Pilot Insights | Improving Business Efficiency for Merchants in Rwanda through DeFi Systems
This post is the second of a two-part series; our previous post introducing the pilot is here. Written by Eva Hoffmann.
Update, July 2022: This pilot tested the application of DeFi incentives to motivate financially responsible behavior by microentrepreneurs. MSMEs received 1–2% rewards on their working capital, promoting a ‘savings’ mindset by offering tangible, risk-free incentives.The rewards were supported by a generous grant from Terra. This grant of $50,000 was staked on Anchor, and the proceeds were used to fund the rewards for the MSMEs. At no point were the funds of our pilot participants exposed to Anchor or other market risk. We prioritize the design of responsible and human-centered pilots, and this pilot ensured there was no downside risk for participants.
At Mercy Corps Ventures, we’re responsibly piloting new decentralized finance solutions. These utilize evidence and impact measurement to prove how the financial system can be made to work for unbanked and underbanked populations. We know that access to financial services is key to unlocking the productive potential of individuals and communities, but these services are often prohibitively expensive to offer low-income consumers.
In April 2021, we launched a pilot in close collaboration with a trusted last-mile distribution partner, Sokowatch, along with IDEO CoLab Last Mile Money and Terra. Here, we tested a new prepayment product for Sokowatch’s informal micro-retailers (‘merchants’) who own informal shops in Kigali, Rwanda, to help them digitize their transactions, manage their cash flows, and ultimately plan better for their businesses. Merchants could make prepayments into Sokocash, Sokowatch’s existing wallet tool which functions like a pre-loaded gift card, and through these prepayments could earn a 1% or 2% ‘bonus’ which was added to their accounts for every week they kept the money stored. Users could then redeem their Sokocash at any time to buy stock on the Sokowatch platform.
To enable this we used a decentralized finance (DeFi) corporate treasury. Thanks to a generous grant from Terra, we worked with Sokowatch to set up an account using Terra’s Anchor protocol that would earn a stable yield of 18–20% per year. Our ultimate aim was to explore how to share the earnings of DeFi with those traditionally excluded from the financial system — while protecting them from risk.
We explored two key questions:
- What would lead a merchant to trust and make prepayments with a brand that isn’t their bank?
- Could DeFi help us offset the costs of incentivizing savings, to make this scalable?
After successfully rolling out the service to more than 100 merchants over three months, we have been able to explore these questions, and have learned a ton about the potential for DeFi to power new financial offerings for low-income users.
Working with merchants to develop trust in a service that wasn’t their bank
It was clear that merchants who tried the service saw the value and trusted it. Ninety-one percent of those who actively engaged in the pilot (i.e. made at least one prepayment) saw value and continued to use it, and on average added money 7 times over 10 weeks.
What most delighted me was… “When I first got my bonus a few days [after] I had prepaid. And also it was avoiding the stress of making long lines in the bank to withdraw and later on paying for products… With the program, I could add money from anywhere and it would be enough to pay [for stock].”
Female pilot participant, Age 30
We also saw a high level of trust: once merchants tried the service, 100% of them said that they found Sokowatch trustworthy. Many merchants maxed out the $500 limit on their account balances and some even asked us to remove the limit so that they could pre-pay more. Users also saw the service as highly unique, with 96% reporting that they’d never had access to a product like this, and almost none of them could name a similar competitor.
Even more importantly, merchants felt a tangible impact on their lives — of those who actively engaged in the pilot, 89% said their quality of life had increased, citing improvements in their ability to save, their income, and their business efficiency.
“I now earn more income from my business which increased our household wealth and improved our standards of living”
Female pilot participant, Age 34
One clear area for improvement surfaced in our follow-up surveys regarding awareness of the pilot and product knowledge. Although the merchants that tried the service trusted and used it consistently, many of those that signed up never actually prepaid (78%). For those who didn’t prepay, the primary reasons were lack of awareness/understanding of the offering (53%), and inability to save (32%). We felt we had been rigorous in communication, working with a small team of local Customer Support staff to introduce and encourage use of this new Sokowatch service and related incentives to merchants through calls, visits and SMS messaging, to the point that we were concerned we may have been contacting potential users too much.
