ONDC – Where No Person has Ever Gone Before

Context

The ambitious agenda of ONDC is to make digital commerce a democratic regime by enabling equal opportunity for every merchant to access every buyer (and vice versa) in the market place without being limited by the platform in which buyers/ sellers are registered. This also enables the buyers and seller to transact on terms mutually agreed and not dictated by the intermediary.

Why it is so very important to buyer, seller and the industry as a whole? In this quest, let us first look at where we are today in digital commerce and how we reached here.

The TCP/IP (Transmission Control Protocol/Internet Protocol) was developed in the 1970s and adopted as the protocol standard for ARPANET (the predecessor to the Internet) in 1983. TCP/IP became the standard communications protocol that allows computers to communicate over long distances making the internet a possibility.

In the early days of such long-distance digital communication the interaction was limited to geeks and technology enthusiast with collaboration enabled by the likes of bulletin boards & user groups, and search for & sharing of resources was using applications like Gophers, FTP etc. Then came Tim Berners Lee, with HTTP (Hypertext Transfer Protocol), which made the World Wide Web a reality. Lee created the Web as a public good, and hence anyone who could register a domain name in DNS and write even a simple HTML page became discoverable to anyone accessing the net using any browser.

What determined users discovering a website, sharing it and using it repeatedly was the content on the HTML page, and not digitally captive users in a walled garden. The same was the case of email, where anybody or any entity could develop their own mail server with its own features. But so long as they used the open-source SMTP (the Simple Mail Transfer Protocol), they could communicate with any other mail server in the world.

Thus, Internet 1.0 evolved as a democratic place.

Imagine how the internet would have evolved if Lee had instead developed the web not as an open public good, but as a walled garden. Maybe, there would have been a couple of more walled gardens which together controlled the internet access and each of them could have been charging us a small fee ?for access to their silos. But HTTP as a public good made it possible for widespread innovation and allowed everybody to publish on the web using the digital rail enabled by HTTP.

When digital commerce evolved, it took the form of end-to-end integrated platforms built on proprietary technology. These integrated platforms offered great service to both sellers and buyers. They brought about the acceptance of digital commerce in many parts of the world.

But, the model of platforms built on proprietary technologies have an inherent problem: the network effect will ensure that platforms who manage a decent scale of operation the fastest will end up capturing most of the market in every domain, leading to market concentration by a few feudal lords, which can encourage not-so-fair trade practices.

This is a concern the world over and different economies are attempting different strategies to rein these giants.

The US Federal Trade Commission (FTC) is looking for means to disciple the tech lords to address these challenges, as articulated by WSJ “Big tech’s platforms—the things that have made them so much money—effectively make them market-controlling middlemen, and the FTC is saying that the tech giants are abusing their positions as, in effect, the ultimate proxy buyers for all users of their platforms.” (1)

As a part of this overall disciplining strategy “some of the most aggressive suggested reforms have recently been codified into two proposed bills, both of which appear to have some bipartisan support. The American Innovation and Choice Online Act (AICOA) concerns unilateral conduct by large online platforms, focusing especially on “self-preferencing”—treating one’s own products more favourably than those of competitors. The Open App Markets Act (OAMA) deals specifically with mobile app stores and operating systems. It similarly prohibits certain forms of self-preferencing. But it would also eliminate the “walled garden” business model that requires all app transactions to run through a single app store”. (2)

In China, the Government came down heavily with very extensive control to discipline big-tech. The EU is evolving Digital Market Access Act to regulate the platforms and their practices.

The challenge is same all over the world the “sacrifice of contestability and fair trade”.

In India, we are adopting a strategy of using technology and markets with enabling policies to encourage and enable broad-based participation by both buyers and sellers in a democratic and open market. This is being globally looked at with keen interest as this appears to be most democratic and market-friendly option.

Considering the exponential growth of ecommerce in India in the recent past, we may wonder whether there is any need for any intervention. However, when we look closely, we see that the penetration of digital commerce in retail is only around 6% by the consumers, and only around 1% or so among merchants and producers with the lion-share of the market, ?enjoyed by a couple of large market places which are managed as walled gardens.

