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November 9, 2022

Open Network for Digital Commerce is Poised to Accelerate the Growth of MSMEs in India

    • November 9, 2022
    • By Team Kinara
    • < 1 mins read

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    India has one of the fastest-growing digital commerce spaces in the world, expected to reach a market size of close to $150 billion by 2025. This huge surge has been fuelled in part by the tech transformation which has been unfolding across the country for the past decade or so. The government has also added its support and impetus to the tech infrastructure in order to boost efficiency and ease of access. The goal is to create a shareable digital ecosystem and infrastructure that enables the delivery of accessible financial services to millions of people in the country.

    Digital commerce frameworks and open APIs implemented under the broader moniker of India Stack have the potential to redefine the way financial services are delivered across the country. As the landscape expands to include more aspects of digital infrastructure like UPI and Account Aggregators, let us explore the promise that Open Network Digital Commerce or ONDC holds for the MSMEs in the country.

    What is ONDC?

    Over time, India has developed a platform-centric model for e-commerce, with a few giants like Flipkart and Amazon dominating the space. Even as accessibility grows and customers across demographics and regions, including peri-urban and rural areas, log on to e-commerce platforms, hyperlocal businesses that can provide the same products and services are often overlooked.

    ONDC is an initiative by the government aimed at implementing and promoting open networks for the exchange of goods and services across the board, with a focus on small and local businesses. The community-led network has been created to establish an inclusive, open and reasonably competitive marketplace to counter the hyper-competition of the current scenario, which leaves small businesses in the lurch.

    What Purpose will ONDC serve?

    In the current scenario, the platform-centric model which is in place in the Indian digital economy ensures that large e-commerce marketplaces have end-to-end control over the customer journey, from seller on-boarding and customer acquisition, all the way to payment management and order fulfillment. The ONDC framework will be instrumental in unbundling these processes and breaking them down into microservices. These microservices can then be addressed individually, leveling the playing field for micro-small-and-medium enterprises (MSMEs) to step in and benefit from the availability of opportunities.

    ONDC is aimed at promoting open networks for all aspects of exchange of goods and services over digital or electronic networks. The network is designed to be based following open-sourced protocol, and use open-sourced methodology and specifications to democratize digital transactions and exchanges.

    The ONDC project supported by the Indian government to promote an open UPI-like architecture for the e-commerce industry. Think of it like this: What if there’s a shopping app that shows you products not just from sellers on the app itself but also from sellers on other platforms. And as a seller, what if there’s an app that allows you to list your products on multiple platforms rather than just the one you onboarded with. This is the system that ONDC wants to facilitate by creating protocols and network policies.
    The government believes that e-commerce in India is dominated by a few foreign-funded players (read: Amazon and Flipkart) to the detriment of sellers, and it wants ONDC to break this stranglehold.

    ONDC is expected to make e-Commerce more inclusive and accessible for consumers. Consumers can potentially discover any seller, product or service by using any compatible application or platform, thus increasing freedom of choice for consumers. It will enable the consumers to match demand with the nearest available supply. This would also give consumers the liberty to choose their preferred local businesses. Thus, ONDC would standardize operations, promote inclusion of local suppliers, drive efficiencies in logistics and lead to enhancement of value for consumers.

    As is essential for such frameworks, security and data privacy and confidentiality must be ensured for users of the platform. To address this, the Department for the Promotion of Industry and Internal Trade (DPIIT), which is part of the Ministry of Commerce and Industry, is in the process of building ONDC as a secure network designed to curb the existing digital monopolies and standardize the on-boarding of retailers on e-commerce sites, thus broadening their scope.

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    How does ONDC work?

    Like several aspects of India Stack, ONDC is still a work in progress and is expected to evolve going forwards. The foundations of the network will be based on open protocols, which can be used to manage every aspect of the supply chain across the economy. the entire chain of activities in exchange of goods and services, similar to hypertext transfer protocol for information exchange over internet, simple mail transfer protocol for exchange of emails and unified payments interface for payments.

    These open protocols would be used for establishing public digital infrastructure in the form of open registries and open network gateways to enable exchange of information between providers and consumers. Providers and consumers would be able to use any compatible application of their choice for exchange of information and carrying out transactions over ONDC. Thus, ONDC goes beyond the current platform-centric digital commerce model where the buyer and seller have to use the same platform or application to be digitally visible and do a business transaction.

