Beyond Cash: The future of digital credit for small merchants — Part 2
In part 1, we met Sadanand, a neighborhood kirana store owner seeing growing demand since COVID lockdowns began. We’re left wondering — would his work and life have been easier to manage if he had better access to digital credit to help him grow?
Meeting large sales volumes with regular cash flows is challenging and requires kirana owners to look for working capital among networks, both formal and informal.
Along with 6 other leading kirana tech and fintech partners — Setu, Khatabook, Branch, Unilever, CIIE, and DigiSahamati — we explored how kirana owners like Sadanand could access the right kind of credit in moments of need and at the right places by building prototypes to help test and action our design principles.
A build to think approach
Through our research, we heard formal credit can be difficult to understand. Complex terms and conditions create a sense of mistrust and fear. People like Sadanand are adept at managing cash and informal loans, but once we move the medium of interaction to a smartphone, digital interfaces and formal credit terms can seem ambiguous and hard to follow.
That’s why we built “Top Ups”: packaged loans to extend a kirana owner’s bank account balance in a way that feels familiar and comfortable. They function much like a line of credit for store owners, with borrowing limits set based on credit profiles. Borrowers can instantly access loans within their borrowing limit as easily as recharging their phone — simplifying the transaction and decreasing discomfort.
Digital credit that shows up in moments of need
We didn’t design Top Ups as a standalone app. Instead, we imagine them appearing in-context — in any application or product a kirana store owner uses for tracking their finances, managing inventory, and dealing with customers.
In today’s world, this might mean that each of these apps would have to build APIs with every lender to make Top-ups possible. However, with the upcoming launch of OCEN, this type of integration might be standardized through open APIs for “Loan Service Providers”. The Open Credit Enablement Network (OCEN) is a new government-backed system for digital credit in India. It aims to standardize interactions for credit access, due diligence etc. between lenders, marketplaces, and data providers to make instant but responsible loans possible.
Right-sizing digital credit for kirana owner contexts
Sadanand has only recently started using digital payments and smartphone apps for his store. In the last 5 years, his store has operated entirely in cash and on pen and paper. This makes access to formal finance hard. He has no proof to showcase good credit repayment behaviour or consistent cash flows.
Top Ups are designed to work for borrowers like Sadanand who cannot share a lot of verifiable data for KYC and underwriting. It requires minimal Aadhaar eKYC for access, and borrowers can get started with nano loans of Rs. 5,000 in minutes.
As store owners take out and repay top ups, they “unlock” higher loan amounts. There are simple and clear milestones to achieve to get higher loans (e.g. repaying on-time for 3–4 months before the next level of borrowing limit is available). We designed a moment of “play” here for users to better understand these concepts through a loan calculator. It lets them figure out what it will take to get a higher loan sanctioned and also drives home the importance of using loan money only for business purposes.
Meeting their digital confidence and credit literacy needs
As the access to loans becomes easier, the risk of taking on too much debt goes up. The last thing we want is to leave people in a worse financial position than where they started. Educating borrowers on the terms and conditions of loans in simplified ways is critical to supporting the right adoption and usage. Some of the features we explored to make education feel digestible include:
- In-context access to information from peers and experts, to avoid overwhelming the user with information all at once. Videos are especially useful here. Users trust videos that feel like a friend or a peer chatting with them rather a business marketing to them
- Features and moments that help to verify borrowers’ understanding — such as a selfie video re-stating repayment amount, due date, and late fee
- Moments to process and reflect what they’ve just learnt through a tap and hold feature during loan selection
Protecting their interests and hedging against defaults
OCEN imagines credit as borrower-first. But what does this actually mean? One of the biggest shifts might be the normalization of “loan marketplaces” where borrowers see multiple loan options whenever they need credit.
Choice and agency are powerful, but they can also create fear, mistrust, or lead to abuse.
Inspired by digital lenders such as Branch and Tala, we designed for that balance by slowly introducing those choices to the users. The first time borrowers try to take a nano loan, the best option is recommended to them. As loan sizes increase, the stakes grow higher but credit confidence increases. Top Ups start to show multiple lenders so Sadanand can choose what’s best for him.
Building repayment skills through education and consolidated guidance
On time repayment is driven by much more than whether Sadanand has the funds available. It also requires him to remember repayment timelines and feel comfortable paying digitally. That journey needs to feel supported, effortless, and well-integrated into his daily tasks.
What’s more, he might take multiple digital loans across different apps for different purposes. Staying on top of repayments in his busy life could be a challenge. As a provocation, our view here is that different lenders and loan service providers should work together and help borrowers navigate multiple repayments.
Our recommendation is for loan service providers and lenders to work collectively with account aggregators to share data and prioritise a Common Pledge Register (which might even feed into credit bureaus) to protect borrowers from overexposure, and support consolidated repayments.
Come build with us
We build to think — which means that designing Top Ups surfaced new questions for us:
- What are the right modalities to simplify the data consent journey? This is complex for users who don’t entirely understand data privacy and are extremely fearful of fraud. We know the government is working on a Data Empowerment and Protection Architecture that we’d be keen to learn from. How do we design smart loan recommendations, without inherent biases?
- Most importantly, what roles might credit bureaus play? Should their role extend beyond reactive credit scores to more proactive support to borrowers to better manage their credit profiles?
We’re looking for answers to these questions and many more. We’d love to learn from your experience. We want to know what you think might work, and what might break when it comes to making digital credit easily accessible for kirana owners. If you’re excited by the idea of jamming with us to solve these challenges, leave us a note on the link here.
Co-authored by Becca Carrol, Dipika Prasad
