“The limit of ONDC (Open Network for Digital Commerce) is the limit of our own imagination,” says Gopal Srinivasan, Chairman and MD of TVS Capital. His words never rang truer than when Kudumbashree, a Kerala government-supported organisation of women’s neighbourhood groups, joined the initiative this March.

For the first time in its 25 years of existence, women entrepreneurs among Kudumbashree’s 4.5 million members will have their products available for purchase online across India. The integration of organisations like Kudumbashree into ONDC is a natural fit for its core value—address the inadequacies of India’s digital commerce ecosystem and establish a level-playing field for small-scale vendors to thrive.

Look at any large public good project. It takes time for social transformation to happen... What we are doing is priming of the pump; it will grow from there naturally

T. Koshy
Chief executive Officer
ONDC

“Everybody is excited about its possibilities,” says a visibly charged-up T. Koshy, CEO of ONDC, during an hour-long interview with BT at its new August Kranti Marg office in south Delhi. “When UPI was launched, everyone said it is a developing country problem. Today, everyone accepts it is the best in the world. When it comes to digital commerce, the market concentration and associated practices which are detrimental to the industry in general and small industry in particular, are a problem globally.” A veteran technocrat, the 62-year-old Koshy has worked on several digital infrastructure initiatives such as National Securities Depository Limited (NSDL) and Aadhaar, besides having a decade-long stint with consulting biggie EY.

While word on the street is that ONDC wants to shake things up and take on the big dogs of e-commerce, people behind it see it more like a massive digital party where buyers, sellers and logistics providers can all hang out and do business together. “I see ONDC as a force of inclusion,” says Nandan Nilekani, Co-founder and Chairman of IT services major Infosys, and also a member of ONDC’s advisory council, adding that a bulk of India’s retail is with small retail establishments, and while modern retail and large e-commerce players can leverage digital capability, small players cannot. “It is not about him digitising his shop. Rather, it is about participating in an ecosystem that ONDC will enable. Everybody can participate equally in the e-commerce game and that is the value,” says Nilekani, adding that the value of ONDC lies in making all of commerce, e-commerce.

That is good news for both sellers and customers in India’s estimated $75-billion e-commerce market, that has the potential to reach $200 billion by 2026, according to InGovern Research Services. While ONDC gives small merchants who can’t afford to be on marketplaces like Amazon and Flipkart a platform to sell their wares, and access to customers they simply can’t reach, it brings a variety of goods and services to customers in areas not served by the biggies.

What began as a pilot project in 2021 with one buyer app, five seller apps and two logistics partners has grown into 36 network participants (buyer apps, seller apps and logistics players put together) and about 300 at various stages of integration. For the uninitiated, ‘buyer apps’ are consumer-facing apps that connect buyers with sellers; and ‘seller apps’ are designed for merchants and service providers to list their offerings on the network. (See chart ‘The Burger Chronicles’ to understand how ONDC works.)

I see ONDC as a force of inclusion... It is not about him [small retail establishment] digitising his shop. Rather, it is about participating in an ecosystem that ONDCwill enable

Nandan Nilekani
Co-founder and Chairman
Infosys

The network has around 26,000 merchants on board currently, and has expanded to nearly 200 cities since its beta launch in September 2022. Product categories, too, have grown beyond just groceries and food to fashion, home decor, beauty and personal care, and electronics. Mobility and several other categories are being integrated as well. As recently as March 23, ONDC added Bengaluru-based auto booking app Namma Yatri to its network.

Happy beginnings. A possible happy outcome at the end of a long journey. But a decidedly challenging middle that, if not tackled with assurance, might delay the scale-up and success of what is surely a great idea.

The challenging middle begins with order numbers, which are worryingly low—hovering around a couple of hundred a day. By end-March 2023, which is when this story will reach you, ONDC says it will clock 5,000 orders per day. While ONDC officials are confident of meeting the target, other stakeholders BT spoke with are sceptical. It’s not difficult to gauge why. ONDC’s numbers pale in comparison to popular e-commerce marketplaces Amazon and Flipkart, which clock an estimated 2.5 million orders per day, according to industry observers. Of course, the business models are not exactly the same. ONDC is less a marketplace like Amazon or Flipkart, and more a gateway for consumers to reach sellers that the two marketplaces don’t have, and even reach Amazon and Flipkart themselves, provided they join up.

