How India is shaping the future of e-commerce

If it works, ONDC could fundamentally change the rules of the game for e-commerce and retail — potentially on a global scale — and herald a future of more open and competitive retail with less dominance by vertically integrated platforms

The future of open retail is taking shape in India as the nation rolls out the Open Network for Digital Commerce (ONDC) in 100 cities this month. Spearheaded by Infosys founder Nandan Nilekani, ONDC is a non-profit designed to create a level-playing field in online commerce. It puts tens of millions of kirana stores on a more even footing with online giants such as Amazon, Google, and Flipkart (a Walmart subsidiary). According to Reuters, Amazon and Flipkart control more than 60% of the Indian e-commerce market. ONDC caps referral commissions for platforms that send shoppers to a seller at 3%, a far cry from the roughly 30% cut that third-party sellers lose on the existing major e-commerce platforms.

Early reports from ONDC’s initial roll-out in four cities are positive. If it works, ONDC could fundamentally change the rules of the game for e-commerce and retail — potentially on a global scale — and herald a future of more open and competitive retail with less dominance by vertically integrated platforms. It could show United States (US) regulators how to take on monopolies. (Burhaan Kinu/HT PHOTO)

“We have a chance to start over and remake the digital world to be more fair and transparent for all participants,” says Nilekani. “With ONDC, we hope not only to create a level playing field for India and all the businesses operating there but also provide a glimpse for the whole world of how open commerce can drive positive non-zero-sum outcomes for business and society.”

Even mid-sized firms want ONDC. This is because the programme creates an open order book for purchase requests that any store on the network can respond to. As an open platform, allowing stores to respond to purchase enquiries, ONDC aims to create a digital foundation for e-commerce that incorporates inventory, logistics, and dispute resolution.

Early reports from ONDC’s initial roll-out in four cities are positive. If it works, ONDC could fundamentally change the rules of the game for e-commerce and retail — potentially on a global scale — and herald a future of more open and competitive retail with less dominance by vertically integrated platforms. It could show United States (US) regulators how to take on monopolies.

ONDC is not an application, an intermediary, or a specific piece of software. Rather, it is a set of specifications designed to foster open interchange and connections among shoppers, technology platforms and retailers. At its core, ONDC is an open network and set of open standards similar to the Universal Payments Interface (UPI).

Open standards are the hidden foundation of the US economic and technology infrastructure. They underpin open networks (such as the internet), in which a core set of technology standards enables interconnection between different systems. Effective open networks and standards foster competition and eliminate friction and barriers to entry.

According to Nilekani, ONDC aims to democratise digital commerce, replacing a platform-centric model (where the buyer and seller must use the same platform or application to transact) with an open network, allowing cross-platform and cross-application interaction and commerce. ONDC builds on the concept of open source, which has become the dominant format for enterprise software.

By contrast, e-commerce in the US, Europe, and India make platforms the arbiters and intermediaries. To compare prices or offers, an online shopper has to hop from one platform to another, creating difficulties in comparing similar products by vendor prices, shipping costs, and taxes.

Because ONDC functions as a set of standards, it will allow consumers to pick one of many platforms for shopping. Each platform will receive the same product, pricing, and availability information, based on one set of standards. ONDC may also unlock the ultimate killer app for kirana stores and local merchants: Proximity. As Amazon races toward same-day delivery and venture capitalists continue to bet big on short-window-delivery start-ups, the kirana stores already have less-than-an-hour commerce solved due to their location.

India is a natural laboratory to test ONDC. At over 80%, according to Nilekani, it has among the highest digital-finance participation rates in the world, driven by the adoption of Aadhaar that brought vast chunks of the population into the digital world. In addition, the government is pursuing a digitisation policy. ONDC aims to have 25% of all internal commerce online within two years. That’s triple the current online penetration rate of 8% of internal commerce. Supporters also believe that ONDC is necessary because it will create a fairer and more efficient foundation for commerce. ONDC may provide a smooth entry for kiranas, but ultimately all retailers will benefit. Homegrown e-commerce platforms such as Snapdeal are signing up for ONDC. Google, too, has indicated interest.

There are challenges and risks for ONDC. Even if it succeeds, its effect may not match its intent. Bringing the tens of millions of existing kirana stores onto the platform will require a massive, well-funded adoption campaign.

Amazon and Flipkart will continue to benefit from economies of scale that enable them to negotiate lower prices. Any move to restrict commerce that results in higher prices could spark a consumer backlash. And the large platforms may be the ones that benefit the most from ONDC. In the case of UPI, which was designed to provide an open standard for payments, Google Pay and Walmart’s PhonePe have grabbed a dominant share of the transaction volume. The government is looking at mechanisms to generate more competition, but this will be challenging without directly restricting user behaviour.

On the other hand, the combination of ONDC and UPI establishes a foundation for future competition that reduces barriers to entry. By open-sourcing India’s commercial underpinning, the two are setting the stage for the future of competition in which new entrants can challenge incumbents with greater ease.

For retailers and governments worldwide, ONDC provides a glimpse of what open retail might look like in practice. In the end, everyone may benefit through turbocharged e-commerce adoption and the creation of a larger global economic pie.

Vivek Wadhwa, Ismail Amla, and Alex Salkever are co-authors of a book on building billion-dollar businesses: From Incremental to Exponential: How Large Companies Can See the Future and Rethink Innovation. The views expressed are personal (A version of this article first appeared on Fortune.com)