With the creation of ONDC, a potential scenario for the transformation of the Indian e-commerce landscape has opened up. Being incubated by the central government, ONDC aims primarily at supporting grassroots entrepreneurs and digitising local retailers so that they can jump into the e-commerce revolution in India. While ONDC is usually seen in terms of threatening mega-tourism companies such as Amazon or Flipkart, some would view it not as a disruption but as an evolution of the e-commerce market.
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Understanding ONDC: An Open-Network Approach
At its core, ONDC is based on an open-protocol approach driving interoperability of every platform onboarded onto the network. This marks a fundamental change from e-commerce’s current platform-centric setup, wherein buyers and sellers must confine their activities within a single marketplace. ONDC uses open specifications and network protocols with the hope that the network would not turn into a castle of any single platform.
It is, thus, a digital ecosystem that enables frictionless and interoperable online transactions. Parallels have been drawn with Unified Payments Interface (UPI), which democratised digital payments in India – ONDC is viewed as a “digital good,” not just as a platform, just as UPI is not a wallet or a bank.
This network has three central pieces: buyer apps, seller apps, and logistics service providers. The buyer-side apps are consumer-facing, i.e., used by consumers, while the seller-side apps interface with the merchants, i.e., supply-side apps. The seller-side apps enroll the merchants so that they are discoverable in all buyer-side apps on the network, no matter from where they were originally enrolled by the seller-side application. This level of interoperability enables a buyer to buy using any app of choice from any seller across the network even if that seller is not directly onboarded on that particular app.
Generally, the buyer uses any buyer app, such as Paytm, which is in the testing stage, to search for products. Then, the search results display the items available with various sellers on the network. The order is then acknowledged by the seller-side app and passed on for fulfillment to the merchant. The merchant accepts, and soon after, the seller-side app issues a broadcast of the logistics requirement to the logistics partners in the network, who then vied for that task and accepted it for delivery.
The Need for ONDC in India’s E-commerce Landscape
There arose the requirement for ONDC due to the following problems in the current Indian e-commerce market. India has 80 crore users with a second-highest internet penetration worldwide; however, e-retail penetration stands barely at 4.3%, much lower than that of big economies like China with 25% and the US with 22%.
One major challenge is ascribed to having a single entity managing the entire e-commerce value chain. Some of these situations lead to sellers paying huge charges, including high commissions of almost 25-40% on platform-based marketplaces, which eat away the margins and make it difficult to price their product on par with physical stores. In such adverse pricing conditions, quality is usually compromised or prices are hiked.
On the other hand, sellers are racked by the necessity to presence on various platforms besides having to bear the additional cost. ONDC, on the other hand, intends to lessen the pressure by feasibility of limiting buyer-side commissions (3% charged from seller-side apps) and can have market forces determine seller-side commissions (around 10-15%), which would still be lower than traditional marketplaces.
For the buyer side, the current scenario is something of limiting in terms of options as one can buy only from those sellers who are there on the same platform that one is using. ONDC will work toward solving this limitation by foregrounding a large sell-side base through multiplex sell-side apps, all being accessed from one buyer app. However, a duopoly mushroomed in the market, with Amazon and Flipkart grabbing the lion’s share (60 percent approximately) of the Indian e-commerce market. ONDC is envisaged to create a level playing field for all e-commerce operators.
ONDC’s Evolution and Growth
Since its launch and beta testing phase in Bengaluru, ONDC has been scaling rapidly. Initially covering groceries and restaurants across 16 locations, the network has expanded significantly. In just 15 months since its launch, it facilitated over 4.97 crore transactions, crossing 3 million retail purchases in a single month (January 2024) for the first time. The platform has diversified beyond its initial domains.
While mobility services initially led, accounting for over half of monthly orders through platforms like Namma Yatri, ONDC is also becoming a significant player in other sectors. Food and beverages have seen over 57.8 lakh orders, fashion over 26.4 lakh, grocery over 17.4 lakh, and home and kitchen over 13.5 lakh orders in the past 15 months. The network has also expanded to include beauty and personal care and electronics, with other categories being integrated.
