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What will it Take for ONDC to be as Successful as UPI?

By: K Yatish Rajawat

Last Updated: July 07, 2022, 18:17 IST

Another advantage that UPI had was that it had the blessing of RBI. This advantage ensured that banks understood that the payment roadmap laid down by UPI was also a regulatory roadmap. Currently, this is missing in the e-commerce landscape. (Image: Shutterstock)

Another advantage that UPI had was that it had the blessing of RBI. This advantage ensured that banks understood that the payment roadmap laid down by UPI was also a regulatory roadmap. Currently, this is missing in the e-commerce landscape. (Image: Shutterstock)

The popular perception, at least among general media, is that the Open Network for Digital Commerce is an ‘Amazon-Flipkart Killer’

One of the most outstanding catalysts behind India’s digital revolution has been UPI (United Payments Interface), projected to cross the Rs 100 trillion mark soon. A similar movement is on the horizon for e-commerce. The ONDC (Open Network for Digital Commerce) is envisioned as the UPI of e-commerce, as the IT Minister recently reiterated this ambition for the platform. However, to be a UPI, ONDC needs to position itself and communicate its benefits to different stakeholders.

The popular perception at least among general media is that ONDC is an “Amazon-Flipkart Killer”. Often visualised as a separate “competitor” platform, most media seem to suggest that ONDC aims to go into a direct confrontation with big e-commerce platforms. This misconception has to be consciously corrected with action and statements from ONDC and the government, otherwise ONDC will be a non-dubium est.

The Ministry of Commerce and Industry defines ONDC as “an initiative aimed at promoting open networks for all aspects of exchange of goods and services over digital or electronic networks. ONDC is to be based on open-sourced methodology, using open specifications and open network protocols independent of any specific platform”. Which would mean technologically it is independent of any vendors and its job is to promote open networks for e-commerce. Which would mean interoperability and standardisation across all platforms.

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

What does interoperability mean? When a buyer searches for a product online, the buyer should be able to access options from not just Amazon, but also Flipkart, local sellers and anyone on the network who can provide the necessary product. Currently each platform is a walled garden of proprietary protocols, standards, technology and does not talk to others. This walled garden inhibits the overall growth and penetration of e-commerce in the country. It also leads to all kinds of charges of oligopoly, vendor manipulation, price distortion, and opaqueness. These charges are creating the weakness in the market that ONDC is supposed to address, like UPI addressed the challenges of a global credit card duopoly controlling merchants and users.

The mainstream media paints ONDC as a threat to big e-commerce firms. 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 thus correctly perceived as a back-end technological infrastructure which was not directly competing with any wallet company or banks.

Amazon and Flipkart need to see ONDC as an enabler that will facilitate their next round of growth. UPI’s acceptance by the largest Internet wallets like Paytm, PhonePe and GooglePay and banks, both public and private, was the key to its success. Combined, the market that UPI enabled was larger than what anyone could do individually with one-one tie ups with banks or going via credit/debit card networks.

Compare this to the inconclusive or uneasy relationship between Amazon, Flipkart and ONDC: Integrating these platforms with ONDC will be of paramount importance to the success of ONDC.

How is ONDC enabling the ecosystem so that existing platforms have an incentive to join and participate with ONDC? ONDC currently seems to be integrating local sellers and unorganised retail and it seems more like following the diktat of what the government wants it to do. Whether that is sufficient enough, or will adding sellers lead them to expanding the market, is the crucial question at this stage.

An e-commerce marketplace like any other market needs buyers and fulfilment of transactions. Unlike UPI, fulfilment involves logistics infrastructure on the ground. Getting buyers on board is an even more difficult proposition as it needs consumer incentives such as discount pricing and free deliveries. For daily consumption, FMCG products, consumer durables and the current market places have already arrived at a discount price with manufacturers. This pricing even cuts the distributors and the traditional small shop retail network. Amazon and Flipkart have pumped in billions into warehouses that stock products from the manufacturers. They promise the buyer zero delivery cost. Though it is debatable who is paying for deliveries, as this cost is opaque to the buyer.

Negotiating the rifts in communication between the different agents working to supply the goods to the consumer might increase the costs and reduce efficiency for both the buyer and seller. Redressal mechanisms and refund policies are a big element of all marketplaces. The e-commerce giants claim that they settle any dispute of returns and damages always in favour of the buyer, thus bearing a much higher cost of goods sold or GMV.

ONDC’s attempts at integrating local sellers will not lead to better pricing; currently, ONDC does not have a solution for logistics or how to defray the cost.

ONDC’s hyperlocal search engine and strategy currently prioritises the interests of local sellers as opposed to those of the buyers; large platforms prioritise buyers preferences based on data, popularity and the platform’s profitability. This focus on small local sellers at the cost of buyers prevents the creation of an actual marketplace. This anomaly or strategic gap in ONDC has to be resolved for it to succeed.

Data defines

The algorithms used by large e-commerce firms now have tons of data to define not just better pricing for the consumer but also future needs. These are, by design, refined by the large amounts of consumer data collected by these. The results the customer receives on searching for a product are intuitive and convenient, owing to the data the platform accesses and stores on the consumer. These include previous history of purchase, preferences and patterns outside the platform as well. This terabytes of data are the differentiator for these platforms and this is where the walls also come in blocking access to this data to even the sellers on the platform.

While sharing it with sellers owned by the platform helps them in pricing, logistics, inventory and even structuring new product offering. Currently, under the ONDC framework, data usage and storage is restricted and minimal; there has to be regulatory change for data exchange as that is the key to interoperability. Till such data exchange happens, interoperability will be a pipe dream.

Another advantage that the UPI had was that it had the blessing of the regulator RBI, though it was managed by National Payment Corporation of India (NPCI). This advantage ensured that banks understood that the payment roadmap laid down by the UPI was also a regulatory roadmap. Currently, this is missing in the e-commerce landscape. It is because of the lack of consensus in the incumbent players that e-commerce regulations are being delayed time and again. Until such time these regulations do not establish some working rules, it is difficult for ONDC to succeed as a creator of a larger market system for e-commerce.

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

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first published:July 07, 2022, 11:41 IST
last updated:July 07, 2022, 18:17 IST