Where Credit is Due: How to Safely Scale PAYGo Finance

We need more pay-as-you-go (PAYGo) solar, not less, to bring modern energy to the poorest communities within the next decade. But when companies grow PAYGo loan portfolios too quickly, without establishing cultures of managing risk and internal controls to protect consumers, they can harm the people who need credit the most. 

The Problem

Seven hundred and eighty-nine million people do not have access to modern energy. The world collectively set a goal to bring that number to zero by 2030. For roughly a quarter of those unelectrified households, located in low-density areas far from the grid, solar home systems (SHS) are going to be the fastest, most efficient way to access modern energy. 

Unfortunately, the people currently living without electricity have very low incomes on average. In Sub-Saharan Africa, 350 million unelectrified people live in countries with electricity access rates below the regional average. On average 73% of these people live on daily incomes below $3.20, and SHS are too expensive for them to afford out-of-pocket. PAYGo financing allows customers to spread that cost out over months, making it more affordable. Yet that sword cuts both ways: consumer credit has the potential to create harm for people in poverty, through overselling of products to people who cannot afford them and may not understand the terms.

The ability to pay for valued products over time (consumer credit) is how hundreds of millions of people throughout modern history have accessed everything from farm tools to refrigerators and clothing. It is responsible for the cars we drive and the houses we grew up in. Low-income households have historically relied on consumer credit even more, as a means of investing in a better life. But people who are accessing formal credit for the first time, who may be unfamiliar with contract terms, are disproportionately vulnerable to over-selling and obfuscation on the part of sales agents. 

This problem is literally as old as consumer credit. Lendol Calder, in Financing the American Dream, recounts how in 1856 the I. M. Singer company began selling sewing machines ‘on time’ to working-class households, and within a couple of decades, sewing machine agents who worked on commission “were notorious for their aggressive, ‘dollar down, dollar a week’ tactics.” In her book City of Debtors, Anne Fleming describes early 20th century ‘installment sellers’ in New York City who “engaged in the ‘systematic sale of worthless goods at high prices.’” In microfinance, subprime mortgages, and payday lending, the story repeats: when companies lack the right combination of culture, incentives, and safeguards, low-income borrowers can be misled on terms, agree to purchase an asset over time without understanding its full cost, and wind up defaulting or paying a fortune in added fees. 

PAYGo for Everyone

PAYGo solar financing is a technical marvel that allows households to pay for modern energy as they use it. A user pays for a number of ‘energy days’ at a fixed price per day, then when those days have elapsed the system shuts down, until the user pays again. After they have paid for a set number of days (usually 12-24 months), the system unlocks permanently and the household owns it. This business model combines renewable energy, digital payments, mobile communications, and sophisticated firmware to make SHS affordable for people living in poverty. But PAYGo is still consumer credit, and consumer credit is like salt on a meal: utterly necessary, but ruinous if applied without care.

If we are serious about reaching the goal of universal energy access for the hundreds of millions who live without energy, we will have to rely heavily on credit based business models. Many of these people are poorer than the existing PAYGo client base, and they absolutely need the solutions that solar energy companies are creating. To move forward with PAYGo, without putting customers at risk, we – companies, investors, governments, and donors – will need to ensure that three things are in place

1. Affordability 

The cheaper a product is, the more people will be able to afford it. Sounds simple, but in the world of credit, it isn’t. There are all sorts of ways to create affordability in PAYGo: efficiencies of scale, concessional financing that brings down the cost of financing, a wider mix of entry-level products, and reduced fees for mobile money and imports. 

But by far the biggest impact on affordability would come from end-user subsidies, which reduce the cost that customers pay for a given product. One PAYGo executive said that “subsidies of 30-50% would immediately make PAYGo profitable, thereby bringing in more commercial capital, and it would make the poorest reachable with a market-based model.” In 2021, the Global Off-Grid Lighting Association (GOGLA) interviewed 25 off-grid solar companies, and reported a prevailing view that end-user subsidies were necessary to reach the poorest households with modern energy, but that significant issues would need to be addressed: reducing market distortion, equitable targeting, and transparent, efficient implementation were chief among them. 

End-user subsidy programs that enable households in poverty to pay what they are able, but not more, could transform energy access. Designing and implementing them will not be easy, but they could be transformative. Governments such as Togo and Rwanda have already deployed end-user subsidies, and we hope more countries follow suit.

2. Structure

Even with more affordable products, PAYGo companies need the structure for managing risk and protecting customers. This starts with cultivating a culture of customer care and risk management so that everyone in an organization knows the expectations, and that behavior which violates those will not be tolerated. Then companies need to create a strategy that includes policies, procedures, training, and incentives. Governance across all of that ensures that results line up with expectations, and that if they don’t, there are consequences. 

All of that is internal. But one PAYGo Credit Director pointed out that it’s just as important to have the systems in place that enable customers to succeed: “invest heavily in customer education and understanding, then cross-check both of those as well as capacity and willingness to pay…And you need to have fair recourse if the customer can’t handle their obligations.” 

Despite these safeguards, every company will eventually have an agent that tries to make easy sales by lying to customers. PAYGo companies must have the risk management systems that can recognize a problem, and risk managers who are empowered to act in response. 

Lastly, it is investors’ responsibility to ensure that they are funding companies that take risk management and consumer protection seriously, that those companies have the resources they need, and that they put these structures in place. 

3. Patience

All of this takes time and learning. Credit is an iterative process; you only learn if a model works by seeing if people pay for it over time. Once we have confidence that a model works in a new area for low-income customers, we can apply more capital to scale it up. Moving fast and breaking things is not the right approach when lending money to vulnerable people. A more cautious approach might delay profits, but it will also prevent harm. These signals must come from the market: investors need to value healthy portfolios and retention more than just top-line growth.

We will not solve energy access today. The reality is that many people who need access cannot afford the products on offer, and we are not able to serve them yet. But tomorrow is another story.

What Acumen Has Done, and Where We are Headed 

Like many in the sector, Acumen has endorsed the GOGLA Consumer Protection Code  and our investees have each made a Commitment to it. We look forward to building those principles into a robust code of conduct for ourselves, our portfolio, and the sector at large. 

Acumen’s greatest lessons around consumer credit and protection have always come from one source: the customers themselves. Acumen pioneered the practice of Lean Data: brief phone and SMS surveys with a subset of a company’s customers. As this evolved and was taken forward by the team at 60 Decibels, Lean Data became an invaluable tool for consumer research, but also consumer protection. 

By asking customers whether their PAYGo payments are a heavy burden, whether they have ever cut back on food consumption to pay for energy, and how they were treated by a sales agent, companies are able to evaluate the level of indebtedness of their customers, and whether their sales agents are operating as intended. Nor is this limited to companies: Acumen and KawiSafi Ventures, our affiliated energy fund, both use 60 Decibels’ Lean Data service in the investment process to assess the impact a company is having on its customers. 

We are as committed as ever to the notion of universal access to modern energy. We agree with Persistent Energy that PAYGo solar is the most effective tool at our disposal. As we plan to grow its reach and impact over time, we will remain cautious and conscious of prior missteps. That is the only way to ensure that everyone can access modern energy, safely and with dignity.