Can ONDC succeed in financial inclusion when the rest faltered?

Open Network for Digital Commerce (ONDC) recently announced its foray into financial services. This move comes at a time when it is all set to process one lakh non-mobility and mobility transactions per day by the end of this year.?

While ONDC is revolutionising digital commerce in India, another protocol — Open Credit Enablement Network (OCEN) is simultaneously reimagining digital credit within the country. While we are familiar with the significance and individual impacts of ONDC and OCEN, it takes imagination to comprehend its combined power. So, I thought I must take the time out to appreciate its potential synergies.

To begin, let's present a few facts that establish the boundaries of ONDC-OCEN potential.

A glaring lending gap prevails over retail and MSME lending?

First of all, only 165 out of 840 million internet-active Indians transact for digital commerce, despite 450 out of 840 million Indians being voracious consumers of online content, suggests McKinsey data. While ONDC may help reach the 400-440 million eligible retail customers, the fact remains that only 25-30% of them have received formal credit.?

The remaining 70-75% face a range of challenges: incomplete or inadequate documentation for KYC, absence of credit records with bureaus, and limited availability of point-of-sale credit (only to a subset or retail customers on select channels). However, the good news is that OCEN has demonstrated its ability to address these problems, and when implemented within the ONDC framework, it can make innovative credit products accessible and discoverable to all eligible retail borrowers.?

Source: ONDC & Mckinsey | Democratising digital commerce in India

The story is more or less the same for MSME segments. The estimated MSME credit gap ranges between $250 and $300 billion. Like retail borrowers, small-business owners face a host of issues: limited banking history and documentation, inability to produce collateral, cumbersome application processes, and unviable repayment schedules. This has led to the $300 million credit gap, wherein 60% of India’s 100 million MSMEs (including kiranas) are unable to access formal credit, according to Mckinsey.?

While digital lending enabled by OCEN has been bridging the MSME credit gap, it still has a long way to go. However, ONDC could potentially unlock the scale that lenders have been hoping to achieve all along — that too at an unprecedented rate.?

Source: ONDC & Mckinsey | Democratising digital commerce in India

India could exceed expectations of growth and possibilities of digital commerce with ONDC. Currently, only 6% of all MSMEs actively sell on e-commerce platforms. But by 2030, it is expected to bring 6-7 times more MSMEs into the ecosystem and connect around 80-90 million self-employed workers with demand.?

Bringing the next 500 million consumers and 100 million sellers to trade online is enough to mark the beginning of a Cambrian explosion in digital commerce. Remarkably, ONDC plans to increase eCommerce penetration from 8% to an unprecedented 25% within two years.?

ONDC - A lender’s golden goose?

Ecommerce constitutes nearly 50% of digital payments, whether it is via Net banking, cards, Unified Payments Interface (UPI) or wallets. By participating in a network that can go far beyond the reach of the likes of Amazon and Flipkart, banks can tap these markets without having to establish branches or build customer relationships. Banks can easily penetrate ‘Bharat’ markets or cities below the tier-2 category via ONDC.?

The digital trail of sellers, even if unorganised or without credit score, would help lenders provide customised credit products, including credit lines, overdraft facilities, and term loans. The scope is massive. Banks and fintechs can participate as buyer apps or seller apps depending on the nature of their digital presence, or even adopt an assisted commerce model on ONDC.?

Six banks are already part of the ONDC ecosystem in the form of ‘Network Participant Account Providers (NP Account Providers)’. All ONDC participants are required to have an NP account before going live on the network. This is nothing but escrow account services — which could prove to be a great cross-selling opportunity for banks, especially to customers engaged in significant transactions.?

The bottom line?

To my mind, the capability of ONDC to hyperlocalise commerce and put the smallest of players on the digital map coupled with OCEN’s power to enable real-time credit delivery for underserved segments, is a formidable force.?

I am eager to hear your thoughts on this.?

Written by Rajat Deshpande