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The Economics Of Open Network For Digital Commerce

The Open Network for Digital Commerce is expected to make e-commerce more inclusive and accessible for consumers and sellers.

<div class="paragraphs"><p>(Photo: Bruno Kelzer/Unsplash)</p></div>
(Photo: Bruno Kelzer/Unsplash)

The Open Network for Digital Commerce, touted to be the UPI of e-commerce, is expected to make online retail more inclusive, and more accessible for consumers and sellers.

It’s a network-centric model. Buyers and sellers can transact irrespective of the platforms or applications they use if the platforms and applications are connected to this open network. So, it doesn’t require the buyer and seller to use the same platform or application.

Network participants will charge their fees, either as a percentage or as a fixed fee, depending on the service they provide, and to whom they provide, Shireesh Joshi, chief business officer at ONDC, told BQ Prime.

Edited excerpts of the conversation:

While ONDC is a digital public good, how do each of the players in the network make money?

Network participants will make money, pretty much the way they do anywhere else. This is a commerce-enabler. So, whatever commerce takes place, they will charge their fees, either as a percentage or as a fixed fee, depending on the service they provide, and to whom they provide.

As and when people buy those services and avail of those services, they will pay a commission or a fixed fee. Some of them may also have a different model where the income is not derived from the transaction itself, but something else that sits on top of that. Those are all the various models, the idea is that the model is flexible. There is no set way by which they will do it.

The protocol created, allows that for whatever transaction has taken place, there is an opportunity for a fee, or a commission to be paid to all the parties that are involved in that transaction.

Because it’s an unbundled network, the buyer-side activities are done by a buyer application, the seller-side activities by seller application. If it’s a physical item, and it’s being shipped, then there is a logistics company also involved. So whatever money is being paid as a sum total of product plus delivery that the buyer has paid, the money needs to be shared between these three. Each will declare their charges before the checkout takes place. Each party will determine what pricing they want to charge, and what commission they want to charge that is viable for them.

What about the bank or payment gateways?

Those are gateway charges. Whoever in this network is collecting the money from the buyer, they will then have to pay whatever the gateway fees are based on what gateway they have installed.

Different gateways and different methods of payment have different charges. It depends on what payment tools they have enabled and what those charges are.

The payment part of it is doesn’t go through ONDC. That is going directly between the buyer and seller side applications and depending on the payment tools that they have enabled.

How is the fee or commission enabled?

The way it will work is that when a buyer is searching for a product, the buyer logs into their buyer application. It could be any kind of application, it doesn’t have to be an e-commerce application. It can be any application that has enabled the ONDC protocols to provide buyer side services. The buyer enters a product, then when the buyer application wants to get answers to that product, the buyer application will broadcast that to all the seller applications that have catalogues for that product. When they do the broadcast, they will do it along with their terms and conditions.

For instance, the terms and conditions could that when somebody is looking for an office chair, the buyer application will take a Rs 50 commission or a 3% commission, depending on preference.

The network will look through the registry, identify all vendors, catalogues of the office chairs, look at all the seller applications on which such catalogues are registered, and it will broadcast to all those seller applications. The seller applications will then look at their catalogue and sellers terms and conditions. For instance, a seller may have declared that they can pay up to 5% commission. If terms are compatible, it is a match.

This is not a human phone call. It's a machine to machine set of condition and matching. If it matches, then because of that match the details of that seller and that catalogue entry goes to the buyer. The buyer sees all the sellers, where the item matches what he or she is searching for, and where the terms of trade that have been agreed between the buyer and seller are compatible. In turn, that’s how it will take place.

Will larger sellers hold more sway?

In an open interoperable network, when all parties can see all parties, the size of the parties that are connecting does not matter.

Will sellers, at least maybe in initial stages, have to resort to heavy discounts like we often see on e-commerce sites, to attract buyers?

The context defines the behaviour. Behaviour is different when the world of e-commerce is defined by platforms, where both parties have to be in the platform, otherwise you can't do e-commerce. The entire focus, and the behaviour is to grab as many buyers and sellers as possible by whatever means possible. Obviously legal, of course, but gather as many buyers and sellers, because then once I have lots of them, I as a profit-making organisation can start earning more profit than if I had very few.