    ONDC protocols would standardize various operations of MSMEs, like cataloging, inventory management, order management and order fulfillment. As a result of this, small businesses will be able to use any ONDC-compatible applications instead of being limited by specific platform-centric policies. This, in turn, will provide a multitude of options to MSMEs to be discoverable over the network and to conduct business on their own terms. It is also poised to encourage easy adoption of digital means of transaction by MSMEs that are currently not present on any digital commerce networks.

    The Open Network Revolution

    India has the second-fastest digitizing economy among the world's 17 leading economies. The government expects the digital economy to generate $1 trillion in value by 2025, with the majority of the opportunities coming from new digital ecosystems.

    At the heart of these ambitious plans is the India Stack, which refers to a set of APIs that lets governments, businesses, startups, and developers in the country use a unique digital infrastructure to speed digital transactions and data-led operations.

    ONDC is one of several initiatives by the government to build digital infrastructure that can be accessed by service providers and government departments and agencies to deliver seamless services to the population. The target is to create a backbone for a more presence-less, paperless and cashless economy. ONDC as an initiative, is specifically targeted at democratizing digital commerce by moving it from a platform-centric model to an open-network-based one. This facility is going to be made available for both goods and services across the board. In addition to ONDC, technology innovations due to India’s digital stack such as credit enablement through United payment interface (UPI) and account aggregator (AA), are poised to fundamentally reorder the supply chain of India.

    Changing the game for MSMEs

    ONDC is poised to make it easier for MSMEs to be discovered and to participate in the broader economy, driving financial inclusion and growth for these often overlooked businesses. Once a small business lists its products or services using the ONDC’s open protocol, the business can be discovered by consumers on e-commerce platforms that follow the same protocol. A consumer searching for the product can see the location of the seller and opt to buy from the neighborhood shop that can deliver faster compared to an e-commerce company. This may promote hyperlocal delivery of goods such as groceries, directly from sellers to consumers.

    The network offers several great advantages for MSMEs. It lowers entry barriers to promote competition and in turn market growth, leading to a democratization of the digital commerce space. This, in turn, will reduce channel costs for all players, including industry incumbents. Establishing a common seller registry, as the network aims to do, will help expand the seller base significantly. A common network will also mean that sellers will be able to carry their reputation with them, which will encourage them to provide a better customer experience overall.

    If the success of UPI is anything to go by, the successful implementation of ONDC promises to change the game for MSMEs by creating a cycle of growth as a result of successful networking. However, there are certain caveats to consider, including the importance of the participation of incumbents to drive adoption.

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    Hurdles Along the Way

    While ONDC holds immense promise for revolutionizing the supply chain and giving unprecedented opportunities to MSMEs, there are quite a few question marks surrounding its efficiency and long-term success. As industry experts have pointed out, ONDC is a complex ecosystem, and unlike UPI, it stands the chance to suffer from implementation woes as a result of this complexity.

    Another hurdle to consider is the fact that customers might not be willing to switch away from the incumbent e-commerce platforms that they consider advantageous or provide satisfactory services. Incumbents might not participate in the ONDC roll-out without incentives, having already established their strong platform-based presence, which allows them to largely call the shots.

    Add to this the fact that the terms of monetization of the platform have not been made very clear yet, and as a result, participants in the network might now be willing to make market development investments at the outset. There is a lack of clarity about how customer complaints and grievances will be addressed, and who will be held accountable. This might result in a disconnect between buyer and seller, further discouraging adoption. Further, an overall growth Many are of the opinion that there are barriers to the successful implementation of ONDC, and that it may take many years for the network to truly pick up momentum.

    Conclusion

    India is on the fast-track to digitization, and the government is in the process of strengthening efforts to build a digital ecosystem based on open network APIs. These are poised to bring the country into the tech age.

    As UPI disrupted the digital payments domain, ONDC holds the potential to affect a transformational change for the e-commerce space. The democratization of digital commerce, and a movement away from platform-based e-commerce giants monopolizing the space, is a promising prospect.

    It would be a huge advantage for MSMEs, who would be able to connect to the network easily, given lower entry barriers, and freely transact on their own terms. This could open doors to financial inclusion and economic growth for many small businesses. However, even though the open network revolution shows signs of changing the way business is done, there are some hurdles that might hold ONDC back. It remains to be seen how efficiently the implementation of the network is handled, and what kind of adoption and evolution will shape its future.

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    Written by
    Team Kinara
    • Tags
    • ONDC
    • MSME
    • Digital commerce
    • network for digital commerce
    • micro small and medium enterprises (MSMEs)
    • open network for digital commerce

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