The benefits and risks of new technologies are often framed as a binary. On one side, technology’s proponents promise that the latest innovations will single-handedly solve even the most intractable problems. Skeptics, on the other hand, warn of destructive risks that cannot possibly be managed responsibly. It’s a debate as old as time, and one that has accompanied the pay-as-you-go (PAYGo) financing industry since its inception.
Historically focused on financing solar home systems, the PAYGo financing industry is now expanding rapidly into providing credit for smartphones and even experiments with cash loans. This expansion is creating new opportunities for improving the lives of low-income households through financial inclusion, providing access to essential assets and helping bridge the digital divide. Along with that positive impact, though, comes significant customer risk that will need to be managed. The challenge for the industry will be to manage those risks without killing innovation.
With great potential comes great risks
Descriptions of the potential impact of PAYGo solar have presented a false dichotomy. On one side, advocates have long promulgated utopian hype, particularly in the sector’s early days. On the other side, sceptics have characterized it as a failed and parasitic industry that preys on the world’s most vulnerable populations. But as is usually the case, the truth is more nuanced than either of these two extremes suggest.
At CGAP, we recognized the potential of PAYGo solar early on, but have never seen it as a panacea. Even as CGAP promoted PAYGo as a powerful tool for advancing financial inclusion and energy access, we have also done our best to temper our enthusiasm by acknowledging both the good and the bad in terms of customer experience and the sustainability of its business model.
The truth is that there are real customer risks in the PAYGo sector that need to be addressed. This is true of any innovation at the frontier of technology, however, especially one that markets to vulnerable customers with low incomes. Rather than abandon the innovation altogether, we believe the solution is to address the risks head-on and push the PAYGo industry to live up to its ideals. This is why we supported the development of the off-grid energy industry association (GOGLA’s) Consumer Protection Code, which aims to reduce the risks of negative impacts on PAYGo customers. – as well as improved KPIs to make the sector more responsible and sustainable.
While these efforts alone have not and cannot eliminate unscrupulous lending practices, we do believe that they can serve as a starting point for the industry and its partners moving forward. This will be especially important as PAYGo lenders seek to expand their customer base and move beyond solar to other products like smartphones.
As the asset finance industry evolves, consumer protection measures need to keep pace
The frontier of innovative asset finance has already moved beyond PAYGo solar, and along with it the challenge of balancing opportunity and consumer risk. The same technological and financial innovations behind PAYGo solar (e.g., remote locking, flexible digital repayments) are now being applied to devices like smartphones, allowing lenders to move into new markets and reach new customers. Financing smartphones is a particularly important opportunity for lenders since that market dwarfs the one for off-grid solar home systems. Indeed, while there are hundreds of millions of people who suffer from a lack of access to electricity, billions could benefit from more effective smartphone financing. We started exploring innovations in smartphone financing a few years ago, and since then, the market has expanded exponentially, with the likes of Google, Samsung and Vodacom all introducing their own smartphone financing products.
For people with low incomes, smartphones offer a gateway to the internet and a means for bridging the digital divide. Precisely because of the critical importance of a smartphone to an individual’s life and livelihood, the ability to restrict access to it when a borrower is late on repayments is a power not to be taken lightly. Strong customer protections must be put in place—whether by regulators or industry associations—to prevent customers from risks such as lack of transparency, usurious interest rates, fraud, over-indebtedness, unethical collection practices and misuse of customer data, among other things.
Transforming smaller assets into collateral can drive financial inclusion if done responsibly
From a financial inclusion perspective, one of the most promising innovations that could result from PAYGo smartphone financing—besides expanding access to the devices themselves—is the ability to use the smartphones as a type of “remote” collateral to access loans for needs like business, education or emergencies. CGAP already demonstrated the power of remote locking technology to turn paid-off assets into collateral when we worked with Fenix International (now Engie Energy Access) to develop an education loan product for their customers. To qualify for the loans, customers used their solar home systems as collateral, with Fenix able to lock the systems in the event of non-payment. A randomized control trial conducted in collaboration with IFC, UC Berkely and Washington University found that the lockout technology-enabled loans not only helped low-income, rural students stay in school, but also reduced risk and made the business model more sustainable for the lender.
The same approach used by Fenix to enable access to education loans can also be applied to smartphones, which offer a much larger potential market and impact on financial inclusion. . The impact could be revolutionary.
Of course, the idea of using smartphones as collateral comes with significant risks. In the most egregious scenario, re-collateralizing a fully paid-off smartphone could be seen as akin to ransomware. This is especially true if customers are sold loans they don’t understand and/or cannot afford, with missed payments resulting in them losing access to devices that are central to their livelihoods and ability to participate in an increasingly digital world and economy. Indeed, as CGAP’s research on digital credit over the years has demonstrated, once-promising innovations can ultimately lead to significant harm for consumers if appropriate protections are not put in place.
But even as we recognize the inherent risks in using assets like smartphones as collateral, the answer isn’t to ban the practice outright. Rather, stakeholders in the emerging smartphone re-collateralization industry should take appropriate action to maximize the benefits and minimize the potential harms to consumers. This means allowing the innovation to evolve while also carefully studying the risks, honing best practices, and putting in place strong consumer protections including effective regulatory regimes that can help curb predatory or otherwise unethical practices.
The stakes are indeed high: improperly mitigating risks to consumers can only lead to ruin for an industry that prides itself on social impact. But if done correctly, the innovations unleashed by PAYGo financing could do for internet access and financial inclusion what mobile phones and mobile money did in the two decades prior.