E-commerce has long been operating on a platform-centric model. And ONDC is the major beast which has entered this market with its open protocols trying to disrupt the platform-centric model on which all these e-commerce companies have been building.
By now you would’ve seen or read about ONDC and what it is trying to do on many Social Media posts.
I am here to “unbundle” ONDC (pun intended) and explain to you in easy language exactly what is the vision behind ONDC and what is the Government of India trying to do with this initiative.
And most importantly How does it work?
In this issue of Product Unboxed, we try to uncover How the government of India initiative of ONDC is trying to disrupt the platform-centric model of the E-Commerce industry.
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To start, we have to have to first understand what is the need for ONDC in India.
What is the problem that this new initiative trying to solve? What is the problem?
What is the problem in the E-commerce Industry?
Observation
The E-Commerce industry is not as big as you think in India.
Digital commerce in India is a mere 7 per cent of the total retail market, with 165 million users. (That is all). While it is 15 per cent in the US and 25 per cent in China.1
Source: McKinsey paper on “Democratising Digital Commerce in India, April 2023”
Today 840 million Indians are connected to the Internet, out of which 450 million consume content online. But out of this, only 165 million of them transact for digital commerce.
That means around 75 per cent of Indians who have internet access are not shopping online. There is a large headroom for digital commerce to grow!
So why is digital commerce so low? What is the problem? Why are so many internet-connected Indians not engaging in digital commerce?
In short, there are several! (._. ‘)
Problem 1: Lack of Digital Ease
The digital platform products of individual companies are not so easy to use for the majority of India.
Imagine this, you have been given a digital smartphone (which you know to use to call and message) and English is not your first language.
Would it be that easy to know that to buy something online, you would first have to create an “ID” on the “Playstore” (on Android) or “Appstore” (on IOS), then you would have to “install” an app on your phone which is a platform for buyers and sellers, then you would have to find the product, create an “ID” on that platform, type in your address, go to the “Cart” then select a “mode of payment” (or maybe COD which means Cash on Delivery) and then you’d have to wait for your order to come.
Would these series of tasks be easy for a person who is going to buy a commodity online for the first time, which he can get by going to a shop and asking for the product, where a shopkeeper may get the product for them or guide them to the correct shop?
On the contrary, using social media/messaging has been relatively easy since a product like WhatsApp does not have too much friction for its use, enter your phone number and the setup is complete. OR something like YouTube, where you don’t even have to register, just enter the video you want to see, in your language, and you would find something relevant.
The digital commerce apps of today are not exactly easy to use and you may even need to have different apps for different kinds of commodities. An app for Travel, An app for cosmetics, An app for food, An app for electronics, etc.
Problem 2: The Trust Factor in traditional shopping Channels
Traditional shopping channels provide a trust factor, which you and I, all can relate to. A corner shop will get you anything provided you ask them for it and give them some time.
Then Indians do like to return things if they don’t work out and shopkeepers are happy to take them back and give them something else that the consumer may require.
Now online platforms can also provide this trust as they have proven before with features like “30-day return policies, etc.”, but it takes a leap of faith from the consumer side first.
You feel much at ease buying a product when a shopkeeper can answer all your questions about a commodity, relieve your fears, and assure you that you will benefit from the commodity.
Problem 3: The fears about security while transacting online
India is a country where internet scamming is very prevalent. Anybody in India would have a relative or a friend who got scammed or barely got out of one.
And so you get a lot of friction in transacting online. Though, UPI has helped a lot to reduce that friction immensely. With the incoming of UPI, and the security levels it provides, a lot of consumers and buyers have started to transact online and the penetration of UPI in Urban Areas is astonishing.
Indians transacted a little over $1.5 trillion over UPI in 2022!!2
Problem 4: The difficulties that are faced by small businesses in onboarding onto these giant platforms
Fact: Less than 5 million of 100 million MSMEs are registered to sell on e-commerce platforms.3
This can be attributed to several reasons such as digital literacy about selling products online, the commission charges of the online platform businesses, the need to be present on all online platforms or losing coverage to several buyers.
The last one that is to be present on all online platforms causes the most friction for these sellers since they do not know all the platforms and even if they do, the process of making an account, cataloguing all the products and start selling them seems like a tedious task compared to finding a distributor who takes care of these steps or just distributes the product further to retail stores.
Source: McKinsey paper on “Democratising Digital Commerce in India, April 2023”
The Digital Infrastructure of India has helped these MSMEs a lot to bring their products to the digital realm, but still, there is a lot of headroom to get ahead and make these MSMEs participate in Digital Commerce.
Problem 5: Digital Commerce Unit Economics
Consumers have shown neither the ability nor the willingness to absorb supply chain costs (30 to 100 rupees per order), especially for smaller orders. Most notable platforms themselves face the economic fallout of deep discounts and high consumer acquisition costs, leading to a higher cost of growth.
