ONDC 101: Understanding the basics

Summary:

This article will dive into the exciting world of ONDC, the innovative digital commerce platform that’s poised to make a significant impact on the Indian e-commerce market.

• What is ONDC?
• Who are its participants?
• How is ONDC different from a platform-centric model?
• Where does ONDC stands today and the goals it hopes to achieve in the future?
• What are the potential roadblocks that ONDC may face?
• What are the opportunities for Startups in ONDC?

Introduction:

ONDC is an initiative by the government aimed at implementing and promoting open networks for the exchange of goods and services across the board, with a focus on small and local businesses.

The community-led network has been created to establish an inclusive, open, and reasonably competitive marketplace to counter the hyper-competition of the current scenario, which leaves small businesses in the lurch.

Think of it like this: What if there is a shopping app that shows you products not just from sellers on the app itself but also from sellers on other platforms? And as a seller, what if there is an app that allows you to list your products on multiple platforms rather than just the one you onboarded with?

This is the system that ONDC wants to facilitate by creating protocols and network policies.

Let's begin at the beginning.

What is ONDC?

Closed platform-centric market

We are used to shopping at one specific store, like Amazon, Myntra, or maybe even your local grocery store.

In a closed network, you are only able to buy products from that store, and the prices and selection would be determined by the store.

Open Network Digital market

Imagine what if you would be able to shop at multiple stores at the same time and compare prices and selections? What if you could find the best deals and have a wider range of options to choose from?

Something like a Trivago, but for everything that you would like to buy — This is exactly what ONDC seeks to enable.

ONDC integrates enablers including payment gateways, logistics providers, and buy-side and sell-side applications, allowing buyers to deal with a larger pool of sellers by using numerous sell-side apps.

It’s like a big digital market where everyone can participate.

So, how does ONDC work?

Who are the participants of ONDC?

How does ONDC differ from the current platform-centric market?

What is the current status of the project?

What does ONDC hope to achieve?

The potential impact of ONDC is immense, and its aspirations are nothing short of ambitious. By 2025, ONDC aims to increase India’s E-commerce penetration to 25%, a 5x increase from its current level of 5%.

ONDC’s goal is to achieve the following milestones by 2025:

What are the potential roadblocks for ONDC?

While there are parallels drawn between UPIs' success and ONDCs; the road to ONDC’s success is lined with a few obstacles that threaten to derail its journey to truly revolutionize the e-commerce industry in India. It has a daunting but not insurmountable task ahead.

Let’s take a closer look:

1. Initial struggles

• Slow adoption: Without a large enough selection of products and sellers, buyers may hesitate to jump on board, and sellers may be slow to attract customers without a substantial customer base
• Incentives: It could be a challenge to convince buyers to switch to transacting through ONDC without any added bonuses or discounts
• Investment: Some sellers are reluctant to invest in integration and ramp up on the network if ONDC doesn’t have enough scale and traction.

2. SMEs adopting digitization

• Integration: Despite the majority of SMEs expecting their online sales to increase due to digitization, digital marketing, and online order management are two key challenges
• Inventory issues: Currently, the digitization of SMEs in India is negligible, if we exclude payments. According to industry players, ONDC is failing to fulfill 70% of orders placed by buyers due to poor inventory management practices by SMEs. So far, only 4,000 orders have been executed through ONDC since September 2022 in Beta mode.

3. Onboarding large sellers

• Dominance: Digitally savvy large players will likely have the upper hand in terms of pricing and inventory and might dominate ONDC as well
• Self-preferencing: Larger players may choose to show results from their own sellers, marginalizing smaller retailers.

4. Customer experience

• The current platform-centric e-commerce model places a heavy emphasis on the user experience
• ONDC has a few growing pains to work through like imperfect grievance redressal, partial returns, and longer delivery times
• To compete with the existing e-commerce players, the buyer-side app’s UI/UX needs to be significantly improved
• With ONDC concentrating on enrolling neighborhood retailers, digital adoption, inventory updating, and quality issues are likely to come up and the question of who bears the cost of the mistakes is expected to emerge.

5. Ownership of consumer data

• The ONDC framework currently restricts data usage and storage
• Most platforms use consumer transaction data and behavior to determine what inventory to carry and how much to charge
• Separate buy-side and sell-side apps are involved in a transaction. Consumer data may reside with the buy-side app, which is not expected to influence pricing or inventory, while the sell-side app may not have access to consumer behavior, including conversion rate, after viewing the listing.

Despite these challenges, the potential for ONDC is simply captivating.

UPI is a case in point: Most of the 10 Mn sellers in India were unfamiliar with technology until UPI came along, and the uptake of UPI has been phenomenal. Now, these sellers have the chance to be a part of the next big revolution with ONDC, opening up a world of opportunities for them.

What are the opportunities for Startups in ONDC?

As a startup, there are several opportunities you can explore within this framework:

· Building on the ONDC infrastructure: Startups can build innovative applications and solutions using the ONDC infrastructure, such as creating verticalized marketplaces (buyer apps) or supply chain solutions.

· Leveraging ONDC for business growth: Startups, especially D2C brands, can use ONDC to reach a wider customer base and expand their business. Once a business lists its products or services on a Sellerside App, using the ONDC’s open protocol, the business can be discovered by consumers on all buyer-side platforms.

· Inventory management systems: Startups can build inventory management systems that integrate with ONDC and enable sellers to build catalogs and manage their inventory across multiple digital commerce platforms.

· Offering customer service and support solutions: Startups can build solutions that can integrate with ONDC and offer customer service and support to businesses and consumers.

· Reconciliation service provider: ONDC network has provision to establish separate agencies like Reconciliation Service Providers (RSP) and Settlement Agencies. Either the buyer app or the seller app can be the collector of payment from the buyer. In the case of a COD order, the logistics service provider would be collecting agent from the buyer. Once the amount is received from the buyer, RSP & Settlement agency will be responsible to initiate settlement to the recipient on the basis of settlement terms in the contract

Will ONDC have enough market share to justify startups building exclusively for it?

Initially touted as a “giant-killer” project aimed at dismantling the dominance of Amazon and Flipkart, the question remains whether ONDC can truly deliver on its promises.

In the upcoming article, we will address the question of how ONDC stacks up against other e-commerce players in India.

Can ONDC emerge as a viable challenger to the likes of Amazon and Flipkart?

Will ONDC cause significant disruption or simply bring about an evolution in the industry?

Stay tuned for our analysis.