No Laissez-Faire Or Chinese Type Crackdown, India Charts A Unique Path Via ONDC To Democratise E-Commerce

The Chinese government’s crackdown on technology companies has been discussed widely. While there have been speculations about the reasons for the crackdown, one of the most obvious reasons is the immense power these companies have wielded in recent years.

For instance, Ant Financial, one of the earliest victims of the crackdown, dominates the payments space and is the largest payments processor in the world with its Alipay product.

It runs the largest short-term money market fund in the world and dominates the consumer finance business. Even China’s premier government-run banks combined had a much lower market valuation than Ant.

The paranoid and authoritarian political regime in China soon began taking control of these companies to re-establish its dominance in the socio-political and economic spheres.

The United States of America stands on the opposite end of this continuum. It has stuck to a laissez-faire approach towards large technology companies.

Companies that began as small ventures in garages and college dormitories have ended up dominating the technology space — a classic American success story. The lack of strong regulations combined with easy access to capital and a business savvy environment allowed these companies to grow to huge sizes.

Despite concerns being raised about malpractices these companies indulge in, these companies have continued operating with little restraint. Ironically, at one point, the USA had strong anti-trust laws which resulted in the breakup of the Bell Systems and Standard Oil, two of the largest companies in the USA at that point.

Balancing Act

India has been trying to create a balance between absolute control and absolute freedom for technological companies. So far, one of the main arguments against tech regulation has been the benefits reaped by consumers through lower prices.

But it can be reasonably argued that solely looking at the consumer prices in the short-term might not be the best measure of judging a technological company’s effect on society.

Predatory Strategies?

For instance, the Indian food aggregation space had several players earlier, but competition from a few well-funded competitors who could burn cash continuously has resulted in the current duopoly.

Amazon and Flipkart, two companies owned by foreign entities, have come to dominate the marketplace segment and a few firms, again having large foreign stakes, dominate the payments ecosystem.

Most of these companies have not reported a single profitable year, which clearly indicates their strategy of continually burning cash to drive out competitors and attract users.

Today, capital is easy to come by at zero–interest rates and the basic strategy employed by technology start-ups is to burn cash and capture the market.

Larger companies can also cross-subsidise products to capture market segments. Earlier, companies had to focus on profitability as capital was costly and therefore, predatory pricing practices wouldn’t last long. The Chicago School’s focus on studying short term price movements to determine anti-competitive practices might not hold water in the current scenario.

E-commerce companies have already faced criticism from Commerce Minister Piyush Goyal for flouting norms.

Smaller Stakeholders Suffer

While the consumers benefit from lower prices, vendors on these platforms, brick-and-mortar shopkeepers and smaller competitors suffer. Tech businesses often have strong network effects that allow them to dominate the ecosystem and bully vendors selling on the platforms.

For instance, a few years ago, Amazon tried to force Hachette, a book publisher, to give in to its deal terms by delisting all of Hachette’s books from the platform.

In India, two sellers in which Amazon had minority stakes account for 35 per cent of the platform’s sales revenues in early 2019. It has also been accused of favouring its private labels — brands owned and sold by Amazon on the platforms. Clearly, the business model demonstrates several conflicts of interest.

Food Aggregation businesses have been accused of high commission charges for restaurants. Initially these companies charged lower commissions, but as smaller competitors died out or were acquired, they have continued raising commissions. They have also faced backlash over poor pay for contract workers.

With the rise of digital marketplaces, brick-and-mortar traders have been the worst hit. While already reeling from the competition posed by online channels, these traders were also hit by the lockdowns.

Earlier, competition was limited to electronics, books and other discretionary items. But today, even the local kirana shops are under threat with the rise of large grocery platforms that are funded by investor money or cross-subsidised by profits from other businesses.

Ending Monopolistic Practices through Regulations

To solve these issues, the government has come up with new regulations and a new platform to combat the anti-competitive techniques used by these platforms.

The regulations proposed by the Department of Consumer Affairs have a strong focus on fairness and transparency for smaller players and consumers.

The government plans to regulate “flash sales” and wants these companies to promote Indian alternatives to foreign products. The government also wants these companies to accept a controversial “fallback liability” wherein the e-commerce platform would be held responsible for any failure on part of the seller.

E-commerce platforms might also face scrutiny if related parties sell on their platforms.

Launching ONDC

The government will also be launching ONDC – the Open Network for Digital Commerce, which is being touted as a solution to breaking monopolistic practices by e-commerce companies.

While the web remains open, internet companies have built closed ecosystems on the web to gain and retain customers. The government’s push comes from the success of the Unified Payments Interface (UPI) which ended the reign of closed wallet ecosystem and introduced an open network for money transfer directly from people’s accounts. UPI was integrated into various payments apps and has now completely dwarfed wallets and other modes of digital payments.

ONDC hopes to do to e-commerce space what UPI did to the payments space. It is expected to digitise the entire value chain, promote inclusion of sellers and enhance value for stakeholders, resulting in a fair ecosystem.

Just like UPI allows a person registered on GooglePay to send money to someone registered on Paytm, ONDC would allow a seller registered on Amazon to sell on Flipkart and vice versa.

Nandan Nilelkani, the co-founder of Infosys is a member of the advisory council for ONDC. He is already involved in creating a similar open-source protocol at Beckn Foundation. The Foundation is a non-profit organisation working on developing the beckn open protocol.

The initial idea behind the protocol was to enable local interoperability across urban mobility platforms. Rather than having to access each platform separately and being in a closed ecosystem, the both buyers and seller can view multiple offerings through the Beckn-protocol enabled app. Once he places the order, the seller would broadcast a request for logistics and would receive offers from several logistics platforms. Other committee members include Dilip Asbe, who worked on developing UPI and R.S. Sharma who is working on building Unified Health Interface (UHI).

While open platforms have been encouraged, they might be monopolised by larger players. The UPI space is large dominated by BharatPe and Google Pay. Further, getting users on these open networks without financial incentives is difficult.

UPI was a no-brainer as it ensured free transactions unlike wallets. In contrast, reviews of the Yatri app, built on the Beckn protocol, indicate that the app charges way more than an Uber or Ola would, resulting in low acceptance. Open networks need to attract customers – people with the money, to grow further. For all its faults, Amazon has always placed the customer above everything, resulting in the positive attitude customers have towards Amazon.

So far, most “successful” e-commerce companies have used several questionable tactics to gain customers while flouting rules. The shift from physical to digital, accentuated by the pandemic, has benefitted customers but smaller enterprises continue to struggle. While government intervention in business is usually unnecessary, today it might be a necessary evil.

Also Read: Preventing Digital Gatekeepers' Monopoly: A Dynamic Field Needs Dynamic Responses From The State