NB Financial Innovation
NexThought Monday – Financial Inclusion and the Internet of Things: How Smart Machines Can Benefit the Poor
The Internet of Things (“IoT”) is a term that has been tossed around by tech wonks and futurists alike. Put simply, IoT is the use of technology to automate the transfer of data from one object – man-made or natural – to another via the Internet. Machine-to-machine (“M2M”) technology is an integral component of IoT, which enables data to be communicated from “smart” devices over Internet-enabled networks via chips and sensors without human intervention.
Over the coming years, IoT will undoubtedly have an enormous impact on how we interact with the devices that populate the world around us, from the mundane to the arcane. Billed as one of the disruptive technologies of the next decade, connected devices are expected to grow from 9 billion today to between 50 billion and 1 trillion within the next decade. By 2020, the IoT sector is projected to create $7 trillion of value, with 45 percent coming from M2M applications.
Fanfare aside, one emerging trend that has not garnered as much attention is IoT’s potential to benefit the poor. More specifically, a growing number of emerging market entrepreneurs are combining M2M technology with new payment mechanisms to create commercially viable ways for the underbanked to access basic products and services like solar lamps and changing stations, water pumps, refrigerators and even on-grid utilities like electricity.
To date, IoT has largely been a topic confined to the developed world. The sector is rife with activity concentrating on the latest novelty in home automation and wearable fitness devices or cost-shifting innovation in transportation or inventory management. While these are fascinating applications, IoT extends well beyond incremental improvements to daily routines. IoT can disrupt the way products and services are delivered to the poor by piggybacking on another digital revolution occurring at the base of the pyramid – mobile phone proliferation and the nearly ubiquitous global cellular network.
A major impediment to providing the economically disadvantaged with basic services such as electricity, or with devices such as solar lamps is that these populations lack credit and the means to consistently pay for goods and services. By integrating with new payment platforms, M2M technology is expanding access to credit by enabling two new payment methods: pay-as-you-go (“PAYG”) asset financing, which allows consumers to pay for products over time, and prepaid, where consumers pay for services on an as-needed basis.
Pay-As-You-Go Asset Financing
One innovative solution being fueled by M2M technology is pay-as-you-go asset financing. Most activity in this space has been concentrated on the sale of solar-powered chargers and lanterns, which have a prohibitively high upfront payment (for their target consumer) but offer cost savings over time as compared to traditional forms of energy, such as kerosene. A few innovative solar lantern providers are using embedded SIM cards to connect their devices to cellular data networks, thereby enabling remote management (the ability to enable or disable the device based on payment performance) and integration into payment networks. This in turn is giving providers the confidence to extend affordable PAYG payment options to BoP consumers.
This technology is already being used to address one of the largest pain points at the BoP, the nearly 1.3 billion individuals who lack access to electricity. Lighting Africa estimates that 12 million solar-powered lanterns will be sold in Africa over the next five years. M-KOPA Solar is pioneering this space in East Africa by leveraging M2M technology and device management services provided by Eseye, a UK-based company that Accion’s Frontier Investments Group recently invested in, and integration with M-PESA, the dominant mobile wallet provider. “Connecting devices to the Internet will empower people, improve quality of life, provide safer communities, conserve scarce resources and drive economic growth,” said Julian Hardy, CEO of Eseye. Another notable innovator in this space is Angaza Design, a business-to-business service provider offering a range of PAYG solutions to both solar device manufacturers and distributors globally.
Prepaid smart meters with integration into payment networks are attracting much-needed investment into emerging market energy infrastructure while also providing new, previously unserved consumers with access to the electricity market. Smart meters accomplish both these tasks by offering innovative prepaid payment solutions enabled by mobile data networks and M2M technology.
Prepaid solutions are a win for all stakeholders. Commercially speaking, installing prepaid smart meters that are integrated with mobile wallets and payment networks guarantees that cash can be easily and consistently collected from customers. For governments and regulators, smart meters facilitate the management and optimization of energy consumption. For energy companies, this technology improves customer service, ensures accurate billing, and avoids credit and collections issues, while also helping them to run efficient operations that dynamically manage supply and demand. For underbanked consumers, it offers financial inclusion by providing a method of payment that circumvents the need to obtain credit from the energy company and/or put down a prohibitively large one-time deposit to establish service.
In a testament to the scalability of this solution, utility companies are expected to invest $62 billion in smart meters over the next decade, translating to 90 million to 130 million installed units. Countries such as the UK and Nigeria have recently launched state-sponsored initiatives to accelerate the rollout of smart meters.
The first wave of IoT financial inclusion applications have largely focused on increasing access to consumers economically excluded from energy market participation. However, hurdles remain. Interoperability of payment systems and the continued standardization of IoT/M2M infrastructure are critical for widespread adoption of both prepaid and PAYG models.
The second wave of IoT financial inclusion is just starting and has the potential to radically alter existing cost-paradigms. The most disruptive feature of M2M technology is that of two-way communication between devices. Only recently have providers started to experiment with this ability, querying their managed devices for increasingly specific and targeted information – “where is the device located,” “how is it being used,” “what is causing the device to malfunction.” This seemingly mundane information can be the holy grail of business analytics for device providers. “In emerging markets, distributors have been manually recording sales data and customer information – if they’re collecting anything at all. Now, M2M connectivity can automatically provide distributors with rich data insights to establish long-term relationships with their customers,” said Lesley Marincola, CEO and founder of Angaza.
Inexpensive to collect, this data can be mined to design better products tailored to actual in-field customer use. It can also more efficiently manage physical and human resources in response to real-time geographic distribution of managed devices, and possibly reduce the cost of customer acquisition by tailoring sales and marketing efforts to higher probability customers. In effect, smarter, more efficient business decisions made utilizing M2M data will ultimately lead to lower cost-structures, increased scale and enhanced potential for impact.
Pat Wilson (@patwilsoniv) and Stephanie Pow are with Accion’s Frontier Investment’s Group (@AccionFrontier), an early-stage venture equity impact fund that invests in innovative financial inclusion startups globally.