A UPI MOMENT FOR E-COMMERCE
India is poised to launch another open source protocol like UPI which will disrupt digital commerce by democratising it. EPISODE #57
Dear Reader,
A very Happy Monday to you.
Last week the StartUp India programme dwelled in detail on innovation. It also showcased a detailed preview of the Open Network for Digital Commerce (ONDC) project. The ONDC, which too is based on an open sourced protocol like the Unified Payments Interface or UPI, promises to revolutionise the business of e-commerce.
Not only will this new paradigm challenge the hegemony of the big platforms, it will also democratise the business by solving for the existing asymmetry of access and information for buyers as well as sellers.
The timing of the launch is significant as India is poised to onboard its next 500 million—more than the population of the United States—whose preferred language is not English. As they migrate online their user experience or UX will be deeply influenced by the trust quotient generated by platforms. Hence a democratised space for digital commerce where discovery is equitable—ensuring equal treatment to the small and large retailer—is critical. So this week I unpack the ONDC phenomenon.
The cover picture this week is a mural I snapped at a public park in New Delhi. I am very taken up with the black and white mode on my cell phone. I believe this medium with its inherent sharpness offers a special visual treat. Hope you enjoy it too.
A big shoutout to Gautam, Vandana and Rajeev for your informed responses, appreciation and amplification for last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
REIMAGINING E-COMMERCE
India’s audacious plan to reimagine digital commerce through the Open Network for Digital Commerce (ONDC) advanced another step with its incorporation as a private, not-for-profit company under Section 8 of the Companies Act on 30 December. This was shared by officials at a special session last week to showcase ONDC at the Innovation Week hosted by StartUp India under the aegis of the Department for Promotion of Industry and Trade (DPIIT).
The ONDC initiative seeks to hit the reset on digital commerce. Similar to how the open protocol Unified Payments Interface (UPI) completely upended the payments business by allowing for inter-operability—wherein we can pay each other in real time using any wallet as long as each of us is on the UPI network—at an extremely low transaction cost, the ONDC seeks to revisit the way sellers and buyers connect with each other in digital commerce.
At the moment, these cohorts engage on platforms—which are closed and dominated by few. Of the nine platforms in the world with billion-plus users, five operate from the United States and the balance from China. Unlike these private platforms, ONDC promises to be a public network that will connect the existing platforms—very similar to the way UPI connected wallets.
The ONDC is not a rival platform. Instead it is an open network protocol developed on a open digital ecosystems (ODE) which will amplify the power of these otherwise fragmented platforms by linking them.
It does so by eliminating the need for a central intermediary with proprietary rights—which is what closed platforms do at the moment. Implicit in this is the thought that no single platform can solve for all digital commerce; not only will this risk creating a monopoly it will in all likelihood be inefficient.
The underlying concept is very similar to building a highway with open access. Once connectivity is established you can move whatever you want on them—either passengers or goods. Imagine the value it generates along the way—as services spring up to address your needs en route—besides the origin and destination. The new digital rails of the Indian economy are very similar in their scope in maximising public good and innovation.
Even better, the ONDC will undo the hegemony of the existing platforms by making them interoperable—something that will also unbundle the value chain and thereby incentivise innovation, like it happened with FinTech after the advent of UPI. Further, by offering both buyers and sellers the choice of a platform it will also democratise the business of digital commerce.
The timing of the ONDC launch is hugely significant because India is poised to undertake its next journey on the Internet by onboarding the next half a billion (NHB) and give them access to the Internet for the first time. Almost all of them will do so through their mobile phone.
In a post-Jio world (the launch of Jio and the effect it has had on competition has dramatically lowered the price of data to the lowest in the world) the price of both the smart phone and data have dropped sharply making them more affordable. Simultaneously the union government has initiated action to string 664,369 villages on an optical fibre network by 2023. So the onboarding of the NHB is imminent.
The NHB onboarding however will depend crucially on the comfort factor—especially with respect to the trust quotient in online transactions. Not only will their UX (user experience) differ, their discovery process too will be different.
This is why the promise of ONDC in solving for the asymmetry of information and access that plagues existing platforms—also the reason as to why they are attracting the scrutiny of regulators not just in India but in almost every other country—is very fortuitous.
Why ONDC?
According to Nandan Nilekani, who founded Aadhar and is a key driving force of the project along with several others, the time is ripe for the launch of ONDC.
“It took us 9-10 years to give a billion people their Aadhar (the unique 12-digit identity). It took us five years from launch to get UPI to 4 billion (transactions in December 2021). But ONDC will happen much faster because we know the journey. We know how to make this happen: sequence the tasks, create the coalitions, provide the incentives. Therefore we will do it faster than any other transformation that we have done,” he said at one of the several events hosted last week by DPIIT.
