Is ONDC really the UPI of e-commerce?

Until companies like Swiggy, Zomato, BigBasket and other e-commerce platforms begin to make money hand over fist, there isn’t probably an uneven playing field. (S. Sudarshan/Mint)
Until companies like Swiggy, Zomato, BigBasket and other e-commerce platforms begin to make money hand over fist, there isn’t probably an uneven playing field. (S. Sudarshan/Mint)


  • Though both platforms have superficial similarities, UPI didn't have to contend with an existing monopoly to achieve runaway success in digital payments

Bengaluru: Everyone’s Commerce," the website of the Open Network for Digital Commerce (ONDC), tells us when we log on. “Experience India’s biggest e-commerce revolution!" another page on the site states. “Purchase products or services from a huge catalogue of sellers across India. Find your local grocery, apparel, or utility shops online".

ONDC, set up as a non-profit company, is a network that lets sellers display their products and services across all participating apps and platforms. It uses open specifications and protocols that would standardize operations like cataloguing, inventory management, and order fulfilment. The argument is that this would offer an alternative to large platforms with ‘monopolistic power’ by providing an interoperable decentralized network that would place more power in the hands of the small sellers and give better choices to customers. Today, there are over 35,000 sellers on the marketplace and 38 lakh products.

While the company was incorporated on the last day of the calendar year 2022, it was in the works for at least a year prior to that. As per a Reuters report of May 2023, ONDC aims to raise the share of e-commerce from nearly 8% to 25% in the next two years. And like the website sums up in two words, one of the many stated goals of ONDC is to make e-commerce more inclusive, for consumers as well as the smaller suppliers.

With the two architects of Aadhaar—Nandan Nilekani and R.S. Sharma—part of the nine-member advisory council, there can be little doubt about either the quality of the idea or the execution. The success of ONDC would be a matter of pride for the nation.

With the runaway success of Unified Payments Interface (UPI), the hype around ONDC is quite understandable. Some have even used the metaphor ‘e-commerce’s UPI moment’. However, the two are as different as chalk and cheese. And there are some questions both about the problem that ONDC is trying to solve and the efficacy of its solution. Mint explains:

Is the metaphor simplistic?

Payments, especially domestic bank transfers, are far less nuanced than e-commerce, and success in the former does not automatically assure success in the latter. Historically and culturally, society in India has looked down upon lifestyles supported by borrowed money. Hence, debit cards in India even today far outnumber credit cards to the tune of 10 to one. Mint, in April, reported that in 2022, less than 9% of all the digital payments by value ( 149.5 trillion) were made through credit cards, and the balance 91% were through UPI, debit cards and other pre-paid instruments. And UPI contributed to a whopping 84%. Before the launch of UPI in October 2016, all debit-based transactions were through a combination of cash exchange, online bank transfers, debit cards, and mock credit cards (credit cards that were really used as debit cards).

Therefore, the UPI protocols, created by the National Payments Corporation of India (NPCI), merely leveraged the ubiquity of smartphones and growing internet penetration to reduce friction and enable all kinds of non-credit transactions via smartphones with an extremely simple user interface. UPI was not targeting the customer segment that cared for credit.

So, if the metaphor of the ‘UPI moment’ in the context of ONDC is about democratizing online commerce by providing technology to the small players, one that would enable them to compete with the big daddies of e-commerce on a level playing field, then that metaphor is incorrect because UPI did no such thing. In non-credit payments, there wasn’t any big daddy with monopoly power that UPI checkmated.

E-platform monopoly?

One of capitalism’s most long-standing dilemmas has been about balancing the benefits that competitive forces in a free market unleash with the monopolistic power an unbridled free market could create.

It is easy to view platforms like Swiggy and Zomato as some sort of ruthless profiteering companies exploiting their duopoly power to create super-profits for themselves. The commissions they charge from restaurants are viewed as exploitative and prices they charge customers are steep. Yet, for the fiscal year 2022, Swiggy reported a net loss of 3,629 crore (more than double the loss of 1,617 crore reported in fiscal year 2021), and Zomato reported a loss of nearly 1,100 crore in the same period. So, in spite of all the purported privileges and power that come with a duopoly, far from making a super-profit, these companies are struggling to keep their head above water and there are serious questions as to whether the lack of profitability is merely a temporary phenomenon or is symptomatic of a more fundamental question about the viability of the business model.

One of the accusations that several well-funded e-commerce companies have had to contend with has been that they have used easy access to capital to build unsustainable and unprofitable businesses by offering artificially low prices to consumers and higher earnings for suppliers. And now, when these companies are trying hard to reduce cash burn and become sustainable, they are accused of being exploitative and monopolistic even when there are no definite indications that they will ever be hugely profitable businesses.

Good marketplaces?

A pure marketplace relies on the two parties on the platform—the buyer and the seller—to execute a deal. The marketplace merely charges a small commission for facilitating the deal (small probably compared to what a platform might charge). The problem with pure play marketplaces has always been that customer experience is inconsistent because of a lack of standardization across suppliers on various aspects of a transaction like pricing, payment terms, logistics, packaging, service levels, returns, resolution of customer complaints, etc. For all these very reasons, businesses like Amazon that started off as marketplaces, eventually pivoted to a ‘full-stack model’ or into a platform, where they standardized many of these aspects of a transaction and through continuous monitoring and audits ensured compliance. Besides Amazon, other companies like Urban Company also started off as a marketplace but pivoted to a full-stack model.

