European Microfinance Week 2018

PRESENTATIONS

Eduardo APPLEYARD, UNCDF CleanStart, started this session by explaining how the CleanStart global programme focuses on getting low-income households and SMEs a jump-start on using clean energy. This is done by investing in early stage, innovative business ideas from SMEs and financial institutions that have the potential to make a step-change in improving the accessibility and affordability of modern energy for underserved people. Clean energy solutions are for instance solar home systems, biogas and fuels (e.g. biogas, briquettes, LPG) obtained through micro-loans or PayGo financing mechanisms.

The evolving needs of the energy sector made UNCDF change its strategic focus over the years. CleanStart started off mainly providing financial and technical assistance incentives to financial institutions in order to encourage them to structure energy lending products for low income people. After a comprehensive analysis of market conditions, UNCDF determined that the MFI model was difficult to achieve without strong MFI networks in place and without government strategies emphasising energy lending portfolio growth. At the same time, technology in the energy sector was rapidly evolving and PayGo solutions were becoming more widespread widely. Therefore CleanStart made the strategic decision to promote financial inclusion across the energy value chain and to work with a range of companies (not just MFIs). As a response to the market, they also started using a Challenge Fund mechanism to provide catalytic capital to private companies. This is done to develop commercially-viable models to expand energy access.

Today, Appleyard continued, a new business model is seen whereby PayGo and non-PayGo energy providers are pairing up with MFIs to reach more customers at scale. MFIs offer rural networks for distribution, pre-rated (credit history) customer bases and sources of micro-financing so that energy companies can avoid self-financing. At the same time, MFIs are pairing with energy companies to offer their clients clean energy products that help them extend and maintain their borrower relationships.

DISCUSSION

After setting the scene, Appleyard asked the panellists how they define PayGo. Samuel ADIPRAKOSO, MicroEnergy International, defined PayGo as a payment method, where people pay a specific amount to get a defined amount of energy as a service. The end-user does not have to own the system. Annie VON HUELSEN, Village Power, stated that within the Village Power model, PayGo is a technology-based path to asset ownership. Stefan ZELAZNY, Mobisol, described PayGo as a fusion of FinTech and technology. Technology reflects the remote control of a high-quality physical asset, while FinTech provides high flexibility in the repayment scheme.

The session continued with a discussion on the differences and similarities between PayGo businesses and MFIs. Stefan GRUNDMANN, BrightLife (FINCA Plus LLC), argued that the process for acquiring credit through PayGo companies is much faster than through MFIs. MFIs require a customer to go through a whole range of assessments, whereas the process with PayGo companies is almost instantaneous. Also, PayGo companies have highly flexible repayment schedules, while those of MFIs are strict and enforced by penalties. On the other hand, MFIs have less growth restrictions because of larger balance sheets due to the ability to collect deposits. The repayment rates of MFIs are also generally better than those of PayGo companies. Lastly, Grundmann pointed out that MFIs have the benefit of trust as they have been around longer, which makes it easier for them to create long-term relationships with customers. All panellists agreed that MFIs and PayGo companies can both learn from each other.

The discussion moved on to how PayGo companies are trying to develop a model that effectively merges two distinct value chains, i.e. consumer finance and off-grid solar distribution. Von Huelsen argued that an important step for energy companies moving into PayGo services is to develop some of the core competencies of MFIs and to learn from them. This means that one-on-one trust-building engagement with customers is key, as is having a good understanding of both customer needs and payment capability or credit risk, and managing collections. Von Huelsen added that a benefit of PayGo energy providers, as opposed to MFIs, is that they are positioned to retrieve more value from reclaimed components in the event of a default.

The moderator then asked the panel about the outreach of the PayGo sector when it comes to end-users. Grundmann mentioned that to date mainly peri-urban customers have been reached. The reason that rural areas lag behind has to do with the affordability aspect. This will change when the technology of the assets advances and becomes more affordable, when aftersales services get better and more efficient or, if loans are extended over longer periods of time. Zelazny underlined the necessity of good aftersales services. Maintenance is the biggest challenge to tackle: it is key that energy systems are simple and of good quality so field technicians are able to fix them.

A member of the audience asked what the scope is for partnering between MFIs and PayGo companies in order to reach clients in more remote areas. Grundmann affirmed that there is certainly room for partnering. He believes that MFIs and PayGo companies could serve a larger base of clients in partnership: MFIs often have a larger presence in remote areas and can serve as a customer acquisition channel for the products of energy service providers, whereas PayGo companies can reach lower-end clients as they also do business with people who would traditionally not be accepted by financial institutions. Grundmann illustrated this by explaining how BrightLife, as a PayGo company, takes the credit risk with its customers, which they then hand over as a formal finance client to their microfinance partner FINCA.

Grundmann also set out how the PayGo industry can learn from MFIs when it comes to client protection. He sees how PayGo companies are slowly moving more into a rental business model, because the industry is constantly trying to sell its products cheaper, in part by extending its lending terms. It is important that PayGo companies learn from MFIs with regard to client protection. Zelazny added that investors can also play a role, when they start to stress the importance of client protection principles for PayGo companies.

The investors’ interest in PayGo models was also briefly discussed. Adiprakoso pointed out that, in general, there is still a ‘wait and see’ sentiment between investors when it comes to investing in PayGo technologies. The interest is certainly there but investors first want to see how the companies deal with the risks. He added that from a business perspective, investors do see that PayGo providers are benefiting from the network that MFIs have already established. MicroEnergy International for instance supports MFIs that are greening their loans looking for technology providers. From there a synergy is created between both MFIs and technology providers. 

The discussion continued when an audience member asked the panellists about how important recycling services are to the market. Zelazny replied by saying that, in general, recycling is the white elephant in the room. He set out how Mobisol is now working together with other partners to recollect and recycle their assets, while they are adhering to the guidelines of their own certified recycling process. Appleyard added that this is a role that could well be taken on by specialised recycling companies active in this niche market.