The multiplicative scale of e-commerce can happen only if the digital commerce supply chain integrates with India’s incredibly efficient, disaggregated, and, in some cases, informal supply chains (distributors, wholesale, shop-led delivery, and the like).
All these problems and pain points of the customer base of both borrowers and sellers nudge creating a solution that would be secure, give peace of mind to the buyers and easy for sellers to integrate themselves.
Even After these problems, In 2023, the revenue in the E-commerce market is expected to grow to US$71.29 billion and is further projected to rise by 13.9% over the next five years.
Faster internet, multilingual and AI-powered conversational interfaces and private investment in digital infrastructure are already set to unlock higher volumes of digital commerce. An open network could be a further catalyst. It would allow access to network participants regardless of the platforms and applications used by the buyers or sellers, making room for multiple customer preferences and sellers big and small.
BEHOLD ONDC (Open Network for Digital Commerce)
Open Network for Digital Commerce introduces an open network for all the players who can sell or enable selling in the e-commerce setup, that is, a shopping platform, seller, logistic partners and technology service providers. No single entity controls the end-to-end activities in the buyers’ purchase journey as opposed to a platform-centric model.
Now a natural doubt would come as to what is the difference between a Platform-Centric Model and an Open Protocol Model / Open Network.
What is Platform Centric Model vs Open Protocol Model?
In this model, the platform essentially tries to aggregate as much market share as it can, of both the buyers and sellers by giving both parties easy onboarding and immediate access to buy or sell commodities respectively. The platform profits from the buyer and seller by charging them subscription or delivery fees. And the platform takes the responsibility of delivering the commodity end-to-end. Examples - Amazon, Swiggy, Zomato, Flipkart, Youtube, etc
An “open network,” as the name suggests, could allow market access regardless of the platforms and applications used by the buyers or sellers. It is neither owned by a single company nor limited to a particular company’s products. An early example of an open network is the Internet, where multiple servers connect on the World Wide Web, and search engines curate results using all relevant information fetched from an endless array of sources
The Open Network for Digital Commerce (ONDC) is a very very bold project that wants to create a fair and inclusive digital shopping system. Imagine a world where everyone can buy and sell things online without being limited to just one platform or app. ONDC aims to make that happen by :
Expanding digital commerce as the channel between all kinds of buyers and sellers.
Including all kinds of products on the channel. Be it B2B or B2C. Any consumer can find a seller for their product or service.
Building multiple connections or rails for buyers to sellers using connecting different apps and creating interoperability balancing the demand and supply.
The 3 pillars on which ONDC stands
Interoperability-: All the different stakeholders (buyers, sellers, logistic service providers, etc.) would work together over the protocol without the need of being configured on a single platform.
Unbundled- All the different stakeholders or participants could take on their roles such as sellers, logistics, payment, buyer side activities, etc. and provide that particular service thus breaking down the full platform model service into microservices.
Decentralized-Data availability and control of agreeing transactions are at both the buyer and seller’s ends.
The UPI has all three of these characteristics. Its success proves how open networks can unlock opportunities for massive participation in India’s digital economy by democratising access for all consumers. The launch of the UPI was an inflection point in the country’s payments history. Transaction volumes quintupled between 2019 and 2022, and transaction value grew by ten times over the past four years to reach $1.5 trillion in 2022
So overall how does ONDC work?
Imagine ONDC as a set of gears that swing into action the moment the consumer tries to search for a product on the buyer app such as Paytm.
The buyer app relays this search query to a gateway, which searches the ONDC registry.
The gateway would then identify the sellers relevant to the search and cast the query to all the registered apps.
The apps then in turn fetch the status of the availability of the product from the sellers and relay this information back to the buyer app. The relayed information would be sorted and displayed on the buyer app with the highest relevancy.
While the buyer app can define the subset of products and services it wants to be known for (e.g., hyperlocal grocery and online food delivery services), it will need to make public its rules for listing and sorting search results. This is in keeping with network policies to ensure a truly democratic marketplace.
Now once the buyer has selected the product from a seller, the seller may fulfil the order on its own or use a logistics service discovered via the network. Depending on the option, the delivery time and cost are transparently shown, and the buyer makes an informed choice about the logistic partner, pays and confirms the order.
At the back end, a set of network services keeps ONDC running smoothly, from registries or applications that maintain the list of participants to scoring and badging services that uphold sustainable and transparent practices on the network.
Together, all these gears interlock for a tailored outcome based on the consumer’s preferences.
In 18 months, ONDC has built its presence in key categories such as grocery, online food delivery, home décor, and mobility, with pilots in five major cities—Delhi, Bengaluru, Meerut, Bhopal, and Coimbatore.
So in Summary:
“ONDC” is to “digital commerce” what “www” is to “Internet”.
In the next issue of “Product Unboxed” we will further unbundle the exact nature of ONDC, consisting of “the architecture of ONDC”, “the elements needed in the user journey”, “use cases”, etc.
If you want us to cover an element of ONDC or another product, feel free to share it in the comments and we will cover it.
A good read..