In recent Mondato Insights, we have discussed a series of digital finance & commerce (DFC) use cases such as health, agriculture and education. Utilizing digital technologies to resolve challenges in these areas can propel more adoption of mobile money while at the same time solving real-world problems for many of the world’s underserved populations. In Africa specifically, the GSMA’s State of the Industry Report claims that the percentage of mobile broadband access will increase from 19% last year to 53% in 2020, promising a surging opportunity to leverage mobile networks and digital technology to distribute essential services. Access to energy via mobile technology presents one of the most attractive value propositions for both end-users and the legacy institutions that can assist in the development and distribution of off-grid energy solutions.
According to the 2016 World Energy Outlook, the African continent has a collective electrification rate of less than 50%, compared with 86% in emerging Asia and 95% in Latin America. The highest concentration of those without access to modern energy lies in the rural areas of Sub-Saharan Africa, with a rate of electrification of merely 28%. As a majority of the African population lives with little or no access to power, the use case for energy delivers a powerful, if not essential, value proposition, particularly since Africa is not short of the sunshine necessary to generate off-grid solar solutions for power.
With mobile connectivity and digital financial services on the rise, it’s no wonder that off-grid solar solution providers have sprung up in rural communities across Sub-Saharan Africa. In order to finance these solutions, many companies are leveraging mobile money systems to provide a palatable way for users to pay for the technology - Pay-As-You-Go (PAYG).
Let’s Get Lit: Winning Over the Consumer
[So how do PAYG solar services work?](https://www.scientificamerican.com/article/pay-as-you-go-solar-energy/) In most cases, there is an upfront fee of approximately US$10 for a solar charging kit with a solar panel and a LED-light powered control unit that can charge devices like mobile phones. It can take between 1-3 years for the kits to be paid off, depending on the payment plan and frequency of payments.
Providing solar energy via mobile money, on a PAYG basis, eliminates the barriers of financing and capital requirements to providing power, while also tackling obstacles to mobile money adoption and usage. One major barrier to uptake is a lack of financial literacy, which makes it difficult for end-users to understand the value of formal financial services. More valuable than formal financial services is often an immediate access to electricity, which means more time for shops to remain open, and more time for children to study. The strong value proposition incentivizes the rural poor to spend time with agents to overcome literacy issues that would normally prevent them from signing up for mobile money.
A lack of trust in financial institutions also deters consumers from signing up. A report found that 44% of non-users in Sub-Saharan Africa believe that the service is not secure. Focus groups have shown that the fact that one can return the light before the installment payments are complete is a major incentive to try it, thereby overcoming the problem of trust in the institution and the service by allowing them to test out the kits before fully investing. One study even found that 15% of customers paid back the full loan in a few larger payments after trying the service for a short time.
PAYG solar companies have priced the payments to match the daily spending on kerosene so that cost should not be an issue. As PAYG does not require any additional saving, using the same budget already allocated to energy, it is a more attractive payment model than other off-grid services.
Once the kits are paid off, the electricity from the solar kits is free for the owner. Some companies utilize the user’s repayment history to refinance the solar base station as collateral to generate credit. The opportunity for access to consumer-level financing is another important motivator for cash-poor users since it enables loan sizes much smaller than previously possible to first-time borrowers. And though the original need was for lighting, once introduced to the formal financial system of payment and credit, many wish to utilize the PAYG model for other solar-enabled appliances like TVs, smartphones and radios or leverage the credit to take out cash loans.
Lightening the Load: How PAYG Helps Banks & Telcos
Mobile money presents [a more efficient and automated way to collect payments](http://www.cgap.org/sites/default/files/Working-Paper-Access-to-Energy-and-Finance-April-2016.compressed.pdf), as well as a less expensive and more transparent means than physical cash. And though mobile money has been cited as a [critical enabler](http://www.gsma.com/mobilefordevelopment/programme/m4dutilities/assessing-the-opportunity-for-pay-as-you-go-solar-in-nigeria) for PAYG solar products, the most distinct opportunity for PAYG is found in [countries such as Ethiopia, Tanzania, Ghana, Nigeria and Côte d’Ivoire](http://www.howwemadeitinafrica.com/four-things-know-africas-pay-go-solar-energy-market/) that can support solar technology, but may not have experienced as much mobile money uptake.
In the case of M-KOPA, a PAYG solar company that has partnered with M-PESA , much of the success can be attributed to M-PESA’s already established customer base. Other countries do not benefit from a Rolodex like Safaricom, and have built strong agent networks that individually register and educate each customer. These agent networks are a massive investment, and both banks and telcos benefit from these relationships, as well as the ability to sign up last mile populations.
