Pilot Launch | Merchant Digitization Powered by DeFi Systems in Rwanda

This post is the first of a two-part blog series.

By: Hetal Petal (Head of Venture Growth at Mercy Corps Ventures) and Ann Kim (Consultant at FinX)

FinX is excited to announce the launch of our newest pilot, in collaboration with Sokowatch (a Mercy Corps Ventures portfolio company), IDEO CoLab Last Mile Money, and Terra. Together we’re launching a new service for merchants who own informal shops in Kigali, Rwanda, to help them digitize their transactions, manage their cash flows, and ultimately plan better for their businesses.

We’re out to reimagine the financial system and make it work for unbanked and underbanked populations by utilizing evidence, impact measurement, and responsible innovation. We know that access to financial services is key to unlocking full productive potential, but these services are often prohibitively expensive to offer to low-income consumers. Through this pilot, we’re exploring whether we can utilize a trusted last-mile distribution partner (Sokowatch), tangible business incentives (inventory discounts), and new financial technologies (DeFi systems) to increase merchants’ income and stability. Will Sokowatch merchants adopt the new incentive program? Will they pre-pay enough to establish credit and unlock discounts? Will DeFi yields be able to sustain inventory discount (and financing) programs in the long run? The pilot has just kicked into the implementation phase, so the verdict is still out, but read on to learn more about the WHY and HOW behind it.

A Sokowatch agent delivers a shop’s order full of daily essentials, like rice and cooking oil, for its customers.

Status Quo

Across Africa, there are as many as 10 million informal shops, or “dukas”, as they are known in some parts of Africa, that trade over USD180 Billion in goods every year. These shops form a significant portion of the micro, small, and medium enterprises (MSMEs) that employ 70% of Africa’s working population, but have limited access to the benefits of technology, financial services, and consistent product stock. While these merchants and their shops are a vital force in their local economies, unexpected shocks (anything from changes in inventory cost to emergency healthcare expenses) can severely impact their livelihoods. Solutions to increase the efficiency, profitability, and resilience of these shops can impact millions of lives.

Sokowatch, a last mile distribution and service provider, is on a mission to reinvent informal retail. Its 20,000 registered MSMEs can order products (inventory) via SMS or mobile app, enjoy same-day delivery without closing their shop to go to the central market, and receive the inventory on credit. (Although common in other markets, inventory financing for informal merchants is still uncommon in many parts of Africa and has been a game-changer for many merchants).

While the current model works, lack of a digital trail is a key barrier to growth for both Sokowatch and merchants. Many shops pay in cash, do not utilize mobile money, and still make orders via a call center. As a result, Sokowatch experiences lower efficiency, failed orders, and limited ability to offer inventory financing and discounts.

Many merchants (an estimated 97%) are unbanked and are unable to tap into formal credit, thus limiting their ability to grow. At the same time, merchants operate on small margins and often struggle to manage their finances. Without tools to track their businesses’ cash flows and keep personal funds separate from business funds, merchants will often revert to holding cash in separate physical buckets to track personal and business income.

FinX Hypothesis

Through this pilot, we aim to incentivize merchants to shift their behavior from managing their working capital in cash, to using a combination of mobile money and prepayments for inventory powered by DeFi yields.

Benefits to Merchants:

• Reliable stock supply, no failed orders due to lack of cash
• Access to inventory discounts
• Prizes for consistent pre-payments
• Support from Sokowatch for stock management

Benefits to Sokowatch:

• Less failed orders
• More consistent orders, and ability to help merchants plan orders in advance
• Ability to offer better payment terms to merchants, by leveraging DeFi yields
• And, over time, the ability to better assess merchant creditworthiness, and offer more sophisticated services and a larger pool of inventory capital to merchants.

Pilot Summary

This FinX pilot aims to recruit 100 merchants with the support of two Sokowatch associates. Recruited merchants will be split into two cohorts to explore the best incentives to convert merchants to utilize mobile money and pre-pay for goods.

Merchants participating in the pilot receive product discounts for pre-paid orders.

These discounts might seem small, but for those making a 5% margin or less on the goods they sell, these discounts have the potential to boost income and ultimately transform merchants’ ability to save and plan for their businesses.

Following recruitment, we’ll be tracking a number of KPIs including: prepayments made, discounts earned, and order frequency. We will also be conducting in-depth surveys to understand changes in savings, values, and trust. Through these efforts, we aim to gain deeper insight into merchants’ needs and their relationship to managing money.

For Sokowatch to scale discounts and other financial services to thousands of its merchants, it needs to unlock efficient pools of capital. In this pilot, Sokowatch is leveraging deposits in stablecoin, a cryptocurrency algorithmically designed (in this case) to peg to the US Dollar. That stablecoin (Luna) is lent out through Terra’s platform to earn interest for Sokowatch. Sokowatch is testing DeFi as a treasury tool. If the numbers add up, there is potential to leverage traditional tools (venture debt, equity, bank debt) to unlock greater capital at a cheaper cost and increase operational flexibility.

This FinX pilot aims to address ambitious impact and learning goals through a number of key questions:

• How do merchants currently manage their money? What barriers keep merchants from planning for their business expenses and managing their cash flows effectively?
• Can we shift short-term merchant behavior to encourage them to keep cash digital and incentivize merchants to grow their working capital over time?
• If we can make this product financially viable for Sokowatch to offer in the long-run, how can this be used to offer more services and credit to a larger pool of merchants?
• Can DeFi yields help offset costs, especially in tight margin businesses?

So far, we’ve seen an overwhelmingly positive response from merchants; more than a third of those who have been offered the service have signed up, and we have onboarded more than half of our pilot participants so far. Merchants will have two months to use the service, and then we’ll be able to share initial results and insights in autumn 2021.

Stay tuned for our learnings on uptake and value to merchants in part 2 of this blog series!