Democratizing e-commerce: ONDC’s role and challenges

In recent years, the Digital Public Infrastructure (DPI) in India has grown rapidly, creating open and interoperable networks that facilitate interactions among various stakeholders. DPIs, being non-rival and non-exclusive in nature, enable broad participation. They exist in almost every sector in India, from payment systems, e-commerce, logistics, agriculture, health and education. Some of the DPIs that have seen exponential growth include Aadhar, Unified Payment Interface (UPI), GSTN and Fastag.

The adoption of digital infrastructure at an incredibly fast pace has allowed the masses of India to access a wide range of digital services – especially e-commerce. The e-commerce sector is witnessing significant growth and is expected to grow to $350 billion by 2030. However, the Indian e-commerce market has become a monopoly, with Amazon and Flipkart controlling 60% of the market. There are limited opportunities for new and small sellers in the digital commerce space, unless they are associated with a well-established end-to-end service provider.

The Open Network for Digital Commerce (ONDC), a non-profit company, was launched by the government in December 2021 with the aim of creating a public infrastructure, decentralizing e-commerce, and combating monopolistic practices in the digital commerce space. There are three types of service providers in the ONDC network: buyer-side applications, seller-side applications, and logistics providers. ONDC promotes interoperability between these different components, allowing sellers and buyers to interact seamlessly across multiple platforms, which increases the reach of sellers and provides consumers with a wider range of products and services. Initiated as a pilot project in five cities in August 2022, it has gained significant traction over time. It currently operates in over 600 cities, has around six lakh sellers on board, and around 70% of orders come from tier-2 and tier-3 cities.

Unlike platforms like Amazon and Flipkart that charge hefty commissions ranging from 25% to 40%, ONDC does not charge any commission from sellers. However, the commission is charged by the Seller Network Providers (SNPs), which is usually between 10% and 15% of the selling price. Sellers have the flexibility to negotiate the commission with the seller’s SNP, allowing them to choose a reasonable rate. Apart from the commission, traditional platforms also charge other fees like preferential listing fees, which are not charged by the ONDC platform. This way, any listed seller will get discovered on the ONDC network, whereas in the case of traditional e-commerce platforms, preference is given to those who provide higher margins.

There are, however, some challenges with ONDC that need to be addressed. One of the key aspects of a successful e-commerce setup is the customer experience. The user touchpoints, from browsing the e-commerce app, placing an order, payment, checkout, and after-sales service, determine the willingness of customers to switch to any platform. ONDC currently relies on community support and third-party online dispute resolution platforms to handle disputes. Buyers and sellers can raise complaints through their apps, and these parties can coordinate to resolve the disputes. However, this approach carries inherent risks, such as potential malicious activity, negative customer experiences, delays in resolving disputes, and lack of ownership. Additionally, there are no clear guidelines on what to do if the network providers fail to resolve the disputes.

Another important aspect is to ensure strong consumer protection and data privacy regulations. The implementation of the Digital Data Protection Act (2023) is a step forward in this direction but it lacks detailed provisions. The Act does not address harm (financial losses, identity theft etc.) arising out of processing of personal data; it excludes processing of personal data by the government (central, state, local bodies and government undertakings), processing of data for research purposes and transfer of data outside India, except in certain countries. It is necessary to regulate such data processing and have clear guidelines on cases of data leakage and misuse.

ONDC is a pioneer in building and democratizing open network commerce at population scale. It is expected to bring synergy between different parties and have a significant impact on the digital growth chart of untapped enterprises. However, without the aforementioned controls and initiatives, the planned scale will be difficult to achieve. In order to build an ecosystem at population scale, it is very important to take some structural steps in the near future so that the participation, experience and outcome can be fruitful for all the participants involved.

The article was authored by Valbha Shakya, assistant professor at the Centre for Social and Economic Progress (CSEP), New Delhi.