Encouraging new savings behaviors: Making prepayment desirable for retailers
This is the second article in a series about a prepayment product that IDEO and Mercy Corps Ventures have been building over the last few months in conjunction with Sokowatch, an informal retail logistics platform. We launched a prepayment product that enabled Sokowatch’s micro-retailers (‘merchants’) in Rwanda to make prepayments into Sokocash (similar to a pre-loaded gift card with a 1% or 2% ‘bonus’), offset by a DeFi corporate treasury of UST staked in Anchor protocol. They could redeem their Sokocash for products on the Sokowatch platform to sell to customers.
For background, you can read the earlier articles in this series about how we structured the project and team. In this article, we focus on what we learned about making the product appealing to retailers — what we considered in design, and what we learned in practice as we spoke to retailers about what really mattered to them.
When we set out to design a prepayment product that would appeal to retailers, we knew that we were jumping into a messy challenge. Managing a small shop comes with immense complexity: managing inventory, informal lines of credit (e.g. giving bread to a customer in the morning who will pay back in the evening), formal lines of credit from banks, juggling multiple suppliers, tracking market prices, and managing expenses for a business and household.
At the same time, we knew retailers felt a need to more effectively store their business’ working capital. We know that decentralized finance yields might provide greater incentives than storing capital in traditional low-interest accounts or mobile money wallets. We explored what it would look like to give retailers access to different types of products (a traditional savings account, a pre-ordering system, a prepayment system). We dove deep into all the details–like incentives/bonuses, structure, lockup periods, messaging, framing, operations, and overall customer experience.
Through the design process, we explored questions like …
What is prepayment? And how is it different from savings?
- Sokocash works similarly to a gift card, with limitations on how it can be redeemed. Retailers could redeem Sokocash for inventory (such as rice or cooking oil) at any time, but for every week that they held money in their Sokocash account, we added a bonus to their balance. Similar to other gift cards, they could only use it for purchases from Sokowatch and they could not exchange it for cash.
- Since Sokowatch isn’t a bank, we couldn’t give retailers a traditional savings account. We tried to account for this in our bonus structure, offering bonuses above the yields they might earn from making a prepayment with their bank.
How long should retailers store their Sokocash?
- While a lock-up period (a waiting period after money is prepaid, before it can be used) can be useful for planning, it makes building trust harder. This is especially true for retailers who are worried about unexpected expenses or shifts in their business.
- Syncing lock-up times with times when retailers knew their money wasn’t “working” (e.g. if their shop was closed over the weekend and their extra cash was sitting idle) resonated well and lowered hesitation for retailers to make prepayments.
How close are DeFi tools to being usable for retailers?
- Initially, we explored giving retailers direct access to crypto-based lending protocols. However, for retailers who were adopting digital money for the first time, the UX of these tools was overwhelming and confusing.
- Beyond that, we prioritized security, knowing that many of them could not afford the risk of loss.
- This led us to prototype mechanisms that could backstop retailer funds and reduce the risk they took on. By using a corporate treasury, built on UST (Terra’s stablecoin, pegged to the US Dollar) and staked in Anchor, we were able to gain 19–20% APY that could be passed on manually to retailers.
And through the process, we learned that…
Retailers need to know their money is working for them.
- Just because retailer capital isn’t formally ‘saved’, it doesn’t mean it isn’t ‘working’. We spoke to retailers who took advantage of price fluctuations, stocking up on goods while the prices were low so that they could sell them later at a higher margin. We needed to consider how our offering would compete with other ways retailers put their money to work, and make it worthwhile to store their money with Sokowatch.
- Margins for informal retailers are small. The retailers in our pilot typically earn around 3–5% on their sales (and typically sell about $7,400 per month), so earning an extra 1 or 2% for prepaying felt significant. We wanted to provide meaningful incentives that were also sustainable in the long term, which the crypto savings offset.
Cash isn’t always king! The quality of the core service is just as important as the incentives.
- While we explored a variety of incentives, many retailers told us that the chance to have access to a better core service was more important than bonuses. They asked for faster deliveries, less warehouse stock-outs, and even some other services — such as warnings when prices were fluctuating — that could help them better manage their ordering. These features didn’t create out of pocket costs — but they were incentive enough for retailers to prepay capital.
There is no ‘perfect’ incentive.
- To encourage prepayments, we tested multiple incentives. Some retailers were motivated by the chance to win a smartphone, while others had no interest in prize-linked incentives. It seemed to depend on their mindset, and how lucky they felt overall.
We’ll wrap up with some top questions to consider for others who might be running pilots or building new fintech products.
Consider:
✅When crafting a product, map out a few possible customer journeys and ask your customers for feedback. This initial gut check might give you ideas early on and ensure you are accounting for your customers’ needs from inception.
✅ Is it essential to lock money up, and if so — how many potential users will you lose because of it? Is it possible to offer a non-lockup trial period to build trust? Can you shorten the lock-up period?
✅ How do we account for price fluctuations, especially the cost of key staples, sugar, oil, bread?
✅ Do you understand your users’ current behavior and options?
✅ What mechanisms are in place for your users to store and accumulate money (e.g., buying inventory when prices are lower)? Why do those processes work and why do they not work?
✅ Do you really know the opportunity cost of your users storing money with you, and have you quantified it?
✅ What formal and informal methods are retailers using to manage their shops? Does a new method replace, bolster, or negatively impact existing ones?
Stayed tuned for the next post in this series, where we’ll go into more detail around what we learned in implementation.
This post was written in conjunction with Eva Hoffmann and Becca Carroll.