The number of network participants has grown from an initial pilot with a few apps to 36 participants (buyer apps, seller apps, logistics) and around 300 more in various stages of integration. The network now has approximately 26,000 merchants onboard and has expanded to nearly 200 cities since its beta launch in September 2022. Prominent entities like PayTM, IDFC First Bank, HUL, Nivea, ITC, YESBank, Loadshare, Dunzo, and Shiprocket are already live or onboarding. Others like CSC, PhonePe, Axis Bank, Microsoft India, Snapdeal, and Zoho are in advanced stages of joining as buyer or seller-side apps.
Technological Backbone and Key Features
Technology and infrastructure are crucial to ONDC’s potential to realise. The open network infrastructure has been conceived to scale effortlessly in line with increasing users and transactions and to ensure performance stability. ONDC employs APIs for integration and value-based data exchange between participants so they may create new products and services and standardise operational details like inventory handling or cart handling.
Security, transparency, and privacy are ensured through encryption protocols, user authentication, on the possibility of Blockchain/DLT use. Data analytics tools and software give insights into customer behavior and market trends. It allows for transaction integration with mobile and digital payment solutions. AI/ML algorithms could be used for powering two-sided recommendation engines and intelligent marketing. Cloud computing gives scalability and flexibility to retailers on the platform.
By design, ONDC is built to scale. Fair and transparent, and it has an easy joining process for both buyers and sellers. This eliminates hurdles of legal/regulatory compliance through standardisation and finally addresses issues of technical interoperability by working through one network. Stakeholders are encouraged to cooperate by aligning interests within the network. They are trying to solve infrastructure or limited connectivity issues, which are particularly prominent in remote areas.
Challenges and Roadblocks Ahead
Despite its potential, ONDC faces significant challenges in its execution and scaling phase. A classic “chicken-and-egg” situation exists, where a threshold level of transactions is needed to attract both buyers and sellers. Without enough buyers, sellers have little incentive to join, and without sufficient merchants offering diverse products, buyers lack motivation to use the network.
Order numbers, while growing, remain relatively small compared to e-commerce giants. For instance, ONDC’s daily orders stood at 2.87 lakhs compared to Amazon India’s 22.58 lakh and Flipkart’s 22.23 lakh orders per day at one point. Early merchants have noted the slow pace and lack of awareness about the network, stating that marketing is required to change buying behaviours. They express disappointment at not yet seeing the promised benefits of discoverability and price advantages. Tackling the complexity of the network’s language and structure also requires patience.
Issues related to user experience on buyer apps have been noted. For instance, the ONDC section on early adopter Paytm was initially low on the homepage, and the interface, search, and buying experience were deemed less than ideal. Buyer apps need to actively market and woo their existing customer base for services they might not typically associate with (like Meesho’s users with F&B).
Operational challenges include difficulties for sellers in accurately managing inventory, reconciling payments, and adapting to regulatory and compliance requirements. Buyers might have concerns regarding product quality, delivery reliability, and fraud, requiring ONDC to build trust and ensure security and privacy of data.
Logistics companies face challenges like last-mile delivery, infrastructure constraints, and integrating their systems with ONDC. Establishing effective enforcement mechanisms for issues like fraud, counterfeit products, and consumer grievances is also crucial. Customer complaints redressal can be fragmented, creating potential gaps. ONDC is building an online dispute resolution process for unresolved issues.
Conclusion
ONDC is seen as an ambitious undertaking to reshape the e-commerce landscape in India on the lines of an open, interoperable network. Its intent to uphold small businesses, increase digital penetration in retail, and give an exit to previously undeserved segments such as grassroots entrepreneurs and rural populace makes it a driving force for inclusion and democratisation.
With the active involvement of government agencies, banks, fintech organizations, and large private-sector players, strategies like the integration of ONDC storefronts on incumbent platforms are creating goodwill momentum around ONDC. But as ONDC marches on, its triumphs will be evaluated not merely on the basis of transaction volumes heading into the giants territory but more on nurturing the vast network of small businesses and retailers across India, thereby truly putting e-commerce into the hands of everyone.
