PaygOps’ Fintech Leadership: Resolving the Bottleneck in Last-Mile Financing
Pay-as-you-go (Paygo) financing technology has definitively been a game-changer. Despite that, last-mile distributors (LMDs) still face some challenges in terms of scalability and financing. Solaris Offgrid’s co-founder and CEO, Siten Mandalia, shares our company’s vision on the situation of the Paygo financing industry and how PaygOps is currently contributing (with projects such as the Receivables Finance Platform Pilot) and will contribute to developing the industry in the near future.
What’s the current state of the Paygo market towards ensuring access to affordable, reliable, sustainable and modern energy for all (SDG7)?
Siten: SDG7 is essentially “solved”. We can provide energy access to all. We have solar and battery technology, we have the ability to distribute to the last mile, and the technology is affordable to all, if paid on credit.
The industry has the methodologies and the tools; Paygo has been deployed by several LMDs already, at scale. What we need now, to be able to reach the huge market demand, is hundreds -or even thousands- more local distributors that can carry out that Paygo model and, in effect, scale up the availability of energy access solutions. In fact, there is a $200 billion market opportunity for climate-first investors to achieve SDG7 according to Catalyst Offgrid Advisors’ recent research.
So, the only issue is: how do we provide credit sustainably to the people in need?
If we have the key and means to reach SDG7, why do current projections estimate that 31% of African households would still be unelectrified by 2030?
Despite the huge market opportunity, this is a capital-intensive industry, households cannot afford to pay for accessing many essential goods (such as Solar Home Systems (SHS)) in cash which requires local Paygo businesses to provide credit, making it really difficult for them to scale. Only a handful of companies have reached scale and operational efficiency to get reasonable unit economics and attract capital, and these scaled companies tend to concentrate on peri-urban areas of relatively high population density to allow for lower logistical costs. Whereas smaller companies in deeper and remote rural areas are not able to provide products on credit as they don’t have access to finance themselves.
As long as adequate finance is not accessible for last-mile distributors (LMDs), scaling will remain a challenge and, with the current pace of financing (according to a recent Catalyst Offgrid Advisors study), SDG7 will be missed by more than 100 million households.
What are the challenges that LMDs face in terms of financing?
LMDs need to balance the finance provided to them by lenders and their repayment schedules on one hand, with the sales of products on credit and the related repayments on the other. This can be a complex challenge as lenders typically ask for fixed repayment terms whereas Paygo is inherently flexible. Paygo flexibility might allow for significant delinquency and unpredictable payment flows which causes issues with the accuracy of projections and models.
On top of this, foreign exchange rate risk between local currencies and debt notes (often provided in USD or EUR) and inflation can further complicate matters, especially when early stages require regular startup capital before cash flow covers operational costs.
We’ve talked about LMDs’ challenges, but what are the debt investors' struggles?
Debt investors give liquidity to LMDs and enable them to continue providing credit and scaling up. For each investment opportunity, the investor needs to assess the associated risk; such as the performance of its portfolio of customers making repayments. This due diligence process is often costly as each company reports information in its own way. Furthermore, since the loan is provided to the distributor, due diligence needs to be done on how the company is operating and its own financial risks, not just that of its customers.
This means that the cost of the transaction is high and, therefore, the size of the loan needs to be high as well, so that those fixed costs can be compensated by interest returns. This limits the number of distributors that can be provided with such loans, as they may not have the means to deploy such a large amount of capital through their operations. As a result, debt investors have had to concentrate their investments towards larger, more established distributors, of which there aren't many.
What do you think the sector needs in order to overcome these challenges?
The sector needs to move to a model that allows for sustainable low-cost off-balance-sheet financing, and eventually aggregation of financing across multiple distributors. To start, a standardised credit policy framework and a standardised data model would mean that those local last-mile distributors will be able to efficiently communicate their credit process and performance data to investors, who will be able to understand, analyse it and compare like-for-like.
This standardisation effectively allows economies of scale in the sector, allowing sustainable lending and this is where we have a role to play over the next few years through our PaygOps platform.
How do you envision PaygOps fintech ambitions will contribute to developing the industry in the near future?
Because we've understood there is a bottleneck in financing the last-mile customers, we are now building on our PaygOps software platform in order to further reduce bottlenecks on the financing front. To do so, we are now focusing on streamlining the flow of credit to the last mile customers, always keeping to our strengths within core IT infrastructure. So in order to progress within this ambition, we are launching three new initiatives over the next few years.
We will be facilitating a credit policy and credit scoring mechanism
We will be supporting the sector in standardising Paygo data
And finally, we will be launching a True Receivables Finance platform, which we are currently piloting, and a receivables marketplace as well. This True Receivables Finance platform aims to streamline the financing process.
What is a True Receivables Finance platform? How is it different from the current receivables facilities or traditional finance mechanism?
This new platform allows investors to purchase pools of paygo receivables, making it off-balance-sheet (the receivables are removed from the balance sheet of the distributor), whereas until now receivables financing in the Paygo sector has mostly been on-balance-sheet, even with recent data-driven approaches, such as the Angaza Distributor Finance Fund. It is to say it has been structured as a loan to the distributor with a fixed repayment schedule that tries to mirror the repayments being made by the end-customers in the portfolio. This loan has an interest rate and the distributor would be liable to repay the loan principal and the interest regardless of the performance of the underlying portfolio.
