The Next UPI: What is India's Open Network for Digital Commerce?

Microsoft became the first tech giant to onboard ONDC, which is currently in its pilot phase.

Microsoft became the first tech giant to onboard Open Network for Digital Commerce (ONDC), a government backed initiative to give small merchants across India access to a decentralised e-commerce network.

The tech giant intends to introduce social e-commerce to the Indian market with the launch of a shopping app that will let Indians shop with their social circle. To this end, it wants to harness the network to discover the best pricing among retailers and sellers.

ONDC is being touted as the next UPI (Unified Payments Interface), since the government hopes it will democratise e-commerce and give small sellers access to systems and technology that currently only giants like Flipkart and Amazon enjoy.

Here's all you need to know.

What is ONDC?

ONDC, set up as a non-profit company (like the National Payments Corporation of India), is a network that lets sellers voluntarily display their products and services across all participating apps and platforms.

Since this network uses open specifications and protocols, and isn't tied down to any platform – it doesn't require buyers and sellers use the same platform to complete a transaction.

So long as the platforms are connected to this open network, buyers and sellers can transact irrespective of the applications they use.

In April this year, the Department for Promotion of Industry and Internal Trade (DPIIT) launched a test run of ONDC in five cities – Delhi-NCR, Bengaluru, Coimbatore, Bhopal, and Shillong – with plans to add 150 retailers in the pilot phase.

What’s the Aim?

Around 1.2 crore hyperlocal Kirana stores account for 80 percent of the retail sector in India and most of them aren't digitally connected, according to an ONDC strategy paper published earlier this year.

Even though the COVID-19 pandemic has given a massive push to e-commerce in India, the benefit of that has largely gone to the big players like Amazon and Walmart's Flipkart which control more than 60 percent of the market.

Due to the high investment required to build end-to-end e-commerce solutions, small retailers and MSMEs have little choice but to sell through the established platforms. Trust built on these platforms (in the form of ratings) is also not transferable, which keeps them bound.

To allow small sellers to be free of such shackles, ONDC aims to facilitate a shift from an operator-driven monolithic, platform-centric model, to a facilitator-driven, interoperable decentralised network.

ONDC aims to raise e-commerce penetration from nearly 8 percent to 25 percent in the next two years, according to Reuters. It also aims to sign up 90 crore buyers and 12 lakh sellers within the next five years, while adding $48 billion to gross merchandise value.

How Does It Work?

Apart from buyers and sellers, an enterprise that wants to be part of ONDC has to play one or more of the following roles:

1. Connecting buyers to the network: Building applications or websites that customers will access to browse and search for products that are on sale on the ONDC network. Currently, only Paytm has built a buyer-side interface.

2. Connecting sellers to the network: Building applications that will allow sellers to access the ONDC network, put their products up for sale, and accept orders. These facilitators have also been tasked with pitching ONDC to merchants.

3. Gateway: Applications that will broadcast the search request received from buyer-side apps to seller-side apps listed on the ONDC registry, based on search criteria.

4. Technology services: Providing software and technical add ons for the other three roles.

Instead of concentrating power with a handful of players, this approach will allow consumers and sellers to choose which apps they want to use to access a single network. It will also keep government involvement to a minimum.

In practice, you will be able to download the ONDC app of your choice (like with UPI) and use it to buy certain products and services from all the sellers that offer them. Deliveries will be handled by logistics partners.

ONDC isn't just for the retail sector. It is intended to facilitate any digital transaction between a buyer and seller for good or services including wholesale, mobility, food delivery, logistics, travel, and urban services. It will also cover business to business transactions.

Who’s on Board?

Only a handful of buyer-side and seller-side participants are live on the ONDC network at present:

• Paytm is the only one offering a buyer-side interface

• Digiit, eSamudaay, Gofrugal Technologies, Growth Falcons, and SellerApp offer seller-side interfaces

• Dunzo and Loadshare offer logistics for hyperlocal deliveries.

Microsoft, Kotak, PhonePe, and Snapdeal are among the companies in the “advanced stage of development”, while Airtel, Axis Bank, HDFC Bank, India Post and hundreds of other businesses have "initiated integration" with the network, according to the ONDC website.

Tech major Google and e-commerce giants Flipkart and Amazon are also considering joining the network, according to media reports.

Network participants aside, the government wants millions of small businesses to join ONDC as sellers. For that it will have to run a massive awareness campaign, the Confederation of All India Traders, which represents 80 million businesses, told Reuters.