Good companies know their customers. When they see an unmet need, they seek to meet it. Around the world, service providers that were not conceived of as financial institutions are innovating to address the unmet financial service needs of their customers. From mobile network operators to ride-hailing platforms to social networks, these companies are emerging as unexpected providers of valuable financial services to their customers.
An older example, often overlooked, is the energy utility sector. Everyone in the world consumes energy, and over 90 percent of the world has access to electricity. As described in CGAP’s “Electric Bankers: Utility-Enabled Finance in Sub-Saharan Africa” (2020), some utility providers have taken it upon themselves to offer financial solutions that enable low-income households to get more value from their energy service and improve their quality of life.
The case of Codensa
A publicly and privately owned utility in Colombia, Codensa distributes electricity to over 3 million households in the Bogota metropolitan area. Formed in 1997 to replace a government-owned utility, Codensa initially struggled with a legacy of technical failures, high levels of debt, and a poor reputation among its customers, who resisted paying bills on-time, or at all.
To improve the value it offered customers, Codensa brought in sociologists and anthropologists to understand its customer base and their needs. Two key findings emerged. First, the customer base was poor: 83 percent of Codensa’s customers were in the lower three income strata (out of six). Second, while customers could largely afford the cost of electricity, they could not afford to acquire the appliances they needed to consume that electricity.
Access to electricity does little good if it can’t be used. Codensa believed that offering financial services to these customers would help them afford appliances and improve their lives. Crédito Fácil was born.
The mechanics of Crédito Fácil have evolved considerably since it was introduced in 2001, but its core principles have not. It is a credit facility to which all Codensa customers can apply. Approval and limit decisions are made based on utility bill repayment and credit history (when available), and the credit is repaid through an additional charge on customers’ electricity bills.
Credit can be used to purchase pre-approved products at retailers that have partnered with the utility. In an interview with CGAP, head of Crédito Fácil Fernando Alvarez Morales explained how these products were selected:
“First, we financed home appliances, which was the primary need that improved the customers’ quality of life. A washing machine: for people with low incomes, who sometimes have to commute, 60 to 70 kilometers a day to go to their place of work and return, well, having a washing machine allows them to have better quality time and be with their family. The refrigerator: they no longer have to buy day to day for consumption, now they can buy for much longer term. So we first solved basic conditions," he said.
Codensa originally tried to partner with a bank to handle the financing, but none were willing to take on the risk of lending to poorer households. For the first eight years, Codensa financed the loans on its own balance sheet. By 2009, the portfolio had grown to $273 million and had the potential to become bigger than Codensa’s other business lines. That year, Codensa sold its Crédito Fácil portfolio to what is now Scotiabank Colpatria, one of the largest banks in Colombia. Codensa continued to manage the customer service and bill aspects of Credito Facil. Last year, it announced a broader partnership with Scotiabank Colpatria to create a new company to continue growing the business.
To date, more than 1.3 million Codensa customers have taken a loan through Crédito Fácil. For more than 75 percent of them, this was their first formal credit experience. In 2015, non-performing loans stood at 4.98 percent, lower than competing retailer credit cards.
A few factors have been crucial to the program’s success:
- Deep customer relationships. Customers consume energy every day and have regular payment interactions with their electricity provider. Codensa (and now Scotiabank Colpatria) is able to analyze that data (with the customer’s consent) to underwrite loans.
- Trusted service provider. According to Alvarez, “The program was so successful because people did not see a bank. It was the energy company that reached out to them and helped them to acquire their assets.” Even today, Crédito Fácil’s trademark yellow card bears Codensa’s name, not Scotiabank Colpatria’s. The program is also managed as a separate unit within Scotiabank Colpatria, with different customer service channels, which helps cater to Crédito Fácil’s customer base.
- Retail partnerships. Customers like the program because it connects them with appliances and other goods they could not otherwise access. These are available through partnerships built by Codensa, which offer retailers an opportunity to reach a new group of customers.
- Use of payment infrastructure. Customers repay their Crédito Fácil as a line item on their monthly electricity bill. Embedding the loan into a familiar bill encourages on-time repayment, and leveraging existing infrastructure lowers costs.
Consumer protection in bundled services
Linking credit to an existing service payment is convenient for the customer, but it can also raise consumer protection issues. In the case of Crédito Fácil, customers have the option of paying the electricity charge and credit repayments separately, and their electricity service cannot be disconnected for nonpayment of the finance charge.
Another key concern for Alvarez is over-indebtedness: “If you over-indebt customers from the beginning, if you don't treat them judiciously, if you don't have a judicious program, what you end up offering ends up punishing the customer, and that ends up being a social problem because you harmed that person for life. So you have to be careful when taking a credit decision.”
Codensa tries to mitigate this risk by starting customers with lower credit limits, then only upgrading them when they’ve clearly demonstrated ability to repay.
Electric Banking: Part of a wave of embedded financial services
From WeChat to Go-Jek to Codensa, embedding financial services in non-financial services has had an enormous impact around the world. Poor households may not always make good clients for traditional banks or microfinance institutions. But for the types of organizations that know them and serve them, there are many opportunities to add value through appropriate financial services.