East Africa is known as a hotbed of innovation in financial services. Now that mobile money platforms have become widespread, the private sector is using these services to power the delivery of additional services, such as pay-as-you-go (PAYG) solar energy. Interestingly, we are now seeing this relationship work in reverse: usage of PAYG energy services is also propelling financial inclusion.
This trend is becoming evident in four critical ways:
1. Solar operators are actively signing up their customers for mobile wallets. CGAP research suggests that 30%-50% of PAYG solar customers outside of Kenya are new to mobile money and opened a mobile wallet in order to purchase a digitally-financed energy solution. In urban areas, evidence suggests that utility payments are a main driver of ongoing mobile wallet usage. As the majority of PAYG solar customers are rural or peri-urban, PAYG solar providers are pushing mobile money services into frontier areas, often ahead of the corresponding agent infrastructure. Solar operators are often mobile provider agnostic, giving customers the choice to sign up for a mobile money account of their choosing – likely benefiting all mobile money operators. As the off-grid energy market begins to scale, it’s likely that PAYG solar will become a main driver of mobile wallet signups in frontier areas.
2. Digitally-financed energy gives customers a tangible ongoing use case for mobile payments. Most customers make a payment for prepaid energy services every 7-10 days. In Tanzania, Mobisol and Off-Grid:Electric customers send recurring mobile payments for three years or more – delivering the kind of long-term “stickiness” mobile money providers are seeking. Many PAYG solar providers are also taking steps to ensure users avoid over-the-counter transactions, providing a discount to customers who purchase prepaid energy with their own mobile wallet and offering extra commission to sales agents to promote this habit. Off-grid energy companies are also becoming some of the largest mobile money billpay recipients in East Africa, with M-KOPA Solar already cracking the top three in Kenya.
3. PAYG solar providers are also addressing a key business challenge – agent liquidity. A big question for mobile money providers is the feasibility of mobile money agents operating in rural or frontier locations. Such mobile money agents typically operate as a cash-out point, but in the case of solar, agents in frontier areas receive reverse liquidity when rural PAYG solar customers consistently top up their prepaid energy accounts. Additional research is needed, but this initial experience shows that off-grid energy can improve the feasibility and business case for mobile money agent networks in frontier areas.
4. PAYG solar companies are providing off-grid, predominantly unbanked consumers with their first access to formal financial services. These solar providers assess and segment customers according to payment risk, extend credit in the form of a high-value asset that is paid off over time, introduce incentives to drive payment behavior, follow up on non-payment, and of particular importance to financial inclusion, create a formal credit history for customers. This payment and credit history is already being used by PAYG solar providers to provide follow-on credit in the form of upgrading to larger systems and aspirational appliances. For example, Off-Grid:Electric has started to sell higher end appliances such as TVs to consumers through short-term payment plans where the asset installment is combined with the customer’s prepaid energy top-up. Mobisol offers customers the ability to upgrade to a larger home solar solution based on the equity they have built toward owning their first solar product, using this as a form of collateral toward extending additional credit to the same customer. It can also be leveraged to extend a wide range of other financial services to the same consumer. In many ways, PAYG solar companies have built the first scalable model for providing asset financing to unbanked consumers.
The impact of PAYG solar on the uptake and use of mobile money is larger than originally expected, and ultimately could become a major driver of financial inclusion in frontier areas. As the PAYG solar sector scales, these businesses are likely to expand beyond energy to deliver other essential goods and services – i.e. water filters, education loans, tablets – through the same channel and similar digital finance offerings. The future of consumer finance for the poor might just start with a PAYG home solar solution.
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This is a wonderful example of how to build an ecosystem. savings and postal banks could also take advantage of this network to enhance their financial inclusion activities by, for example, partnering with PAYG solar providers, benefiting this way of their segmentation and payment experience meanwhile working with a bank could provide PAYG solar with a source of additional collateral (savings accounts) or additional credits to buy higher end appliances, etc. without speaking about development of insurance products etc.