ONDC FS: the UPI unlock for credit in India?

The Open Network for Digital Commerce (ONDC) is rapidly reshaping India's digital landscape, experiencing a remarkable 15% surge in transactions from January 2023 to February 2024, reaching a staggering 7.5 million monthly. With McKinsey forecasting a five-fold increase in India's digital consumption to $340 billion, propelled by ONDC, the platform is set for significant growth.

Disrupting the Norm: Decentralised Architecture

At the heart of ONDC's growth is its decentralised architecture, distinguishing it from traditional e-commerce platforms. Operating as a protocol-based network, ONDC separates buyer and seller functionalities, fostering competition and innovation. This approach, termed "unbundling" in protocol economics, leads to a more efficient system, akin to the success of India's UPI. By separating money custodianship (handled by banks) from the actual payment functionality (linked to UPI IDs), UPI enables seamless transactions across different banks.?

Building upon this legacy of UPI, Open Network for Digital Commerce (ONDC) presents a similar transformative potential for the lending sector.?

ONDC's recent foray into credit services, with the successful facilitation of its first credit transactions, marks a significant milestone. Its open network architecture breaks down barriers between lenders and borrowers, enabling seamless access to unsecured personal loans and GST invoice financing.

Streamlining Lending: The Five-Step ONDC Product Flow

The lending process on ONDC follows a streamlined five-step flow, leveraging digital public infrastructure to ensure a fully digital experience?

Step 1: Registration as a borrower initiates the process & completion of loan application, followed by?

Step 2: Underwriting that lenders do specific to requirements such as tenure, amount, interest rate, and terms and conditions.

Step 3: Verification of the borrower's identity, which may involve Aadhaar-based KYC to ensure compliance.?

Step 4: Establish e-NACH for automatic EMI payments from the borrower's bank account, streamlining the payment process without manual intervention.

Step 5: Execution of the loan agreement and disbursal of funds finalises the process, followed by managing loan payments and prepayments efficiently to conclude the lending transaction

These five steps form the backbone of the lending flow, leveraging digital public infrastructure (DPI) to ensure an entirely digital process. Every aspect, including KYC verification, payment setups, and agreements, is conducted online, eliminating any offline components.?

Inside the Product Flow: ONDC's Core APIs in Action

ONDC's four core APIs - search, select, init, and confirm - facilitate communication between buyer and seller apps. Delving into the product flow, borrowers initiate loan requests, which are broadcast to multiple lender apps for response. The underwriting process considers various factors, culminating in a loan offer presented to the borrower. KYC verification and e-signing of agreements ensure a secure and seamless transaction process.

Here’s a more detailed look at the what borrowers see on their phone screens (in yellow) and what goes on behind the scenes (in blue) -?

ONDC’s Communication Mechanism: Ensuring Secure Data Exchange

ONDC facilitates communication between the borrower and lender apps through a published-subscribe mechanism. Buyer apps publish information on ONDC, received by registered lender apps via subscription. Authentication keys and encryption secure the transmission of data. ONDC operates peer-to-peer, generating unique subscriber IDs for participants. Two interaction journeys exist for buyer apps: aggregating customer details for all interested lenders or facilitating individual interactions based on lender criteria.?

What does this mean for borrowers, lenders and buyer apps?

From the borrower's perspective, the power of Open Network for Digital Commerce (ONDC) lies in the vast array of lending options it presents. Rather than being confined to a handful of choices, borrowers can now explore a diverse range of lenders to secure the best possible loan terms tailored to their needs.

ONDC is a game-changer for lenders too.? It acts as a powerful lead generation engine, connecting them with a vast pool of potential borrowers.? This streamlines the loan origination process and integrates seamlessly with buyer apps, making everything quicker and easier.

But ONDC's impact goes far beyond convenience.? By bringing together a massive network of lenders, it tackles the critical issue of access, especially for underserved communities.? This democratises financial services, empowering individuals who were previously left out of the traditional system.

ONDC's impact extends beyond accessibility. It revolutionises the financial landscape by:

• Making digital products more affordable (Sachetisation): Financial services become more accessible to underserved communities by being offered in smaller, more manageable chunks.
• Creating a level playing field: Standardised API protocols ensure everyone has a fair shot at success in the ONDC ecosystem.
• Building new connections: ONDC bridges the gap between financial institutions and new markets, fostering opportunities for both lenders?

Expanding Horizons: ONDC Ventures into Insurance and Investments

ONDC expands into insurance and investments this year - completing its suite of financial services. This shift potentially attracts major players, positioning ONDC as a full-suite provider. Motor, health, and marine insurance products are set to launch this year, with big names like Insurance Dekho, Policybazaar and Bajaj Allianz being the first onboarded.

A good example of ONDC looking to democratise financial services is its plan to offer Rs 3-5 marine insurance (sachetisation); this could potentially reduce risks for small-scale sellers. In investments, the economic bottom of the pyramid typically invests in fixed deposits or chit funds; While fixed deposits provide a safe haven, they don't yield the same returns as mutual funds, and chit funds often lack proper regulation. ONDC's initial strategy in the investment arena aims to democratise mutual funds, beginning with options as low as Rs 100 to cater to a broader audience.

Traditionally, both insurance and investment products have been plagued by high acquisition costs, making them less accessible to underserved communities. This often creates a vicious cycle – credit-underserved communities are also typically insurance and investment deserts. ONDC disrupts this cycle by leveraging its massive network to bring down these costs.?

So then, is ONDC poised to become India's Credit UPI?

In the case of UPI unbundling is valuable because it occurs across two layers only: the sending bank and the receiving bank. The coordination costs are minimal and are sufficiently resolved by the protocol. A payment is also basically one "SKU" irrespective of who is the sender or receiver. Credit is of course a lot more complicated.

So whilst ONDC FS aims to simplify the distribution of financial services - the manufacturers of the products may complicate the simplicity of the offering. Unbundling credit on ONDC offers exciting possibilities, but achieving a seamless lending experience requires careful consideration of the platform's economics and integration mechanisms. ONDC is a work in progress right now and it's still early days for ONDC Financial Services.

The way I look at it, trust lies at the core of open networks. Trust signals are built on ethical technology, responsible participants, transparency, and fair compensation. As Tim Berners-Lee, inventor of the World Wide Web, aptly stated, "The web is more a social creation than a technical one. I designed it for a social effect - to help people work together - and not as a technical toy." This philosophy underscores the empowering nature of open networks, fostering trust and ultimately reshaping our digital interactions for the better.

That’s all from me this week, but we would love to know what you think about ONDC, decentralised networks and how it could potentially transform financial services, particularly lending!?