Democratizing e-commerce: The role and challenges of ONDC

In recent years, digital public infrastructure (DPI) in India has expanded rapidly, creating open and interoperable networks that facilitate interactions among various stakeholders. DPIs by being non-rivalrous and non-exclusive in nature enable broad participation. They exist in almost every sector in India ranging from payments system, e-commerce, logistics, agriculture, health, and education. Some of the DPIs that have witnessed exponential growth are Aadhar, Unified Payment Interface (UPI), GSTN, and Fastag.

Adoption of digital infrastructure at a remarkably fast pace has allowed Indian masses to access a broad range of digital services - e-commerce in particular. The e-commerce sector is witnessing substantial growth and is projected to grow to $350 billion by 2030. However, Indian e-commerce market has become monopolistic with Amazon and Flipkart controlling 60% of the market. There is limited opportunity for new and small sellers in the digital commerce space unless they are affiliated with an established end-to-end service provider.

Open Network for Digital Commerce (ONDC), a non-profit company, was launched by the government in December 2021 and was aimed at creating public infrastructure, decentralising e-commerce, and targeting monopolistic practices in the digital commerce space. There are three types of service providers on the ONDC network: Buyer-side apps, seller-side apps, and logistics providers. ONDC promotes interoperability among these different components, allowing sellers and buyers to interact across multiple platforms seamlessly which enhances the reach of sellers and provides consumers with a broader range of products and services. Initiated as a pilot project in five cities in August 2022, it has gained significant traction over time. At present, it is operating in over 600 cities with around six lakh merchants onboard and around 70% of the order originating in tier-2 and tier-3 cities.

Contrary to platforms such as Amazon and Flipkart charging significant commission fees ranging between 25%-40%, ONDC does not charge any commission from sellers. However, a commission is charged by the seller Network Providers (NPs), which usually ranges from 10%-15% of the selling price. Merchants have flexibility in negotiating the commission fee with the seller NPs, providing them to choose a reasonable rate. Apart from the commission fee, traditional platforms also have other fees such as preferential listing charges which are not charged by the ONDC platform. Thus, every listed seller will be discovered on the ONDC network whereas in case of traditional e-commerce platforms, the ones who provide higher margin are given preference.

However, there are certain challenges with ONDC that need to be addressed. One of the key aspects for success of an e-commerce setup lies in the customer experience. User touchpoints, starting from browsing an e-commerce app, placing the order, payments, fulfillment of the order, and after sales service define the inclination of customers to switch to any platform. ONDC, at present, depends on community support and third-party online dispute resolution platforms to handle disputes. Buyers and sellers can raise a complaint with their respective apps and these parties can coordinate for dispute resolution. However, this approach carries inherent risks such as potential malicious activities, negative customer experiences, delays in resolving disputes, and lack of ownership. Moreover, there are no clear guidelines stating the action that should be taken in case the network providers fail to resolve the disputes.

Another important aspect is ensuring strong consumer protection and data privacy regulations. Implementation of the Digital Personal Data Protection Act (2023) is a step forward in this direction, but it lacks detailed rules. The bill does not regulate harms (financial loss, identity theft etc.) arising out of processing of personal data; it excludes processing of personal data by the government (Centre, state, local bodies and govt. enterprises), data processing for research activities and transfer of data outside India, except for certain countries. It is necessary to regulate such data processing and to have clear guidelines dealing with episodes of data leaks and misuse.

ONDC is a pioneer in building and democratising open network commerce at population scale. It is expected to bring in synergies across various parties and have significant impact in the digital growth charter of untapped businesses. However, without the mentioned checks and initiatives, the planned scale will be tricky to achieve. To build the ecosystem at population scale, it is very important to take some structural steps in the near times so that participation, experience, and outcome can be fruitful for all the participants involved.

This article is authored by Valbha Shakya, research associate, Centre for Social and Economic Progress (CSEP), New Delhi.