5 Principles for Building Financial Products for MSMEs in Emerging Markets

What we learned from designing a loan tool for independent merchants in Pakistan with Unilever, Finja, and Standard Chartered

Nearly 300,000 merchants are the lifeblood of emerging market economies around the world. These small, micro, small, and medium entrepreneurs (MSMEs) generate revenue for their households as well as local economies, and they connect their communities to much-needed goods and services. Their footprint is extensive, too: globally each year, they process $19.8 trillion in payments. Yet despite their potential to contribute to local and global economies, these entrepreneurs are vastly underserved by formal financial services.

The traditional financial landscape has largely been designed for those already familiar with it — mostly urban, middle-upper income customers — without much thought for other kinds of users. Additionally, most traditional financial systems have been centered in the West and don’t take into account important nuances for groups with different cultural and religious backgrounds.

Exploring cashless, Islamic-compliant finance in Pakistan

In Pakistan, the finance gap for micro merchants is especially steep. According to the 2014 Findex Database, only 13% of adults in Pakistan held a bank account. Many cited religious reasons among other contributing factors, since Sharia law forbids certain types of financial services that rely on interest, such as traditional credit. Ultimately, this leaves micro-merchants in Pakistan with few options to sustain their business with working capital, much less ways to grow.

What will it take to reach — and convert — these micro-entrepreneurs as the latest financial customers?

In a recent project, IDEO Last Mile Money worked with Standard Chartered and Unilever to explore this question focused on micro-retailers across Pakistan. Knowing that for these entrepreneurs cash is still king and that the values of Islamic lending are extremely important, we explored the opportunity through design research and prototyping. Ultimately, we helped launch a redesigned Islamic compliant digital credit and repayment solution that allows merchants to buy stock on credit, partnering with Finja, a fintech platform, to connect Unilever merchants to digital loans.

Our redesigned UX enables merchants to feel confident when self-onboarding, taking out and repaying loans, and growing their businesses over time. Additionally, a separate research project around Unilever’s Guddi Baji, or “Good Sister,” initiative helped unlock additional insights about how best to reach and serve female entrepreneurs in these markets.

The results have been outstanding. Following access to Finja credit, retailers reported a 32% increase in basket size and an average of 58% higher sales. Within the Guddi Baji program, women reported a 5X increase in their income due to access to credit. These numbers suggest massive potential growth for micro-merchants — as well as their communities.

Keep reading to learn insights from our research, understand these new entrepreneurial customers better, and get practical tips for launching financial products that stick in similar markets.

Uncovering unexpected insights in the Explore project phase

Our approach began with research to understand the unique needs of micro-merchants in Pakistan.

Over the course of multiple weeks in 2021–2022, we conducted an initial round of qualitative, in-person research in Islamabad and Lahore, where we spoke to retailers with varying levels of literacy and at stores of different sizes. We asked them about their needs and frustrations around accessing credit, their familiarity with Islamic lending laws, their business goals, and started to understand how Finja could provide value to them. We also spoke to an expert on Islamic finance to better understand common concerns around such products.

Many of the micro-merchants we spoke to owned and ran small shops with the help of their families. They often transacted in cash and relied on paper records to keep track of financial details. Although some merchants were comfortable with a variety of digital apps, they tended to avoid using digital financial tools, either through distrust or lack of knowledge.

After an initial round of research, we then synthesized this information into key insights which informed the build of two rough concepts that we tested in the field.

On ground/ethnographic research with retailers and Finja field team (BDO) across Islamabad and Lahore to test digital confidence, financial literacy, and views on Islamic compliant credit.

Refining key opportunities in the Prototyping project phase

Through building and testing multiple prototypes, we gained a deeper understanding of the needs of micro-merchants and their businesses in Pakistan. While some insights were revealed during our initial research and testing phase, others became apparent as we increased our pilot 1,000 retailers. Here are five design principles that emerged throughout the project:

1. Make sure Islamic finance compliance is front and center, as well as credible
2. Onboard users by balancing tech and touch to build digital confidence
3. Leverage existing relationships to build trust and grow adoption
4. Adapt to the busy lives of merchants with flexible, progressive onboarding
5. Nudge — but don’t push — digital payments, since cash is still king for many merchants

Round 2 of research to test out screens and sacrificial concepts with retailers across multiple cities in Pakistan.

Let’s dive into these principles.

1. Make sure Islamic finance compliance is front and center, as well as credible

Due to religious concerns, retailers in Pakistan are averse to taking “loans” that come with interest, unless they fit into Islamic principles of lending and trading. It’s further a mark of trust if a mufti has certified the business to be Islamic-compliant. To build trust, these terms must be communicated to retailers upfront and clearly — an insight we uncovered pre-pilot. This information around Islamic compliance also needs to be accessible at all times, especially for family-run businesses that must seek approval from other family members.

To address this, we created a digital experience that highlights Islamic compliance and is accessible to all retailers, no matter their level of digital/financial confidence. Key elements included:

• During onboarding — and next to key areas within credit application and repayment that could trigger Islamic concerns — a clickable Islamic Compliance button appeared that triggered a pop-up screen.
• Within these Islamic Compliance pop-up screens we provided written, audio, and video messages explaining how aspects of the Finja credit experience are compliant.
• All of this messaging was easily shareable via a share button.

UI screens allowing users to navigate credit fees while giving an Islamic perspective if need be.