There are a number of reasons why we think awareness was low and it was hard to stay top-of-mind amidst merchants’ busy lives. COVID-related lockdowns and curfews heavily impacted merchants’ businesses, and made it harder for us to raise awareness of the pilot in person, which would have facilitated more engagement and given users the opportunity to immediately ask questions. At the same time, the relatively low penetration of mobile money in Rwanda meant that we had to jump two hurdles: building merchants’ trust of mobile money as well as trust of Sokowatch’s prepayment service. For other DeFi pilots in the future, we’ll be excited to get even more creative about building trust and staying top-of-mind for participants, e.g. through video reminders of how the service works.
DeFi’s role in offsetting program costs to make this solution scalable
We know that the incentives that traditional savings accounts offer are often not appealing enough to increase formal savings, especially for business-savvy merchants that want to keep their money moving or “working” for them at all times. At the same time, traditional financial institutions struggle to serve low-income populations — the margins are often too thin to be workable, with customer acquisition costs that are too high relative to the size of account balances. Naturally, this gap leaves a big opportunity for innovation. We think we’ve found something exciting here, that both encourages merchants to start building a savings habit and planning more rigorously for their business, which can now also be feasible to offer from a cost perspective.
Typically, incentives of 1% or 2% a week would be unthinkably high; savings accounts with traditional financial institutions in Rwanda generally offer less than 8% interest in a year. But DeFi opens up new possibilities, and allows us to offer incentives that would otherwise be impossible. With a $50,000 grant from Terra that earned roughly 18–20% annual percentage yield (APY), the interest earned over the period of the pilot more than covered the incentives and day-to-day costs of running the pilot. On top of this, pre-ordering inventory could solve some additional problems for Sokowatch: it encourages merchants to book orders through the Sokowatch app, streamlining the current ordering process by reducing call center time, and it reduces the logistical challenges of collecting cash on delivery.
We also wanted to help merchants access the yields of DeFi without the typical barriers that come with setting up a personal crypto account. Because the cryptocurrency was held in a single Sokowatch treasury rather than individual crypto wallets for each merchant, we eliminated some of the biggest user challenges of owning a cryptocurrency account: setting up the wallet, securing access (and being sure not to lose the key), and getting cash in and out of the wallet. As such, the prepayment service acted as a layer of buffer between the end user and the DeFi wallet, reducing risks and friction for merchants.
We see a huge opportunity to continue exploring services that give financially excluded populations access to the benefits of the DeFi revolution, while still acting as a protective buffer to ensure that access to this new technology is convenient, safe, and trustworthy.
Learnings in market
Alongside our insights on the service and user adoption, what does rolling out a pilot look like? We co-wrote a series of blogs with partners at IDEO to capture what we learned in implementation, especially the nuances of user behavior and the realities of roll-out:
Pilot launch and team
Getting any new service off the ground is a huge lift — and this was especially true during the COVID crisis when most of our team were working remotely. The way we set up the team and prototyped the product gave us the agility, flexibility, and finger on the pulse that we needed to make this project a success — read how we did this here, and hear from the Sokowatch Customer Support Associates here.Making prepayment desirable for retailers
We thought carefully about how to make the pilot incentives appealing, and how to design the service that would build trust and excitement about setting aside money. Ultimately, we were surprised to learn that for many merchants, the chance to have access to a better core service (e.g. faster deliveries and protection from stock-outs) was just as important as the bonuses we offered — read more on how we encouraged new savings behaviors here.Building trust
Finally, as we explored the technology and financial viability of the product, and what it would take to scale, we kept coming back to a core theme: Trust. Ultimately, trust came just as much from the human components of the service (e.g. leveraging existing relationships with Sokowatch employees) as it did through having a smooth user experience with the technology. Read more on what worked and what didn’t here.
Stay tuned for updates, evidence and insights on our other Mercy Corps Ventures pilots, responsibly testing DeFi solutions for unbanked and underbanked populations.
