Taming the Strange Beasts: Servicing and the Future of PAYGo
Millions of people in Africa and Asia have gained access to payments, savings, and credit through digital finance. But most of them are still not able to access financing for assets that would help them to grow their incomes, mitigate shocks, and improve their quality of life—assets such as solar electricity, clean cookstoves, vehicles, and processing equipment.
Pay-as-you-go (PAYGo) solar is the first of what we hope will be many industries that upend this dynamic. These companies provide financed solar home systems to off-grid households by connecting financing to use: when users make a payment, their system is activated to function during the amount of time purchased. At the end of that time, it shuts off. Once the customer has purchased the contracted amount of time, the system unlocks permanently and becomes his or her property.
“Strange Beasts: Making Sense of PAYGo Solar Business Models” details the unusual structure of PAYGo solar companies: they combine manufacturing, distribution, and financing to offer a single, intuitive product to the end client. PAYGo value chains are already beginning to become decoupled as more and more companies outsource manufacturing and software to specialist providers. But the solar product and consumer financing parts of the PAYGo business are still tightly linked through their shared servicing functions. Every PAYGo loan installment requires a device code to be sent. Every PAYGo device malfunction leads to nonpayment on a loan. This integrated servicing is at the heart of PAYGo solar and is the focus of this paper.
The single greatest obstacle to asset finance companies reaching scale is financing for their receivables, which would enable them to acquire and distribute more products while they are waiting for older sales to be paid off over 12-36 months. There are several ways that receivables can be financed: on-balance sheet, off-balance sheet, through captive finance companies, or through direct financing of the end customer by a bank or microfinance institution. But all except on-balance sheet financing would require the PAYGo company to decouple its servicing of the solar asset from its servicing of the PAYGo loan. This would enable more commercial debt to reach these companies and more financial institutions to take up active partnership.
Raising more investment would be a tangible benefit. But standardizing and isolating loan servicing should also be a focus of investors. Most of the capital invested in the PAYGo sector can be recovered only by the originating company; there is no backup option. This paper demonstrates why this represents a serious and underappreciated risk and lays out the options for how it can be avoided. As the PAYGo sector grows and expands, it is likely to get a little less strange. And it will be able to help far more people to access the assets they need.