12 May 2021
Contextual financial services in growth markets: a deep dive into off-grid solar financing
Off-grid solar financing: an example of contextual Financial Services
We believe that Financial Services in growth markets have the potential to take a radically different path than what we have experienced in developed markets. As high levels of the population have yet to experience formal Financial Services, providers in these regions have the opportunity to design, manufacture and distribute Financial Services that are natively contextual, and by doing so, chart a unique path for financial sector development in Growth Markets. Be it specialised auto lenders in India that have emerged initially as captives of large auto-dealers / OEMs and consumer product manufacturers, or the energy backed finance provided by pay-as-you-go (‘PAYG’) solar providers across Africa.
Key example: Off-Grid Solar
The Off-Grid Solar (OGS) financing industry has experienced significant growth off the back of the introduction of the pay-as-you-go (PAYG) or pre-paid model. In effect, PAYG solar companies are providing off-grid and predominantly unbanked consumers with their first access to formal Financial Services through the embedded financing that accompanies the sale of the solar home product.
Product-led Financial Services as enablers of broad Financial Services
OGS providers assess and segment customers by repayment risk, extend credit in the form of a high-value asset that is paid off over time, introduce incentives to drive payment behaviour, follow up on non-payment, and create an informal financial identity and credit history for financially underserved customers and hence leading the way to be able to cross-sell and up-sell additional Financial Services’ products responsibly.
Reaching the financially constrained consumers
PAYG solar can thus be seen as a scalable model for providing asset financing to the difficult-to-reach unbanked mostly rural consumers in Africa and Asia.
We expect that product-led credit will take centre stage in growth markets. It is the underlying product consumers are interested in. And indeed they are increasingly doing just this by providing financial services that are wrapped in the sale of underlying consumption or income generating products. Financial services represent a means to those ends.
Context is paramount
In developed markets, Financial Services require lifestyle context to remain relevant. In Growth Markets, context is even more fundamental, as Financial Services represent a means for financially constrained consumers to afford the underlying products they are seeking.
It is our hope that Financial Services operators globally not only recognise, but continue to keep sight of this seemingly simple and universal truth.