Paygo vs. Retail: Demystifying Distributors' Key Challenges
This is Chapter 2 of 'Why SaaS', a series of articles produced by Solaris Offgrid aimed to empower last-mile distributors to make more informed decisions on the IT resources that can help them leverage their operations to thrive in the Paygo sector.
Financial exclusion is still affecting the lives of 1.7 billion people worldwide. For them, having no banking services equals no access to credit, and no credit often translates into the inability to access a sustainable source of energy or to afford essential services such as water, sanitation, health, and so forth. This holds especially true in Sub-Saharan Africa (SSA), where, as depicted in Solaris Field Stories Episode 3, at least 66% of adults don’t have a bank account.
Given the financial constraints of the unbanked, they understandably have to lean on acquiring products with cash-savings, which represents a solution only for some of them, especially those with enough cash-savings located in urban -or peri-urban- areas where retailers operate. But how is it possible for a family to acquire a solar home system (SHS), a water pump, or even a fan with cash in a region where, according to the UN, more than one-third of employed workers live on less than $1.90 a day?
Let’s not forget that the population in rural areas of SSA keeps increasing drastically. According to the Food and Agriculture Organization of the United Nations (FAO), “by the middle of the century, the estimated rural population in SSA is projected to increase by 63%. Sub-Saharan Africa is the only region in the world where the rural population will continue to grow after 2050.”
Therefore, serving the last mile in SSA is a tremendous, but complex opportunity. As per the Global Distributors’ Collective’s 2019 Status of the LMD Sector Report, “last-mile customers often have low, fluctuating, or unpredictable incomes. Most live in remote, rural areas with poor transport and telecommunications infrastructure.” Simply put, households at the last mile cannot afford to pay for accessing essential goods in cash, which requires local businesses to provide credit.
Through Pay-as-you-go (Paygo), consumers who cannot afford to pay for an asset in one go, have the chance to pay for it in instalments, more flexibly over time, thus not only being able to get access to clean energy solutions, but having access to financial services for the first time in their lives and, thereby, building a payment and credit history. And, given the success of the model, consumers are now gaining access to reliable products and services that are literally changing their lives, with multiple industries beyond solar, such as Agriculture, Clean Cooking, Water Access, or even Transportation, providing new financial opportunities for larger underserved communities.
Paygo has allowed SHS distributors to rapidly increase their sales to reach millions of installations per year. According to the Off-grid Solar Market Trends Report by GOGLA (2020), SHS Paygo sales increased 38% from H1 2018 to H1 2019, and 73% of the sales of lanterns, SHS and multi-light systems come from Paygo vs. 27% that comes from cash sales. Furthermore, Paygo has become such a propelling force driving consumers to adopt financial services that it generates an estimated 1.6 million mobile money transactions monthly (GSMA, 2017).
However, as we’ve seen the impact of the Paygo business model on successfully tackling energy poverty and propelling financial inclusion, what could possibly prevent a company in the region from adopting such a revolutionary business model?, how does it differ exactly from Retail? Let’s explore the answer through the following key challenges:
1. The ever-present cash flow constraints of Last Mile Distributors (LMDs)
To begin with, a cash model retailer is able to collect 100% of the margin and make a profit as soon as they sell, requiring them to keep cash flow positive between the sourcing and B2C transaction stages, and although the cash flow may be reduced at times before they manage to sell, they usually manage with no complications. They take care of the usual expenses that come along with the model, such as transport, taxes, clearance costs, sales channel but, for instance, a (cash model) distributor importing an order of hundreds of devices today, could start selling them as soon as the sourcing is complete, and collect their corresponding sales margin with relative ease.
Now, as good as that sounds, SHS and other essential appliances sold by retailers are still cost-prohibitive assets to afford with cash upfront for most households in remote areas of SSA. Therefore, although a retailer would constantly make a profit on the day of the sale, the market size to serve those who can afford such services paying by cash tends to be limited in the SSA context, making it non-viable to address the whole 600 million people in need of energy access, for instance.
In contrast, the journey to profitability for a Paygo provider requires way more patience and, among many other factors, tons of working capital. “The Paygo industry is a highly capital-intensive one and can require up to eight times more capital than cash sale-based companies” (Dalberg Global Development Advisors and Lighting Global 2018; Lighting Global, GOGLA, and ESMAP, 2020). And while there is an increased profit margin on a Paygo model, such increase is usually eaten up by higher costs of financing and the complexity of its operations.