Because if you’re on my platform, you can only transact on my platform. So if I can raise to a large scale today, then I automatically create a barrier for entry for somebody else. And so there is a strategic advantage, a competitive advantage, and therefore it’s worthwhile investing in it. So the behaviour of pricing discounting to build a large base is driven by the context of closed spaces where you can't transact across.

The moment you have an open network, you don’t see that behaviour. In an open network, there is no benefit to any entity to expend effort, like discounting and deep discounting to attract the user. Because there is no binding factor to the user. In a platform, there is a binding factor.

On ONDC, the buyer can go to a different application, and buy the same thing. So the behaviour of discounting is of zero benefit in an open network. In fact, it will be detrimental to anybody to actually do such a discounting behaviour because they’ll get no business benefit for it. They get a business benefit in a closed platform, but in an open network, they will not get a benefit.

What are some of the secondary benefits? For instance, banks have picked up stakes in ONDC and that could help them understand and tap the financing opportunities for small vendors and MSMEs.

You have to separate the shareholder role, and the shareholder benefits from a participant role and participant benefit. Let’s say, I happen to be a shareholder in one of the large market places around the world, does that mean I have access to the data in that marketplace? Absolutely not.

Now let’s talk about banks in a participant role. That’s a completely different. You could have a bank that is not a shareholder, yet become a participant, and you could have a shareholder bank that is not interested in being a participant.

Banks can play multiple roles. And let’s start with one. Banks have retail users and corporate users. ONDC is an unbundled network. A bank can enable its users—whether individual or corporate users, and enable them to buy on the network. There’s a buyer side application they can develop, they can onboard their buyers.

Likewise, they can look at the merchants and the MSMEs and the enterprises that have accounts with them, they can offer to digitise their catalogues and enable those catalogues to be visible to the network.

So, in this fashion, banks could come both on the seller side, as well as on the buyer side, obviously, as separate solutions, and be able to facilitate ecommerce transaction.

The third role that banks can play is that the they can create financial products. So, just the way you can today buy a car or food delivery from a restaurant, you can potentially buy a financial product. And so someday, insurance products, loans, fixed deposits, these products will also be available. They are in fact in conversation with us and working with us to see how that category of products and services can be developed. So that’s one model that the banks can play.

Then banks can also play a role that is for the network participants, but not on the network. So they’re neither a participant, nor are they a seller of financial products, but they are providing financial services. For example, they could provide EMI services to a customer who wants to buy a large value item, they want to buy it on EMI. When they go to their buyer application and they hit checkout, they can get a six month EMI interest. Now that has nothing to do with the network, that’s a completely different product.

A very large part of the buyer market remains untapped because of all sorts of challenges, especially so in rural areas—like awareness. So post ONDC, how are some of these challenges going to be overcome?

Initially, awareness will be an issue. Now, a large part of the country is aware of buying online, it’s just that they may not do it often enough, because what they’re looking for is not available. Today, we estimate that the participation of digital commerce as a percentage of total commerce in the country is still in single digit percentages.

The existing e-commerce models tend to follow a certain predictable standard path. The goal is first to create scale and then to find solutions that work for something that is at scale. For example, you want to show top-selling items. I might not want the top-selling item. For instance, I might like the panipuri that’s made by the seller who’s down the street. So, scale is no longer important.

Now if I have a method by which I could discover that panipuri wala, the delivery mechanism could just simply be the morning newspaper delivery guy on a bicycle. He picks up the panipuri and delivers it to me. So now we’ve tapped into existing capacity that was sitting idle. Second, we’ve enabled people to discover providers in a different way than the scale method allows. So this, like this, there are many such solutions.

You’re creating an e-commerce transaction between two entities that are not part of the e-commerce today—like a bank or a social media platform.

Lastly, what are the timelines looking like?

We know ONDC is inevitable. We know it will happen at scale. But it’s hard to predict a precise date because a few factors can change it dramatically. But I think what can be said is that the contributors to confidence will keep increasing—the number of domains that are present, the number of seller options that whichever domains are live, the number of locations from which people can order.

Because it is new, the journey is not very predictable. But the milestones are predictable the sequence and the end state is predictable. So, what I feel very confident about, is a year from now in many places, shopping on e-commerce shopping ecommerce on ONDC will be fairly well accepted as an activity, and two years from now, we’ll have e-commerce solutions that we couldn’t even think of today.