While companies like Amazon made this shift, they discovered what many other physical retail chains had discovered much earlier, namely why sell someone else’s products when you can sell your own white-labelled products. This evolution was not induced by a desire to create super-profits for themselves through exploitative practices but was in response to the fundamental flaws of a pure play marketplace. Similarly, in grocery, too, the initial fad with asset-light models (a different term for marketplaces) died quickly because the asset-light models did not address the fundamental customer requirement of avoiding a visit to a physical store. This fundamental flaw in the marketplace model resulted in the inventory-led model (platform), like that of BigBasket, emerging as the winning model.

So, if the migration from marketplaces to platforms was in response to one of the fundamental problems of a marketplace, the reversal to a marketplace will bring back all the problems that were inherent in that model. Every problem has multiple solutions. When you finally pick the best solution after evaluating all the pros and cons, you have accepted to live with the downsides of the solution you have finally chosen, because you know that in balance, this solution has more pros than cons. If after experiencing the downsides of the chosen solution, you begin to believe you should switch to the other alternative, you are being fickle.

A level playing field?

Until companies like Swiggy, Zomato, BigBasket and the others begin to make money hand over fist, there isn’t probably an uneven playing field that needs levelling. The basic question is what aspect of the e-commerce fulfilment process—from procurement to order fulfillment—would ONDC transform by offering a neighborhood kirana store the opportunity to deliver their products to customers in their locality and yet ensure that the whole chain of economic activity is more efficient than the one facilitated by a company like BigBasket with its own dark stores?

The reason a customer shops with BigBasket today is because of assortment, price and consistency of overall experience. On each of these key metrics, BigBasket would significantly outperform a kirana for obvious reasons. So, how would the ONDC marketplace model deliver better efficiencies? Companies like BigBasket are diligently scraping every penny at the bottom of the cost barrel that does not add value.

If you were to go by doomsayers, then all the small restaurants and kirana stores would soon be killed by the bigger e-commerce players. This is unlikely to happen anytime soon. Not everyone likes to shop online and not every offline store wants to be on a marketplace. Many e-commerce companies are, in fact, seeing a flattening of growth, especially after taking measures that will get them out of the red. Retail has grappled with channels and channel conflicts for as long as retail existed. When ‘modern retail’, which is really the large format stores, began emerging in India, there were fears that the kirana stores would die. That did not happen. Both thrived and both grew. The share of modern retail after more than three decades is an abysmal 10-15%!

Technology has given shape to a new channel. The struggle between channels will continue with one new channel in the mix. But just as modern retail did not live up to predictions of total domination, online retail too will not live up to such a prophecy. Companies, both online and offline, have now wisely begun to take a holistic view of channels from a customer perspective.

Investing strategically in public goods that enhance inclusivity is the right thing to do. The question is, what form should they take? Imitating the models of the bigger players is probably not the answer because what has worked for them may not work for the mom-and-pop stores and small restaurants. There is an opportunity for entrepreneurs to build businesses by enabling the smaller players through technology related to inventory, demand forecasting, procurement, easy access to schemes offered by brands, etc. Most small players are not even targeting customers who care for the convenience of home delivery. Therefore, any solution that focuses on home delivery is unlikely to benefit smaller players because they can never beat the pure play e-commerce companies on this.

Is the idea game changing?

Any game-changing idea should involve a fundamental change to the current construct of the game. As an analogy, no matter what modifications you make to the exterior design of a car body, it can never be made to fly so long as the engine that powers the car on the ground remains unchanged. Therefore, just because a current business model is experiencing a set of problems at scale, there is no guarantee that a new business model with cosmetic changes will be any different when it begins to scale.

Users of Uber/Ola have been facing many challenges, and some are extremely frustrating. But neither users of Uber nor Ola faced these challenges when these companies were small and were burning cash to create a good experience. It is not that Uber/Ola are no longer committed to delivering a good customer experience. It is just that the experience they created in the past, when they were much smaller, is simply not sustainable at the current scale when they are pushing for profitability. The experience that customers were used to, and had come to expect, simply cannot be provided at the price points they are willing to pay.

So, any optimism that BluSmart, an all-electric ride-sharing company, is God’s answer to the prayers of urban commuters, is misplaced. Any kind of cosmetic change that does not alter the underlying fundamentals is unlikely to change outcomes.

While the intent behind ONDC is very good, what isn’t evident are the game-changing elements of its business model. From time to time, India will have to deal with different shades of the debate around the nature and ownership of economic activity—one that optimizes for employment on the one hand vis-à-vis one that optimizes for customer experience (and create some inequality) on the other. In some ways, the idea of ONDC is a manifestation of this debate. It would be interesting to see how this idea plays out.

T.N. Hari is an author and co-founder of Artha School of Entrepreneurship.

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