A Paygo provider must endure collecting the profit margin toward the end of the 6 to 18 months lease period (exposing such a margin to customer default risk), while in parallel take care of stages such as distribution and maintenance. All of this while attempting to keep the cash flow running, which represents an immense challenge, especially for early-stage and medium-sized organisations. If able to manage such implications, they can reach higher volume sales, as the model has proven to provide increased affordability for the consumer and enable Paygo LMDs to cover a larger segment of the market unattended by Retail.
Year after year, Paygo keeps expanding its market size and positioning higher its value. According to GOGLA’s latest market report (2021), “approximately three quarters of all SHS sold globally are sold on a Paygo basis.” In other words, the SHS market size of Paygo is now three times larger than that of Retail; without Paygo, the SHS market would only amount to 25% of what it did through 2021.
Semi-annual Evolution for Key Appliances Sales Volumes - East Africa (Source: GOGLA)
The Paygo methodology and the tools are already in place, allowing several LMDs to deploy the model at scale and, ultimately, transform lives. However, as we explored recently in PaygOps’ Fintech Leadership Vision, thousands more local distributors are still needed to reach SDG7 by 2030, as “investment in the sector is highly concentrated, with just ten companies receiving 78% of total investment in the sector between 2012 and 2019” (Lighting Global, GOGLA, and ESMAP, 2020).
For early-stage Paygo providers, scaling up is still a struggle, and they must heavily rely upon generally limited equity and grant investments. Yet, while having to juggle with so many operational processes, when repayment trajectories of customers don’t always go as expected and there’s no cash flow, attracting investment becomes also a massive task, given distributors will also lack the resources to carry out the pertinent due diligence and data structuring that can get them exposure to major debt providers.
Having understood that the bottleneck in last-mile financing exacerbates the struggles of LMDs towards scaling and reaching profitability, Solaris Offgrid engineered the PaygOps TRUE Receivables Platform, which allows debt investors to directly purchase pools of Paygo receivables from distributors, giving the latter the opportunity to obtain the needed liquidity in a short time and be able to reuse that cash to scale, while taking less risk because instead of having to repay in fixed periods the underlying pool of receivables, the payments are being sent directly from the end users to the investor (To dig further into the scope and benefits of the novel financing mechanism, we invite you to visit our dedicated page).
2.- More complex organisation = more complex set of skills
Retailers in SSA sell essential products and energy-efficient appliances, such as SHS, TVs, fans, lanterns, water pumps, among others, directly to customers, generally in a centralised physical shop in urban centres where the purchase takes place, done by cash and in one go. They don’t take part in manufacturing the products they sell and, instead, import large quantities of appliances from suppliers that they (sometimes) manage to pay after up to 90 days. Some of them offer basic after-sales services, which also occur at the same point of purchase. A retailer is, in short, a liaison between the end consumer and the supplier.
Paygo providers, on the other hand, require the same business management background and expertise as retailers do, on top of a series of competencies within an operational structure integrated by several business areas, such as product design (this is becoming less frequent), sales and distribution, installation and maintenance, payment collection, and necessarily, financing. As CGAP describes them in Strange Beasts: Making Sense of PAYGo Solar Business Models (2018): “Paygo companies combine elements of modern electric utilities that provide clean energy services, retailers that sell durable goods through diverse distribution channels, and financial institutions that provide leasing that makes valuable assets affordable for low-income customers.”
Paygo Value Chain (Source: CGAP)
As if running such a complex organisation is not cumbersome enough, Paygo providers must deal with increased overheads drawn by complications inherent to the unique logistics of last-mile distribution, in aspects such as credit control, agent management, customer education, delinquency and the inevitably unpredictable repayment trajectories, just to name a few. Additionally, Paygo distributors offer after-sales services that increase in intensity against Retail, as it involves, among others, field maintenance visits, repayment collection management and customer retention. Larger organisations even have multilingual call centres with a large network of agents and local technicians, which allows them to provide higher quality service.
In order to manage a market three times larger than Retail, it comes as no surprise that Paygo organisations present an increased complexity in the organisation structure and functions; hence the need for Paygo LMDs to learn new skills that will let them efficiently handle the different complications that may arise while, again, keeping cash flow positive. But how can a Paygo organisation manage such a complex scenario? On one hand, it’s imperative for them to become debt raising masters to manage the financial implications of such varied operations and their possible drawbacks. On the other hand, a Paygo provider can benefit from automations/systems that can make processes more efficient, which they can obtain via PaygOps’ Custom Workflows, as we’ll dive deeper into in the following challenge.
