Can DeFi treasuries help us incentivize merchants to use digital money?
Mugisha is always concerned about whether or not he’ll have enough cash to pay for his weekly inventory delivery.
Some weeks he has enough. But in other weeks he depends on credit from suppliers.
Mugisha finds it tough to account for his personal and business expenses. And without an easy and secure way to accrue cash for business expenses, his worries are likely to continue.
Small and micro enterprises, like Mugisha’s shop, account for 98% of businesses — and 41% of employment — in the private sector in Rwanda.
And on a global scale, these merchants have a massive impact. Over 180 million merchants currently operate across emerging economies, interacting with an astonishing 4.5 billion customers and transacting over $6.5 trillion per year.
But without the right financial tools to calculate working capital, manage expenses, and accrue interest, many of these merchants go out of business within a few years.
COVID-19 has only exacerbated these challenges. And many shops are struggling to stay afloat.
At IDEO CoLab’s Last Mile Money initiative, we’re working with Mercy Corps Ventures’ FinX initiative and Sokowatch Rwanda (a fast moving consumer goods supplier to micro and small merchants) to develop new tools to help small merchants navigate their finances.
Mugisha is participating in our pilot program of Sokowatch’s prepaid digital product that helps merchants set money aside to meet their business goals — like pre-paying for their inventory.
This pilot program is built on a body of research that demonstrates how digital accounts (provided through secure and trusted channels) positively influence savings behaviors and cause families to invest more in their businesses.
With the right tools to navigate their financial challenges, we believe more merchants will succeed. And when more small and micro enterprises succeed, livelihoods improve.
The pilot is designed to help us understand what incentives are most effective to help merchants put capital away for future business expenses.
We’re testing the efficacy of prize linked savings (PLS) against a “bonus” model. PLS incentivizes participants by giving them entries to win a prize — a smartphone, in this case — when they put away additional funds. The more they put away, the more entries they receive.
Other merchants in the bonus group will receive a small percentage bonus on the balance they keep in their Sokowatch ‘Sokocash’ account.
Our hypothesis is that a well-designed tool, with intelligent nudges and strategic incentives, will help more merchants build financial resilience by putting capital aside for future needs.
But we aren’t just testing merchant behavior in this pilot. We’re also exploring how decentralized finance can support financial inclusion by making it more viable for companies like Sokowatch to support merchant incentives. By funding a treasury in Terra’s Anchor protocol, we’re seeing how merchant incentives can be offset — or paid for entirely — by the yield that this treasury earns over time. That makes it more possible to share the earnings of DeFi with those traditionally excluded from the financial system.
Our eventual goal? A cryptocurrency-powered suite of financial services that small merchants — traditionally excluded from formal finance — can use to earn substantial yields on their capital. All as a means of improving the livelihoods of the small merchants who form a critical part of our global economy.
As Emmanuel, our talented associate and field agent, put it: “We want to help merchants build bigger and better businesses and reach their goals in life.”
This pilot is supported by Project Manager & Merchant Financial Inclusion Expert, Abigail Steinberg, Cryptocurrency Expert, Jamaal Montasser and LMM Co-Lead, Becca Carroll,. Interested in learning more? Feel free to reach out to us through lastmile.money
