Clean energy in developing economies rests with a seamless, ubiquitous, easy-to-use financing platform based on energy and mobile money. Wireless credit is a very important piece of that platform.
Wireless credit is a new financial product that enables customers to build upon their pay-as-you-go (PAYG) energy repayment history and leverage the equity they’ve gained in their energy base station as collateral to access newfound credit. They can then use that credit to grow their businesses or invest in their child's education.
Energy access companies like Fenix International offer a revolutionary opportunity to extend credit at scale through a data-driven, risk-adjusted loan that’s bundled with PAYG energy. To date, microfinance, self-help groups and other lending products like M-Shwari have not offered larger loan sizes at attractive interest rates. Energy lending can change the game through data that shines light on true borrower risk and pairs loans with technology measures such as remote deactivation to turn off products with delinquent borrowers.
According to the 2014 GSMA report, there are strong signs of growth in mobile money -- with 61 percent availability across the developing world and 300 million registered users moving $16.3 billion across 717 million transactions in the month of December 2014 alone.
Yet most of these mobile money transactions are airtime top-ups (62 percent), and only 8.9 percent of mobile money transactions by global product mix volume are related to bill payments. With the exception of new energy access products, which represent <0.01 percent, bill payments are not on credit. So how do we exponentially grow and derisk the wireless credit opportunity to empower the unbanked?
Look no further than development banks and grant funds to catalyze the design, testing and scaling of the wireless credit opportunity. MasterCard Foundation has launched a new innovation fund that does just that.
A challenge grant from the U.K.'s Department for International Development, in partnership with Safaricom, helped launch M-Pesa and the first wave of mobile money. Grants also catalyzed PAYG financing that brought distributed energy products into the homes of millions of customers previously left off the energy ladder.
The current growth of M-Kopa and Fenix International shows the disruptive power of mobile money platform incubation in the energy space. Nick Hughes, co-founder of M-Kopa, echoed the need for and results of grant funding for high-risk ventures: “Grant funding gave us the breathing space to build our track record, and, with fewer than 5 percent of our customers defaulting, we’ve now been able to securitize our financing book and raise commercial debt to grow the business.”
Mike Lin, co-founder and CEO of Fenix International, explains how grants opened doors to scale energy access and finance:
“Fenix was awarded a $560,000 matching grant from the GSMA MECS initiative funded by DFID to scale our mobile enabled ReadyPay Power product in partnership with the MTN, the leading mobile telecom in Uganda. Grant funding enabled Fenix to test and launch innovative joint marketing with MTN, scale up our customer service and support teams, and manufacture the first 1,000 ReadyPay power systems beyond our pilot, which has now scaled to nearly 20,000 systems, installing over 250,000 watts of solar, and benefiting over 100,000 people in Uganda.”
To actualize the opportunity for wireless credit, we need to draw on the success of the M-Pesa model. More innovative capital is required from development banks, bilaterals and foundations for venture-worthy energy startups with a vision to derisk opportunities that telecoms and financial institutions are still apprehensive about today.
Innovative capital should come in two forms.
First, we need high-risk technology incubation capital from foundations and bilaterals to further the R&D of digital finance with focus on the customer interface, scalability and data security. Today’s USSD pay-as-you-go interface is clunky and not user-friendly, despite it being the most widely available product. The technology needs to be able to scale, and securely transact and store customer data.
Second, we need new working capital and favorable term debt funds from development banks that meet current deal-size requirements for the industry to scale both volume of loans as well as repayment data. More loans mean better meta-data for predicting risk.
Energy companies are already designing the foundation to create the possibility of wireless credit. The type of grant funding Lin and Hughes point to -- as well as development finance -- can certainly tip the scales in favor of an actual product. The most compelling progress is in building databases of customer credit history for predictive modeling of future repayment.
Daniel Goldfarb of Lendable explained:
"To better understand the creditworthiness of PAYG customers, providers will need to take seriously the task of knowing their customers. At Lendable, we help PAYG providers understand the risk of their portfolio, which sometimes means collecting more robust and organized data upfront and [on an ongoing basis]. The result is an increased ability to predict outcomes. With better data, we have been able to predict with a high level of accuracy the performance of follow on financing."
Business-to-business service providers for energy access have also seen the opportunity. “Repayment patterns for energy purchases provide a rich data set that can accurately predict consumer credit risk,” explained Lesley Marincola of Angaza, a PAYG solar company that provides a B2B technology platform to third-party manufacturers and distributors.
“By looking at how much, how often, and with what method a consumer pays, we can optimize the accuracy of the credit analysis," said Marincola.
Despite many regulatory, design and commercial barriers that need to be overcome for next-generation credit systems to work, we as an industry are on the right track and are well positioned to be energy and credit providers.
However, to fast-track the opportunity for wireless credit, development banks need to help support market development. Energy products coupled with wireless credit means putting meaningful life-changing solutions into the hands of billions of last-mile customers to rise out of poverty.
Daniel Tomlinson is an access-to-energy entrepreneur and 2012 Echoing Green Fellow. In 2009, he co-founded Frontier Markets, a distribution company whose aim is to build scalable clean energy access to last-mile markets in India.