3. Investing in IT to support complexity of last-mile operations
Cash model retailers rarely have the need to invest much in specialised IT infrastructure or tend to overlook it. They might have a basic CRM or a business management software to manage their customer relationships, register transactions and manage their one way inventory. As we’ve seen in the field, on many occasions, some of them just use Excel spreadsheets for accounting purposes and the traditional over-the-counter operations.
The complexity of the aforementioned Paygo operations at the last-mile, however, requires organisations to have in place a sophisticated technology/IT infrastructure. For starters, LMDs need to have in place a dedicated last-mile management software, that allows the LMD to have their sales, lease, after-sales, and inventory functions centralised. What’s more, given internet connectivity in isolated territories is usually unreliable or non-existent, a mobile app that supports offline activity is essential, such as the PaygOps Offline Mobile App. In many cases, LMDs can’t provide their agent network with smartphones. Therefore, an SMS integration is also necessary to serve both the LMD and end-customers in lease management and after–sales operations (we recommend you to read our TelCo series to learn further about Mobile Money and SMS integrations).
Whereas in Retail the purchase happens in one go and represents only one transaction per client, Paygo providers must deal with multiple transactions from the same customer over a year or more until repayment completion, which gets trickier when dealing with thousands of transactions by thousands of customers spanning across different villages, while also controlling the activation/deactivation of devices through a token (such as the OpenPAYGO Token), and the increased after-sales service requirements inherent to the model.
Besides, Paygo LMDs require the right technology to manage a multiple-way inventory that can ideally enable them to maintain all essential inventory functions under a centralised system and keep track of inventory aspects such as stock level, asset identification, and movements, while dealing with the complications explored previously.
Not only that, but a Paygo provider needs an IT infrastructure that can support them in knowing their customers better than a retailer would, given that they now play the role of credit providers, so they must assess whether such a customer can repay such loan or not (credit scoring) and, in the long run, assess whether the customer is eligible for energy discounts, device upgrades or further financial services.
And while the LMD needs to monitor their customers’ behaviour over time, a debt provider will be interested in analysing such trends plus the overall financial performance of the Paygo organisation itself. Therefore, LMDs must have the IT capacity to report, through a complexified/lease structuring accounting system, to debt providers trying to assess the quality of their portfolio and provide them with granular data and metrics on different aspects of their business operations.
That’s just the big picture of what any given LMD might come across, but since organisations carry out processes differently, use different tools for different tasks and have specific business needs, building custom workflows with complementary software solutions will enhance the Business Intelligence of their organisations. Designing and setting up custom workflows will enable automated data exchange smoothly between the core last-mile management platform and the third-party applications that the organisation may use, preventing the LMDs from executing prone-to-error manual work across platforms, thus making more efficient their processes by saving them time and, therefore, overall costs (For detailed information on Business Support Services, visit our dedicated page).
As we concluded in our latest study on IT Costs across Last-Mile Distributors, if used effectively, having a solid IT/Technology strategy can have a huge impact not only on the day-to-day operations of a last-mile distributor but also on its likelihood to raise funds, as investors are likely to invest additional capital in companies for IT when they know that the capital is used well. Larger and more mature LMDs increase their investment in IT and technology because they understand that investing now will allow for greater returns from the increased effectiveness of operations, greater market opportunities now available, among others.
Thus, sporting a robust and flexible SaaS such as PaygOps as a core feature can greatly increase the scope of possibilities to support those LMDs willing to enrich their processes and IT infrastructure. PaygOps supports distributors through their data migration and custom workflow set up journey, working alongside LMDs to find the best solutions to adapt their complex processes to our last-mile management SaaS and tailor our advanced features to their unique business challenges.
In a nutshell…
1. Retailers earn the sales margin as fast as they sell. A Paygo business can reach higher volume sales within time as many more can afford the essential product/service (Paygo SHS is currently 3 times the market size of Retail SHS), but usually struggles to remain cash flow-positive in the process, which can be achieved through company loans, inventory or receivable finance mechanisms, such as the True Receivables Finance Platform.
2. Given the consequent changes it implies on the revenue model, it requires a more complex organisation and LMDs to learn new skills, such as managing debt raising and setting up custom workflows to properly enter into Paygo.
3. The added complexity of the revenue and organisational models of Paygo business management requires extra investment in IT. A Paygo provider can hardly manage millions of payments of multiple thousands of clients through a spreadsheet and needs powerful tools such as PaygOps, often as part of an application network (to interconnect it with accounting softwares for instance) and thus complemented by its Business Support Services.