Herein, establishment of an open and interoperable digital network of platforms is a powerful idea to address the above market limitations and help wide-ranging reforms in regulating the digital market. Such an open network will democratize the market with both large and small players having fair and equal opportunities to participate. This will be a first-of-its-kind initiative in the world to create a level playing field for digital commerce at such a magnitude in a country like India.

Without a doubt, India has led the world and shown that it can innovate such population-scale initiatives with the power to fundamentally disrupt and democratise markets; be it UIDAI – Aadhaar for Digital Id, UPI for financial payments, GSTN for tax administration or ABDM for health. As UPI has transformed the payment system in India, ONDC aims to transform the digital commerce ecosystem.

While UPI was solving problems of developing countries like India with very limited digital payment at that point, ONDC is attempting to solve a global problem faced by both developing and developed countries and that is why there is a keen interest in how this pans out.

Digital Commerce built on Open Protocols

Open Network goes beyond the current platform-centric model where the buyer and seller must be a part of the same platform/application to enable transactions between them. Instead, in an open network so long as the platforms/applications are interoperable with ONDC protocol, buyers and sellers can transact no matter which platform/application they use to be digitally visible/available.

An Open Network based on open protocol will enable location-aware, local commerce across industries to be discovered and engaged by any network-enabled application. As the IMAP/SMTP are for emails, HTTP is for the World Wide Web, the Open Network idea has been conceived to transform digital commerce in India.

The open network protocol is expected to act as a force multiplier for various segments – businesses, consumers, application developers, governments and other relevant participants - by creating an interoperable and open playground for various sections to function and compete.

This open network will unbundle the supply chain thus shifting the power from the intermediaries to the ends, that is, to the consumers, merchants and providers of support services. This will be most impactful for small businesses who are looking to unlock innovation and scale their operations through digital commerce.

What does it mean to the consumers and merchants?

Firstly, let us look at the challenges from the point of view of the consumers:

1.?????They have only a very few options as buyers.

2.?????Buyers can have visibility of only the sellers registered in that platform

3.?????Consumers need to access multiple platforms to search from all the sellers available in the digital space - As the platforms give priority for the affluent sections, the categories of products and options available are skewed towards this segment and limited

4.?????Platforms normally attempt to influence the consumer choice was per the platform’s priority/ benefit than to help the consumer make the right choice

When we look for the point of view of the seller, the situation is not much different:

1.?????There are only a few platforms that can offer a reasonable consumer base

2.?????The sellers in a particular platform are discoverable only by the buyers in that platform

3.?????The sellers need to onboard to multiple platforms with different processes and technology to increase the consumer base adding to their costs

4.?????Platforms become monopsonies exerting excessive margin squeeze

5.?????Very limited market data is made available to the sellers

6.?????Unfair competition from preferred sellers of the platforms

In summary “contestability” and “fair trade practices” become serious concerns for all.

It is in this background that Government of India came out with an initiative to establish Open Network for Digital Commerce (ONDC)

The fundamental characteristics of Open Network are “unbundling” and “interoperability” of the building blocks of transactions like seller interface, logistics, warehousing, payment, buyer servicing etc

Unbundling would mean it will be possible for different entities offer each of these building blocks. The interoperability by means of a common protocol would enable stitching of these building block to offer seamless commerce to the consumers and merchants.

ONDC Driving Innovation

The unbundling and interoperability ?will drive innovation and specialisation unlike the platform centric model which limits innovation within the platforms and suppresses competition.

Let us go a little deeper.

There are many service providers like Telcos, Fintech, Banks, etc who have large number of digital consumers for their existing service/ product offering. Now they can offer eCommerce to this large pool of consumers without having to worry about onboarding sellers and service providers because all the sellers who have published their digital catalogues using ONDC protocol will be available to these consumers if these service providers can expose these buyers to the network using ONDC protocol.

In this case the buyer platforms are focused only on the buyers and their welfare as they have no direct relations to the whole pool of sellers. This will encourage innovations leading to specialised buyer applications addressing the needs of specific buyer segments.

For example, some smart start-up from Kerala can come up with a ONDC protocol compliant “Buyer App” with consumer interface in Malayalam and that too both in text and voice which can have features for the Malayali buyers to sort, filter and also offer them recommendation meeting their tastes and culture. This app will be able to access all the sellers in the network irrespective of which platform these sellers are registered with and help the buyers to choose what is most relevant for them.