It’s important to note that in this fintech innovation the role of Solaris Offgrid / PaygOps with regards to receivables financing will remain as a technology provider - staying true to our strengths of building technologies. Thus with PaygOps receivables purchasing platform, an effective sale is made of the Paygo receivable assets and, subsequently, all payment flows and rights are transferred to an external investor working with such a platform. Then through our paygo management CRM, the performance of the assets can then be tracked and the payments are received directly by the investors.
So the True Receivables Finance Mechanism devised by Solaris Offgrid represents the first step taken towards your vision. How does it tackle the financing challenges faced by both LMDs and debt investors in the Paygo industry?
The main benefit to the investors is that they get to have standardised data, so they can make that like-for-like comparison between different pools and between different distributors as well, so they save a lot of time not having to do data cleaning and analysis on each one, and that reduces their costs.
These standardised data allow us to do Aggregation. That means that PaygOps platform will be able to offer investors the opportunity of investing a large ticket size from the investors’ perspective.
But from the distributors’ perspective, it can now be a lower size investment (as low as tens of thousands per project as we are demonstrating with our Receivables Platform Pilot Project). This allows more flexibility and smaller distributors to come in and get finance, which is important for the scale.
It also allows a reusable legal framework, so the underlying legal functionality can be reused every time and is essentially the same, so that reduces a lot of costs for the transaction.
On the other hand, the benefit for distributors is that very quickly after they have installed solar home systems, they can get liquidity, they can get an investor to purchase those receivables and be able to reuse that cash, having that cash flow to basically scale. That means that they don’t need to raise large amounts of investment and plan for the repayment of that over a fixed period.
Distributors are also taking less risk under this framework because instead of having to repay in fixed periods the underlying pool of receivables, those payments are being sent directly to the investor as repayment, and because of that, distributors can reduce their risk in providing Paygo.
Is it a challenge to manage the repayment of the financing in such a different way?
For the investors, indeed repayment will be less predictable than those of a fixed repayment schedule. However, cash flow from the portfolio is provided immediately and this, as well as detailed analytics, allows investors to clearly see if performance is adequate along the way. The distributor shares the risk of the performance still, as they would typically continue servicing the portfolio, collecting additional fees, and providing minimum performance guarantees. Since the risk is shared, the investors can be “partners” rather than just lenders, they can compare performance against their benchmarks and assist in implementing appropriate processes that improve credit quality.
Why is data standardisation and transparency so important in financing?
The primary benefit of transparent standardised data is to allow stakeholders to confidently understand the risk and performance quickly and, therefore, make investment decisions at a lower cost. Without such standardisation, investors need to obtain the underlying raw data of a portfolio, clean the data into a format they are familiar with and build performance indicators for each investment - such data processing and cleaning can take weeks or months in order to make it consistent and comparable with other datasets.
Standardised data also allows benchmarking, accurate comparisons and can eventually facilitate asset aggregation amongst different distributors, as mentioned before.
PaygOps provides the technology, including the data, payment flows, and purchasing platform, but how do the legal framework and backup servicing work?
While PaygOps can provide the data and payment infrastructure to carry out receivables purchasing, the ecosystem will include several key partners. For example, it's important to also provide a legal framework that allows for the “true” sale of the assets which would be recognised by the courts of the local jurisdiction.
This means that, in a situation where the distributor was to come into difficulty and default, the investors would continue to have the legal right to the receivables assets purchased on the platform. In this situation, PaygOps alongside its partners, provides a backup service to allow payment flows to continue from the portfolio, thus decoupling the default risk of the distributor and the end customer.
PaygOps management software was created as a result of Solaris Offgrid’s first-hand experience with last-mile distribution of SHS in Tanzania, but in the last couple of years, its role in the Paygo industry keeps expanding as fintech/IoT software in multiple countries. What would be the next steps and what is PaygOps working towards in the upcoming years?
PaygOps will continue to break down barriers to scale the Paygo sector so that the 1.7bn unbanked world can get access to essential products. In order to do this, PaygOps aims to facilitate more local entrepreneurs to enter the market and deliver products on a Paygo payment plan. PaygOps supports such field partners with a suite of tools including the core Paygo payments infrastructure, operational management software and a credit management platform -working together to reduce the risks and capital intensity of Paygo.
In the future, in order to streamline access to credit for the unbanked population, we will continue targeting the specific challenges in the sector, looking at how we can support aspects such as credit scoring, standardised paygo data and open data models accessible to anyone. This way, PaygOps aims to support the growth of last-mile distributors, which consequently will provide more access to life-changing products worldwide.
If you want to discover more about Solaris Offgrid’s projects and financing opportunities, please engage with us at [email protected]. You can also check the Receivable Finance Platform Pilot Project that PaygOps is carrying out together with First Growth Ventures and Pawame.
About Solaris Offgrid:
Solaris Offgrid’s flagship PaygOps platform is an interoperable B2B SaaS PAYGO leasing and operation management system that connects energy and utility appliances (solar devices, water-pumps, cookstoves, smart meters, e-bikes) and payment methods (Pay-as-you-go and Mobile Money) within a suite of enterprise applications or API services, to allow distributors to smoothly manage their operations and tackle their challenges at the last mile, thus enabling them to provide affordable essential products and services to millions of people at the Bottom-of-the-Pyramid. Our team works with more than 35 PAYGO distributors globally and has successfully designed the open source OpenPAYGO Token which manufacturers, like Philips, Victron Energy, Fosera and Biolite, use to freely and securely make their products PAYGO compatible.