The ONDC architecture is similar to that already adopted for UPI—it is based on an ODE. This in turn is based on public digital assets (PDAs), which are used as building blocks to create customised, open and innovative digital solutions—like Aadhar (1 billion plus), UPI (logged 4 billion transactions in December) and Cowin (1.60 billion jabs)—at scale by leveraging their compounding power.
The underlying technology in these PDAs is the India Stack. It is the technology base which combines a set of Application Programming Interface (APIs)—the tech bridge that allows two software applications to talk to each other—permitting businesses, government or any developer to tap into the digital infrastructure built on the foundation of Aadhaar.
In the case of UPI it is able to do so by leveraging four pillars:
Presence-less (digitally access and verification using Aadhaar);
Paper-less (digital records allowing portability);
Cash-less (one interface allowing for inter-operable payments between bank accounts and wallets);
Consent (permits entities to access an individual’s data).
In fact last Monday the Economic Times published my piece arguing in detail as to how the PDAs are the new commanding heights of the Indian economy. I feel chuffed that Varad Pande, among the key people developing ODEs, gave me a shout out on Twitter.
If you wish to read the piece please click the link embedded in the tweet shared below.
The existing structure of digital commerce in India has a tendency to exclude, largely because they operate in silos. Data obsessed platforms are loath to talk to each other as this is often their IP. Another problem is that most of this data is often harvested without permission—and with the data security law still a work in progress there is no regulatory scrutiny.
Addressing one of the sessions last week an ONDC official shared some revealing statistics:
Only 15,000 of the 12 million kirana stores are e-commerce enabled;
E-commerce, though far more efficient and cost effective, accounts for only 4.3% of total retail trade;
Besides information asymmetry, smaller towns and rural India have very limited access to digital commerce.
As they explained, the ONDC, which is orchestrating an open network, will enable these platforms to talk to each other and bridge this gap. So not just buyers, but even sellers will be visible to each other online regardless of what platform they use (very similar to how UPI has connected the various wallets). Basically discovery will be democratised.
Sharing a slide below from the presentation which visually explains the ONDC play book.
The backend of the ONDC is based on the Beckn Protocol (another PDA) which allows for the creation of an open and inclusive network of sellers and buyers to execute e-commerce orders. And the thing is that ONDC can potentially collapse all digital commerce into one public network. So it is not just about buying goods, it can be about a transaction involving a restaurant take-out or a salon. In short it extends to the entire market place.
Sharing a short video below which visually details the scope. As a regular readers you may recall I had shared this recently while writing about PDAs.
The Gains
Now that you know how the ONDC will work it is a good moment to recap the gains and dwell on some concerns accruing from this public protocol.
First, the very foundation of ONDC is built on PDAs. This unbundling of a process through an open protocol creates opportunities for innovation. Very similar to how so many startups have emerged to exploit the opportunity thrown up by the digital rails driving UPI.
Second, the inbuilt democratisation solves for two problems: information and access asymmetry. It gives both sellers and buyers choice. And like I mentioned earlier this will be key when we onboard the NHB.
Third, the digital footprint of both buyers and sellers can be harvested (with their permission of course) to access easier credit.
However, regardless of how spectacular the promise, this project is not without downsides. The good news is that these are generic to all ODE based projects like Aadhar, UPI, Cowin and so on. And can therefore be addressed by a common solution.
And in this the biggest concern is about the privacy of data. Yes, a new law is in the works, especially after a joint Parliamentary committee signed off on it. Yet the point is that till this is in place individuals will be vulnerable. Good news is that this is a question of when and not how.
Second, yes in theory the model is democratic. But we know nothing is ever really equal in real life. For example in the case of UPI, bulk of the business has been cornered by two-three players. This could be due to the fact that the pie is still very small. It is also how market forces operate. My limited point is that it is always best to be aware of the risks, rather than flying blind.
In the final analysis it is clear that the gains from ONDC far outweigh the risks. As they say the ‘Ayes have it’.
Recommended Viewing
Among the events unveiled last week as part of the StartUP week showcasing the ONDC was this talk by Nandan Nilekani. I have used segments for today’s piece.
Even then I would recommend you should watch his talk. Nilekani sets out the ONDC vision as only he can.
Sharing a teaser:
“In the case of e-commerce, there will be multiple players. And we have to create a way for the small entrepreneur, small merchant, small seller to compete in this new e-commerce world in equitable ways.
So if we are going to increase the proportion of e-commerce to total commerce to even 20% of our retail business, we are talking about $200 million, and therefore, we owe it to our millions of sellers and small retailers to give them an easy way to participate in this new emerging, high growth digital commerce.”
Always a treat to listen to Nilekani.
Till we meet again next week. Stay safe.
Wonderful. Fairytale like. What could go wrong?
This is perhaps the road to reducing distances between buyers and sellers. The long term implications are of easier and faster accessibility for trading opportunities and may not be to the advantage of intermediaries. This will have far reaching ramifications in both domestic and international business. Thanks for sharing and updating us Anil. Keep enlightening us.