The buyer apps will also provide for customer interaction post purchase including grievance reporting which will be digitally forwarded to the seller app and monitored for resolution. Thus, for the customer the experience is seamless.

Similarly, we will see explosion of innovation on the seller side too.

Specialised seller platforms will come up catering to specific types of sellers as they have the privilege of accessing the total population of buyers in the network independent of which platform they are registered with. For example, somebody can develop a platform for the Tirupur garment manufacturers to offer their products digitally. In the current regime it would have been very expensive for them digitally discoverable unless they are part of an established market place.

Now in the paradigm of ONDC they can access the billion consumers on the open network without any restrictions. This model can work for any products. This opens enormous possibilities for sellers and software solution providers to launch specialised platforms for different products and/or services.

This market structure, which incentivises innovation and customer service will encourage competition based on specialisation, reduce concentration and encourage disciplined market practices

ONDC A Self-Correcting Market Model

ONDC network being unbundled, very often the Buyer Apps will only have buyers as clients and Seller Apps will have only sellers as clients.

The Buyer app will be forced to have loyalty to the buyers and would have to take extra effort in terms of functionalities and services to retail loyalty and continued support from the buyers. Their services thus will include active follow-up with sellers for grievance redressal and escalating aberrant behaviour by the sellers if any.

Seller Apps, on the other hand, with no captive buyers but with a responsibility to ensure good customer service to attract the buyers, will have to put in checks and balances to ensure that their sellers treat the end customers in a fair and transparent fashion failing which their network wide reputation will suffer and may be rejected by buyers.

With multiple platforms offering competing services, there will be possibility for continuous social audits on the practices by the platforms and ONDC will enable publishing of such social audits. This becomes all the more relevant with multiple buyer and seller apps in the market giving strong competition

Even cases where the platforms are providing both buyer and seller apps, each side will attempt to focus on their consumer (buyer for buyer app and seller for seller app) as their own platform offer of sellers for buyers and buyers for sellers will only be a small part of the total available options in the network.

Functions of ONDC

With this vision Government of India has taken this initiative of establishing ONDC as an entity that us focused on mentoring and managing this Open Network.

ONDC as a body will play three vital roles, namely; Development of the Network, Ensuring Disciplined Network and Service Delivery.

ONDC, as a part of its developmental role, will have two focus area. First is to set up and sustain the Open Network by adopting and building cutting edge technology foundation to form the digital rails for the network. Second is to enable and enlist wide-scale voluntary participation by ecosystem players. In this case there will be special focus to handhold small and medium enterprises who are not digitally enabled or even literate so that they can take advantage of the equal access an open network can offer.

As a part of network management role, it will help in establishing the “Network Code of Conduct” from inception by collaboratively developing policies and rules of the network. This will be based on the principles of consumer protection and fair trade, aspiring to make them machine-readable and software enforceable in the network to the possible extent.

As a part of service delivery role, it will provide foundational services for operation of the network (e.g. registry, certification, grievance redressal, ?etc.). Along with this, development, maintenance and continuous upgrade of value-added solutions that make sense to be made available as common foundational service to the whole network instead of each NP trying to build on its own. These could include, network level reputation index, online dispute resolution framework, common repository of catalogues, open data shared among all participants etc

Organization Structure

ONDC is established as a private company to provide the necessary flexibility and agility in investment, recruitment, and management decision-making. However, the company has been established with a public purpose, to provide sector-enabling foundational services, it is registered as company under the Companies Act, 2013.

In specific, a Section 8 company (not for profit) as the same removes any incentive for the owners to drive for profit maximization, and at the same time being a company established under the Companies Act provides for elaborate and rigorous norms concerning accountability and transparency.

Twenty institutions have participated in the equity equally. These include HDFC Bank, IDFC First Bank, Axis Bank, ICICI Bank, Kotak Bank, SBI, Bank of Baroda, UCO Bank, Bank Of India, PNB, SIDBI, NABARD, BSE, NSE, CDSL, NSDL, Protean, NPCI, QCI and CSC.

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(1)??https://www.wsj.com/articles/how-the-ftc-is-reshaping-the-antitrust-argument-against-tech-giants-11643432448

(2)???Proposed Antitrust Reforms in Big Tech: What Do They Imply for Competition and Innovation? Erik Hovenkamp