2. Onboard users by balancing tech and touch to build digital confidence

In general, retailers tend to be active smartphone users, especially on social apps like WhatsApp, YouTube, and Facebook. However, more complex applications like financial services and e-commerce require a combination of high-tech, high-touch interactions for onboarding and sustained engagement.

Here are some ways to design for that:

• Designing for self-use, but starting off with light in-person interactions, is critical to establishing the required trust and confidence for long-term success. Once a sizable number of retailers have had a good experience, they are more likely to recommend the app to others and become nodes of support in their community.
• We created a tailored onboarding experience that builds digital confidence by helping retailers understand what Finja is, what makes it Islamic compliant, and how they can sign up for a loan — with less support over time as retailers become more comfortable with the app.

A Finja credit loan allows retailers to buy more stock, thereby growing their businesses.

3. Leverage existing relationships to build trust and grow adoption

Early on in our research, we learned how important relationships are to micro-merchants. Retailers have limited trust in digital credit solutions, especially when introduced by a new and unknown brand. Here are some elements to consider:

• Leveraging existing relationships that are built on trust can help a retailer feel supported in this experience and that they have necessary safety nets and guardrails in place in case something goes wrong.
• Existing networks of transactions therefore offer great on-ramps to digital credit.

4. Adapt to the busy lives of merchants with flexible, progressive onboarding

Making the app work for retailers’ business schedules is critical for long-term adoption. Retailers are strapped for time, and need the app to be flexible to meet their daily schedules. They don’t always have the time to complete an entire onboarding and KYC process in one go, as they are often interrupted by work at the store or don’t have access to necessary security information such as their CNIC number and mother’s name.

Designing apps so retailers can preview essential steps and know requirements ahead of time is invaluable. Allowing them to come back and restart from where they left off allows for continuity and saves the retailer time.

To address this, we:

• Simplified and reduced the number of inputs a retailer must make in high-stakes moments, saving them time and improving accuracy.
• Revised profile entry to provide autofill options for some fields, reducing the burden on the user.
• Explored optical character recognition (OCR), which enabled users to take a photo of their CNIC cards to fill out some of their info and use their device’s GPS to enter location-based information.
• Offered visual cues. Illustrations and diagrams help users know how and where to enter their info. A progress bar helps them see how far into the process they are.

A simplified onboarding flow allows retailers to enter essential KYC details encouraging self-sign up, in addition to options for assisted sign on.

5. Nudge — but don’t push — digital payments, since cash is still king for many merchants

Retailers largely operate in a cash-based system, and they are often strapped for time. We saw clearly in our pilot how important timing is with payment cycles, and how challenging this can make it for merchants to complete payments.

As the mobile money ecosystem slowly evolves in Pakistan, it’s critical to bring retailers along in the journey. They require supportive systems to receive digital payment, similar to UPI in India or M-PESA in Kenya. In the absence of such a ubiquitous system, retailers must be strategically incentivised to adopt digital payments, and providers must establish last-mile access to agents, who can help with cash in/cash out services.

Here are some ways to address these challenges:

• Within the Finja app, we designed nudges that encourage the retailer to consider digital repayment first. When retailers are due to pay their loan and have clicked on the repayment button, they are taken to the credit repayment overview. This screen shows the amount due, which is automatically filled in on the “enter amount” field. If retailers want to make a partial payment, they can adjust this amount. Retailers are shown their current wallet balance in case they need to top up before making a payment.
• A “snooze” option, white not implemented by Finja, was a big hit with retailers in our research.

Retailers can make partial payments or defer using the snooze option.

The results of the Finja pilot

The results of the program were a success. Through our pilot and subsequent scaling efforts, we were able to onboard 20.9K retailers throughout Pakistan, who oversaw the disbursement of over 11.2K individual loans.

Our design work excelled at building trust with micro-merchants and their customers, resulting in 58% higher average sales among Pakistani retailers utilizing Finja credit. Additionally, we saw a 32% increase in the number of products in basket, post-Finja credit. Essentially: a win-win for everyone — micro-entrepreneurs, their customers, Unilever, and Finja.

Bonus: Empowering female entrepreneurs through an additional pilot with Unilever’s Guddi Baji program

Female retailers comprise less than 1% of Unilever’s universe in Pakistan. As we rolled out Islamic compliant credit to 25,000 male retailers in Pakistan, we launched an additional pilot with a special focus on gender with Unilever’s Guddi Baji program.

Guddi Baji is a female community influencer program that connects mostly rural women as ambassadors and route-to-market agents for Unilever, with a goal of opening the door to economic empowerment and bridging the gender gap.

Under our pilot, 47 Guddi Bajis were onboarded to Finja, where they could access credit to purchase Unilever stock. As of March 2022, Finja has reached Guddi Bajis across five districts. During that time rural women retailers in Pakistan exponentially increased their earning potential through Finja: we saw a 3–5x average increase in order values among rural women Finja retailers in Pakistan as a result of digital credit.

For these women, Finja became not only a source of income, but also a means for them to feel safe. Being able to rely on a trusted financial provider, rather than someone from their family or community, provides a sense of agency and security: women want to be able to manage their own money, too.

How to work with Last Mile Money

At Last Mile Money, we focus on building a set of solutions that complement our partners’ core offerings, helping them find product-market fit or accelerate their effectiveness within markets touching new digital financial users, like we did with Unilever and Finja.

Want to work with us? Have insights about digital financial services to share? Get in touch with our team.