Subathraa Vasan, Founder of Coimbatore-headquartered PVR Foods (not related to PVR Cinemas), who joined ONDC in early 2022, had told BT last September that she “jumped on to ONDC” on hearing the concept because the exorbitant commissions on Flipkart and Amazon were limiting her entrepreneurial dreams. Running a millet-based food products business, Vasan says the lack of awareness of the network is crushing her hopes. “People are yet to know about ONDC,” she says. “My expectation was that it will pick up, but it’s very slow. To change buying behaviours, marketing for ONDC is required. We are trying to spread the word. It is a great initiative; it will be a real boon only when sales pick up.”

Other early merchants, too, express disappointment. They are yet to see any signs of the promised benefits of discoverability and price advantages, but they remain hopeful. As Srinivasan of TVS points out, ONDC’s potential for revolutionising the industry is immense, but the incentives for customers to engage with it are still uncertain. “For us [merchants], it is about getting sales,” says Aadil Shah, Co-founder of digital-first ayurvedic brand AADAR. “Honestly, we haven’t found much yet. Marketplaces have skin in the game, so they will ensure you get orders. In ONDC, I don’t know who the stakeholders are and what my controls are. We are a digital brand, yet we aren’t able to figure it out. Now think of the plight of a smaller kirana owner from a Tier III city.” Shah plans to stick on with ONDC, though.

ONDC has the ability to identify and resolve the challenges that come in the way of digitisation of small sellers and enables them to access a national customer base unlike before

Sanjeev Barnwal
Founder and CTO
Meesho

Tackling complex network participant language and structure in an open network requires patience, says Dilip Vamanan, Co-founder of SellerApp, an e-commerce seller-enablement firm. “ONDC started with a massive mission of building an e-commerce platform in less than three years,” he says. “But traditionally, even marketplaces are built in 15-20 years... The complexities were not really factored in when ONDC started.”

A segment of the ecosystem points fingers at Paytm, which was the sole buyer app for a significant period, for the slow start. The ONDC section remains quite low on the app’s homepage, and the interface, search and overall buying experience are far from ideal. “The company itself has been going through major pivots and focus shifts; ONDC must be a low priority for them,” says the founder of an e-commerce firm who wishes to remain anonymous.

However, as per insiders familiar with the early days of ONDC, Paytm Founder Vijay Shekhar Sharma was the only significant player who stepped forward to join as a buyer app, while others adopted a more cautious “wait-and-see” approach. “Vijay promised to be there on Day One, and said ‘I’ll have a minimal viable product at first and when I have enough merchants, I’ll start advertising’. He was instrumental to this platform being created by virtue of agreeing to come on from Day One,” says a person who was part of ONDC’s early integrations. A Paytm Mall spokesperson tells BT, without giving specifics: “We believe ONDC is going to democratise online shopping in the country and further boost the digital economy by connecting small businesses directly with buyers. As early adopters, we have seen very encouraging traction.”

While Paytm’s ONDC interface has its fair share of challenges, there are bigger fish to fry when it comes to fixing buyer platforms. For instance, buyer applications need to woo their existing customers for services they’re not typically known for. And that takes some serious marketing mojo. Take Meesho, which is pretty much the go-to for small-value fashion products in smaller towns. But when it comes to food and groceries, which is what ONDC launched with, the adoption hasn’t quite taken off yet. According to the company, this might slow down the scaling-up process. “We have observed that there is a natural affinity for fashion brands and products rather than F&B in Tier II cities and beyond, which typically form a significant portion of Meesho’s user base,” says Sanjeev Barnwal, Founder and CTO at Meesho. “Unlike metro cities, the adoption of online grocery shopping is yet to pick up pace in Tier II and smaller towns. ”

Amar Shankar, Partner for Government and Public Sector Consulting at EY India, says consumer campaigns are necessary to promote the network’s value proposition. “Each buyer app has its own go-to-market strategy. However, consumers need to be aware of the ONDC value proposition as well—more choice, the ability to transact with nearby favourite mom-and-pop stores, and having single-point access to the seller universe across the country,” he says.

In large cities, 85 per cent of consumers do their discovery phase online. If they believe that I can go to ONDC and check what’s available, ONDC would have done a great job

Kumar Rajagopalan
CEO
Retailers Association of India

These teething challenges do not take away from the promise of ONDC. The entry of Meesho saw merchants reporting an increase in order volumes. With 80 per cent of its 140 million annually transacting customers coming from Tier II+ cities, the SoftBank-backed company has a strong use case to be on the network.

However, the real game-changer is expected to be PhonePe’s arrival, which industry experts say will provide the much-needed impetus for growth in the network. PhonePe is taking a nuanced approach. With a dedicated buyer app, the Walmart-owned company will have a special focus on hyperlocal, starting with groceries in Bengaluru and gradually adding additional categories, including electronics. As per people in the know, the company aims to hit five-digit order volume in two months from launch, which is expected to happen anytime now. PhonePe declined to participate in this story.

