Where India’s payments infrastructure goes next
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Opinion

Where India’s payments infrastructure goes next

Two new platforms show how India is building on top of its digital foundations.

teenage girl showing a mobile phone to her father
Photo: Getty

India’s world-leading Unified Payments Interface – the interoperable state-backed digital payments infrastructure that is being mimicked from the Philippines to Brazil – has found its latest use case, and it is a big one: the democratization of e-commerce.

One might think that commerce is already as democratized an enterprise as can be: it is, after all, the choice of a buyer to buy from a seller, simple as that. But in truth, up to 60% of Indian e-commerce is split between Amazon and Flipkart, the latter of which is owned by Walmart. Having global players so heavily reflected in the great national bazaar doesn’t sit well with India.

And so to the Open Network for Digital Commerce, a non-profit set up by the government with Infosys chairman Nandan Nilekani vocally behind it (Nilekani, regular readers will recall, also being the spearhead of the Aadhaar national ID card that allowed so much of India’s digital revolution to take place).

ONDC – not the catchiest name ever applied to an e-commerce platform – is at heart just a communication protocol that allows buyer and seller network participants to interact with each other. But the conceit behind it is a truly epic unbundling: anyone can buy from anyone. Mom and pop stores – the forgotten engine of the Indian economy and until now quite distant from India’s digital leap forward – will be able to enter the game. Any restaurant can sell to any consumer without having to go through intermediating food delivery platforms such as Zomato.

It is, in its inception and certainly in the political rhetoric that is accompanying it, a victory for the little guy, both on the buyer and seller side of the trade.

Penetration

The scheme is being piloted in 270 Indian cities – only in India can a 270-city roll-out be called a ‘pilot’ – with an early focus on Bengaluru and New Delhi. The grand design is to push India’s e-commerce penetration from 7.8% today through granting access to small retailers.

Certainly, banks are convinced. State Bank of India, Kotak Mahindra, Axis, HDFC and ICICI are among the domestic players to have taken a 6.35% stake in the platform. This mirrors the foundation of the National Payments Corporation of India (NPCI) in 2007, which was also supported by the banks despite being ultimately a public utility.

India is the world leader in digital payments – some surveys suggest it accounts for 40% of the global total – and within that, e-commerce accounts for nearly half of Indian digital payments

Banks are attracted to anything that enmeshes them within the digital lives of their customers, and it is not hard to see why. India is the world leader in digital payments – some surveys suggest it accounts for 40% of the global total – and within that, e-commerce accounts for nearly half of Indian digital payments.

Potentially, ONDC ties banks into a new way to reach customers they previously could not – particularly those beyond their branch networks, such as rural shopkeepers. We have written before about how rural banking, or towns below the top tiers, have become a priority for the country’s largest banks: they are the heart of India’s compelling domestic demand story.

ONDC could potentially take banks beyond payments, too: into lending and working-capital facilities. That would be a wonderful distribution method for their services without having to spend anything on new infrastructure.

Teething problems

But there are challenges to overcome. The pilot programme has revealed teething problems around the movement of sellers between platforms, which is to be expected; we won’t know for sure until a nationwide launch how successful it is likely to be. Early days suggest that consumers are chiefly using the platform for food delivery rather than other goods, but, again, it is early days.

ONDC is not the only utility to grow from India’s infrastructure backbone. The Open Credit Enablement Network is a decentralized repository linking banks, non-banks and fintechs that allows them to share information about borrowers (with their consent) in order to make better decisions on credit. It sets common standards among borrowers, lenders and credit distributors.

And when lending does take place because of the platform, it will use the same digital payments rails as have already been set up through UPI. This is another important trend: the linking of credit and payment mechanisms on the same digital channels.

Nilekani was involved in this too, and sees in it the same mechanism of financial inclusion as all the other elements of the India Stack. His view is that OCEN makes it easier for credit to reach “the most deserving, smallest businesses and individuals”.

Credit in India, as elsewhere, tends to go to big companies, while smaller players miss out; and the largest part of the reason for that is risk on the lender’s part: the smaller the potential borrower, the greater the relative effort required to get the information required for a sensible lending decision.

Where ONDC and OCEN have gone, many others will follow. India is still working out the possibilities of what can be built upon UPI’s open-source foundations. There is a vibrant industry ready for the next steps.

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