Beyond Cash: The future of digital credit for small merchants — Part 1
It’s 24 March 2020, Sadanand is at his kirana store (general stores in India are also called ‘kiranas’) servicing his usual evening crowd of customers, when the Indian government announces a 21-day COVID-19 lockdown.
All other options to buy grocery and household goods shut down overnight, turning his kirana into the lifeblood of a gated community which is home to nearly 1,000 families. Customers begin to ask for things he had never stocked before, from expensive Greek yoghurt to fresh fruits and vegetables. He is growing his inventory, but there’s only so far he can go with what he earns from the store.
Sadanand and 12+ million kirana owners like him dominate 95% of India’s $350 billion food and grocery market. Like Sadanand, they hold the trust of their local communities. Customers come back because kiranas are convenient, quick, and known. Most of them have seen a post-COVID-19 boom. For instance, Metro Cash & Carry, a popular wholesaler, reported a 40–50% growth in business from kirana stores in June’ 20.
COVID-19 may have provided a growth impetus to kiranas, but sooner or later they’re likely to be back where they were last year: losing ground to supermarkets and eCommerce. To compete, they need to match and exceed competitors by expanding inventory, digitally engaging customers, and delivering better in-store experiences.
Unlocking growth requires affordable credit
We’re at an inflection moment. A moment to invest in the future of kirana owners who serve as the economic heartbeat of their communities. But it requires more than just intent and effort; it takes money. Money for store improvements, procuring from wholesalers who don’t offer trade credit, and making on-time utility and salary payments. Managing working capital is also challenging because so many customers buy things on credit and only settle accounts once a month.
Kirana owners are among the most underserved in India’s lending market. The current debt gap for MSMEs in India is estimated to be nearly US$ 380bn, according to the World Bank and digital financial services are likely to help bridge some of this gap.
When a kirana owner like Sadanand wants credit to grow, he’s often stuck. There’s a limited data trail on his shop, making it tough for him to complete KYC & underwriting. Although he and many like him are aces in the offline world, he’s a novice in the world of formal credit offerings. And for a long time, it’s been prohibitively expensive for lenders to offer kirana owners credit, since both acquisition and collections costs are high for this distributed, cash-based user group.
Additionally, the lead time for accessing formal credit ranges from days to weeks, which can feel too long. Cash therefore wins over digital money in such cases because of benefits like instant settlements and better discount deals.
Collaborating and investing in a paradigm shift
In our Last Mile Money initiative alongside the Bill & Melinda Gates Foundation, we’re focused on connecting underserved communities to the digital economy.
We believe India is at a pivotal moment, as the upcoming launch of the Open Credit Enablement Network (OCEN) promises to change the way digital credit is delivered. OCEN will create the digital rails for credit, which could make easily accessible, low cost, and instant digital credit a reality within the next year. (Check out this primer to learn more.)
This got us excited to explore, invest and collaborate to turn this possibility into reality for kirana owners. We convened a group of 6 leading kirana and fintech partners interested in solving the problem of digital credit by leveraging OCEN — Setu, Khatabook, Branch, Unilever, CIIE, and DigiSahamati. Together, we built over 20 prototypes, and in the process, landed on some critical design principles that can serve as guardrails as we collectively build a kirana-centred solution for digital credit.
Design principles for kirana-first digital credit
#1 We imagine a world in which credit shows up in context: in the moment when kirana owners need it, and through whichever digital channel they use for business. Digital credit should be ubiquitous to the degree that it appears as a feature across multiple kirana tech and consumer tech apps.
#2 Formal credit and digital financial tools are new concepts for most store owners. So how do we avoid cognitive overload, while guiding good financial choices? We believe the answer lies in breaking up education into bite-sized, in-context nudges that show up as moments of support and play throughout user journeys. By experiencing real-time interactive engagement kirana finances, people who are new to credit can build credit literacy and work up a credit score
#3 Widespread availability of digital credit will open up multiple loan choices for borrowers. This is great for encouraging transparency and agency, but it might also lead to confusion for first-time borrowers. One way to tackle this is by starting users off with suitable recommendations, and over time surfacing more loan choices as their financial confidence grows.
#4 Easy and ubiquitous access to digital credit can come with unintended consequences such as overborrowing and defaults due to users not knowing how to repay. (Something that might already be growing in Kenya.) For responsible financial inclusion, repayment should be redesigned entirely with a focus on making borrowers feel guided and clear about their obligations. This could be done through reminders that show up in contexts outside of financial apps (e.g., Whatsapp messages), smart and actionable recommendations to users, and possibly even consolidated repayment information across multiple loans taken through OCEN.
What do all of those principles look like in action? Check out our prototype in part 2.
Come build with us.
If you are interested in the problems of last-mile financial inclusion and helping micro-retailers grow, we’d love to hear from you. Share your thoughts and curiosities with us in the comments below, and reach out here.
Co-authored by Becca Carrol, Dipika Prasad