PhonePe claims to have 440 million registered users, which means one in four Indians are now on the app. It has also digitised approximately 35 million offline merchants. “There is a massive incentive for them [PhonePe], because the cost to do business is not there and they already have the customer,” says Srinivasan, whose VC firm is one of the investors in PhonePe’s ongoing $1-billion fundraising. “They have already solved on the credit side. Now they have to change behaviour.”

While PhonePe focusses on urban hyperlocal, seller and buyer apps like eSamudaay and Spice Money, respectively, are taking ONDC to the masses. eSamudaay offers easy-to-use tools for local entrepreneurs through its District Digital Economy programme, which enables merchants to do local-to-local, global-to-local and local-to-global e-commerce transactions. “True democratisation of digital commerce is achieved when the smallest seller is able to participate in the larger scheme of things without losing autonomy,” says Anup Pai, Co-founder and CEO of eSamudaay. “For that, we need to get the smallest of producers activated on the digital network and be able to compete on the strength of his or her product.”

Spice Money is testing out bulk buying opportunities for its 1.2 million rural entrepreneur-borrowers who can purchase supplies from anywhere through ONDC. It also plans to launch a seller app on the network to give wider buyer access to small manufacturers that are currently limited by their distribution capabilities. “These are huge problem statements in rural India,” says Sanjeev Kumar, Co-founder, Executive Director & CEO of Spice Money. “ONDC is a large opportunity for us because it is a commerce opportunity with embedded finance.”

Snapdeal, which recently launched on ONDC as a seller app, says it is receiving orders from smaller towns such as Ajmer, Gurdaspur, Aligarh, Indore, Kakinada, and Amravati. “Enabling India’s existing retail participants and sellers, especially MSMEs, to embrace the online opportunity is the best way for India to reap the digital dividend for the largest section of society,” says Himanshu Chakrawarti, CEO of Snapdeal Marketplace.

For ITC, which makes products for everyday consumption at all price points, a network that allows universal access for buyers to our products is a great opportunity

B. Sumant
Executive Director
ITC

ONDC expects a hockey-stick growth once these consumer tech platforms iron out the operational creases. “When PhonePe picks up pace, Paytm fixes its issues and Meesho gets up to speed, word will spread like wildfire and everybody will jump in,” says an e-commerce veteran. “Existing marketplaces will get on the network because you can’t be caught napping.”

However, leading marketplaces Amazon and Flipkart have made no moves to join ONDC yet. They see the unbundled network as a suboptimal solution, while suspicion of an ulterior motive behind the move taints their perception. They feel the government wants to “kill marketplaces”, which is against the ethos of doing business in a democracy. “The message that the government and bureaucrats are sending out is that their intention is to control these two players [Flipkart and Amazon]; they want to kill the marketplaces,” says a senior executive with one of these firms who wishes to remain anonymous. “We should remember that they are taking such an extreme view when the e-commerce market is only 6 per cent of overall retail.” The executive further adds that since Flipkart and Amazon are not inventory-based businesses, sellers are not tied to them and are free to go to anywhere, including ONDC. “Therefore, it is strange to ask a marketplace to bring its sellers to ONDC. It is basically asking the marketplaces to disband their business models,” the executive says.

The upper management of both Amazon and Flipkart are closely monitoring ONDC’s progress, but remain apprehensive about its operational efficiency and RoI potential. Their doubts revolve around talent acquisition, data ownership, order processing, and the ability to seamlessly integrate these disparate elements to create a frictionless transaction. These companies have invested billions of dollars in building an infra and tech stack to create a large pool of sellers and buyers, and sharing that with an open network is the last thing they want to do. “If the government’s idea is to create an alternative to these platforms and create competition, why are they asking the companies to join the platform?” is the pointed query of another executive at a marketplace. “You are asking to put all my sellers on your network… it is only saying ‘come and annihilate and destroy yourself, then we will assimilate you fully’.” For now, the logistics services of Flipkart and Amazon have joined ONDC, and industry observers tell BT that would be it for the foreseeable future.