In Nigeria alone, 55% of the population, which adds up to 100 million people, does not have access to the electricity grid. Among that population, 70% has access to a GSM phone, therefore creating an opportunity for 70 million to access PAYG solar services. For bank and telcos with a weak rural presence, PAYG energy provides a value proposition to encourage registration for mobile money services. Often financial services in rural communities – and beyond – may not appear to be particularly useful to last mile consumers. Energy, on the other hand, is seen as extremely valuable, and the introduction of pay-as-you-go electricity can be leveraged as a tool to improve mobile money adoption.
A recent Better than Cash Alliance (BTCA) report cited the digitization of routine use cases, like PAYG energy, as a key accelerator to the adoption and progression of digital payments. It has been estimated that approximately 50% of off-grid energy customers have never used mobile money prior to the energy service. A CGAP report suggests that 30-50% of PAYG customers outside of Kenya had not used mobile money previously and signed up to be able to digitally finance their energy solution. This wasn’t merely a rural phenomenon; the report also found that utility payments are a main driver of mobile wallet usage in both rural and urban areas.
In addition to registration, PAYG users are more active. Mobisol, a PAYG provider, found that that their customers in Rwanda were much more active than those that used traditional mobile money services - with an average of 1.7 transactions per month. By incentivizing mobile money payments through a strong value proposition, PAYG solar programs increase access and usage of the technology, and thus, stimulate the ecosystem. Multiple providers in Tanzania similarly found that customers send recurring payments every 7-10 days for 3 or more years, creating “stickiness” that P2P transactions have not been previously able to achieve.
Beyond encouraging mobile money usage, the digitally financed energy solutions create an introductory point to formal financial services. M-KOPA distributed solar panels to the rural poor in Kenya, Uganda and Tanzania with this model. Users with good payment histories could remortgage their products to acquire other goods, resulting in doubled revenue from 2014 to 2015. Energy companies like M-KOPA are creating wireless credit based on their growing databases of payment histories.
For financial services providers and telcos, the PAYG solar models of credit and asset-ownership de-risk lending to last mile populations. As the product can be repossessed when it is refinanced for an additional product or loan, if a payment is missed, the lights go out, and thus there is a strong incentive for repayment – and more assurance for those providing capital investment. In addition to minimizing risk, the PAYG solar model maximizes agent liquidity by creating more value for mobile money agents in rural areas; their purpose is broaden for a cash-out enabler to a representative that can then top-up prepaid energy accounts.
What’s the Next Step?
Mondato is certainly not the first to declare that PAYG solar services could be the key to mobile money adoption in Africa. While it seems that energy is a viable use case that creates a clear value proposition for both legacy players and end-users, there are still many barriers to be tackled. Some governments may see off-grid as competing with state-owned, incumbent utility companies. To overcome this perception, strong local partnerships with banks and telcos will be required to institutionalize and scale the technology and the PAYG method.
Although PAYG utility companies have developed a commercially viable outlet for credit and loans, many do not have access to enough funds to meet their demand, and because they are not funded by local markets, there is a precarious vulnerability to currency risk. Through partnerships, with a local bank, for example, the bank could leverage the strong customer relationships, accounts and the rural agents and in exchange, provide the utility companies some capital, and potentially banking expertise and infrastructure.
Further, mobile money transaction costs and user experience have been cited as major barriers to PAYG solar adoption. Although mobile money may be less expensive than physical cash, the fees are still a deterrent. A decrease in these fees would result in much more usage and interest. Mobile network operators (MNOs) can offer lower rates and integrate a simple PAYG option into their USSD menus, as what Safaricom has done with M-KOPA in Kenya, or MTN and Fenix in Uganda, and in exchange, they benefit from having the money stay in their system.
Light at the End of the Tunnel
As it is too expensive to extend the electricity grids in many rural parts of Africa, solar systems seem to be the best option to begin to meet the needs of more than [150 million people in Africa alone](https://image-store.slidesharecdn.com/5b2703fe-bd12-4c2d-b2ce-ae71a26bf419-original.png) who are not currently connected to the grid, and thus the technology and its partnership models are bound to gain traction. It is estimated that the number of home power systems on African roofs will grow by [60-100%](http://www.economist.com/news/middle-east-and-africa/21709297-small-scale-solar-power-surging-ahead-africa-unplugged) in the coming years.
“Service providers who offer immediate quality of life improvements tied to mobile money usage are an invaluable catalyst of mobile money adoption. No one will be as invested in the growth and quality of mobile money as the companies dependent on it for their survival,” explains Daniel Waldron, a Digital Finance & Energy Specialist at CGAP, the Consultative Group to Assist the Poor.
The PAYG solar model provides an attractive and digestible financing method from both the demand and supply side perspectives. Moving forward, mobile money stakeholders should consider this use case as a potent opportunity, with a first-mover advantage at stake.
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Image courtesy of DIVatUSAID.