. Can ONDC address these issues? Will the customers who are used to the convenience of bundled platforms be attracted to an unbundled experience? 

We do not know. There are many grey areas and much hype surrounding ONDC, but there is some hope. If not in all areas of commerce, then certainly in local commerce. Overall, it’s a great start by the government with the private players joining in. However, evangelising this noble and ambitious initiative to solve seller problems while not considering the consumer experience is fraught with monumental challenges. 

The consumer is the king. They do not care about the platform’s seller-friendliness. All they care about is convenience and experience. ONDC would do well to remember this. I’m looking forward to seeing how it all plays out. If nothing else, it will push existing platforms to become more innovative in order to retain and grow their business. As a result, ONDC would be a change agent in unexpected ways.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.

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