Shireesh Joshi, Chief Business Officer at ONDC, hopes when the network achieves significant scale, existing marketplaces will join the bandwagon. Currently, marketplaces are a full system, aggregating all the various commissions under a single bucket because they manage all the parts. ONDC mandates existing marketplaces to join both as a buyer and a seller application. It doesn’t want them to take the benefit of one part and not contribute to the other. “Instead of earning all that money in one place, they will earn in three places across buyer, seller and logistics sides. The sum of those three most likely will not be at the level at which it is today for them,” says Joshi. “On the positive side, you have an opportunity to help your customers access a larger selection of products, and your sellers access a larger set of buyers. There is an opportunity to compensate for whatever drop in commission they suffer by accessing a much larger pool of transactions.”

Between the buyer applications collectively, ONDC currently has more than 50 million ‘potential’ buyers. The hypothesis is that as more buyer applications go live, its buyer pool will grow and sellers registered on existing marketplaces may not wait for them to join ONDC. They would join anyway. So would their customer base who may find better price and selection on the network.

However, that is still a distant reality. Established players like Amazon and Flipkart see lakhs of orders daily. As per consulting firm Redseer, 75-80 million shoppers placed orders just in the first week of season sales (between September 22 and October 23 of 2022). And during the entire one-month-long festive season, 115-125 million shoppers placed orders across platforms, resulting in online goods worth Rs 76,000 crore being sold. ONDC needs to create a much larger pool of sellers and increase order volumes by several folds to even begin imagining seller-buyer migration from marketplaces.

ONDC officials say they understand the challenges, and the team is pursuing a structured approach to integrate a wide range of participants, including large corporations as well as the 120 million kirana stores across the country. Both have unique challenges.

Consumers need to know the ONDC value proposition— more choice, the ability to transact with nearby mom-and-pop stores, and single-point access to the seller universe across the country

Amar Shankar
Partner
Government and Public Sector Consulting
EY India

ONDC has set up a dedicated team, under the guidance of Harishankar K., former Kimberly-Clark and Unilever executive, to work with the industry to help them fathom ONDC’s transformational possibilities and persuade the top management to make strategic changes. Some large FMCG firms including ITC, HUL, Nivea and Dabur are being integrated into the network currently. “For FMCG companies like ITC, which make products for everyday consumption at all price points for all sections of society, a network that allows universal access for buyers to our products is a great opportunity,” says B. Sumant, Executive Director at ITC. “To leverage this opportunity, it is essential that we help ONDC onboard as many retailers as possible and ensure that the retailers have the right assortment relevant to their customers.”

On the other end, the seller apps are aggressively on-boarding small merchants and ONDC is building dedicated internal teams to help them on the sales, operations and technical fronts. It is also working with the MSME ministry and various government agencies like SIDBI and NABARD to leverage their large base and machinery to on-board different sections of merchants. ONDC has also launched UP One District One Product (UP-ODOP) on the platform. It is providing incentives to sellers to persuade their physical world customers to order online. Kumar Rajagopalan, CEO of Retailers Association of India, says ONDC will make e-commerce truly omni-channel for sellers and customers. “The success of ONDC lies in inclusivity. The consumer will make or break it. Today, at least in large cities, 85 per cent of consumers do their discovery phase online. If 85 per cent believe that I can go to ONDC and check what’s available, I think they would have done a great job,” he says.

ONDC understands a lot more work needs to be done on the seller side. Version 1 was about building the protocol and proving that it is possible to interconnect these various elements to achieve an unbundled and interoperable transaction. Now the focus shifts to establishing standard operational behaviours among sellers and helping streamline implementation challenges including inventory management, cataloguing and packaging.

The good part is that, despite low volumes, there is a definite pick-up in transactions. “Earlier, it used to take time [for merchants] to accept an order. Now I have sellers accepting and getting it packed in a matter of minutes,” says SellerApp’s Vamanan. “We know that it takes some time for this behavioural change to happen, but it is happening for a good percentage of sellers, much faster.”

ONDC feels the tipping point will arrive when no participant will need the network’s assistance in manoeuvring digital commerce. “They will be doing it all by themselves. A farmer will get another farmer, a weaver will get another weaver, and a home cook will get another home cook. They will tell each other. That is when it will take off. That’s the tipping point,” says Joshi. Koshy adds that ONDC’s role is to help this new system jump start, and then it will feed on its own. “Look at any large public good project. It takes time for social transformation to happen—we are talking about three to five years. What we are doing is priming of the pump; it will grow from there naturally. That’s the beauty of an open network,” he says.

By laying the foundation for an open platform that prioritises small merchants and streamlines the digital commerce experience, ONDC is creating the engine to drive e-commerce in India towards a more equitable, fair-competition era. If it succeeds, it will give the likes of Kudumbashree and the neighbourhood kirana store a true level-playing field against the giants of modern retail and the digital marketplaces.