Buy-Now-Pay-Later with a twist.

Loans-For-Phones: Kenya & The BNPL Schemes That Lock Defaulters’ Phones

By  |  June 14, 2021

After many months of penny-pinching and painful saving, Leo Karanja* was finally able to purchase his first-ever smartphone in the summer of 2013. Although he was just 18 at the time, life had forced him to take to street hawking to fend for himself since his early teens.

Karanja’s purchase was a modest but decent android phone: a TECNO P5. He had always been fascinated by the idea of “being online” with the internet at his fingertips, but this was no vanity purchase.

His biggest motivation at the time, he tells WeeTracker, was “gaining admission into the university.” So his plan was to self-teach himself enough to pass the entrance exams with the materials he had learnt he could find online. And with a smartphone in hand, he seemed on track. Except fate had other ideas.

Fast-forward seven years to 2020 and there’s Karanja trying to keep head above water with a tiny stall that he turned into a barbershop. These days, he gives cheap haircuts in a suburb close to Nairobi. No, the fairytale hasn’t quite happened as “going to college” is still a pipe dream. Plus the now-old-and-battered TECNO P5 has certainly seen better days.

When the device finally gave up in February 2020 after many years of being a loyal servant, Karanja knew he needed another. In fact, he’s known that for a while but money is tight. He just couldn’t afford a smartphone at that time. But he was about to catch a break, or so he thought.

Loan-for-phone: What could possibly go wrong?

When Karanja learned about how the eight-year-old pay-as-you-go solar energy company, M-KOPA, had launched a buy-now-pay-later (BNPL) scheme for smartphones just a few weeks before, he thought he could live with the terms.

Through a product known as M-KOPA POWERED, M-KOPA enables individuals to take ownership of certain Samsung, Huawei, and Nokia phones even if they can’t pay for it upfront.

When it launched in January 2020, the terms of the product were: “come get smartphones with an initial deposit of KES 1-3 K (USD 9.28-27.84) and daily instalments of KES 60.00 (USD 0.56) spread across 320-365 days.”

To Karanja, this was not exactly ‘answered prayer’ but it was as close to it as he could get at the time. So, he was sold.

It didn’t even bother him much that there was a catch: the device will be locked if he failed to pay the daily fee, and the phone is not insured – implying that he would cater for any repairs that become necessary and continue to pay the daily fee for the duration of the loan even if the phone is lost, stolen, or broken.

At first, there were no issues. The Huawei phone he copped was a dream and he was prompt with the payments. What could possibly go wrong? A lot, apparently, because Murphy’s Law struck.

On one unremarkable evening, it dawned on Karanja that his ‘hire-purchase’ phone had been stolen, possibly by someone who came for a haircut. Karanja never found the phone, nor did he ever uncover how it went missing for certain.

Regardless, there’s a daily KES 60.00 (USD 0.56) fee that he had to continue paying to own a phone that had effectively become someone else’s.  Turns out he was wrong when he thought he finally caught a break.

Smartphone syndrome

Make no mistake; the BNPL model is popular the world over, and has been so for a long time.

Prominent firms like America’s Affirm, Europe’s Klarna, and Australia’s Afterpay have built thriving businesses out of making it possible for individuals to take ownership of a range of valuable items while paying in instalments. Also, there are smaller startups gaining a foothold in that area all over the world.

Nonetheless, what is less-known and somewhat odd is the concept of collateralised smartphones which appear to be unique to the developing world.

Of course, the internet is an immense enabler. It’s role as a boundless source of knowledge, connections, and entertainment is unmatched, and lives continue to be transformed by it.

But unlike in the developed world where computers were sort of the first portal to the internet that people knew, much of the developing world has a mobile-first relationship with the internet. With smartphones in the picture, this mobile-first relationship has grown and the internet has transformed lives.

However, even as significant progress has been made, the effort is continuously blunted by the existence of huge economic gaps.

For one, smartphone penetration in low-to-middle income countries (LMICs) is significantly lower than what is obtainable in high-income countries. In sub-Saharan Africa, for instance, the proportion of mobile connections using a smartphone is 39 percent, much lower than the 74 percent recorded for high-income regions.

What’s the major reason for this gap? Cost and affordability.

Enter: Collateralised Smartphones

According to the GSMA, while mobile data costs have decreased steadily, the median cost of an entry-level internet device has remained relatively stable for consumers at just over 20 percent of monthly income, while in many countries it is more than 50 percent of monthly income.

The picture looks even grimmer in sub-Saharan Africa where even the cheapest smartphones can cost up to 375 percent of monthly income for the poorest 20 percent of the population.

In addition, respondents to the GSMA Intelligence Consumer Survey 2018 who had not used the mobile internet in the past three months were asked to identify the most important barrier that stopped them from using it.

From their findings, the cost of the device was the most cited barrier by respondents in half of the LMICs covered in the survey. Again, this highlights how affordability is one of the biggest grouses when it comes to smartphone reach. As it is, the high cost of purchasing a smartphone has always been a lesser-mentioned but major barrier.

As problems are often cornily talked up as opportunities, a whole business has been built around taking away the burden of paying a lump sum upfront for a smartphone. But this particular business comes with a certain twist in emerging/frontier markets that is not found in the developed world.

In high-income markets built on the post-paid model and a functional credit system, consumers typically have the opportunity to purchase a device (even high-end ones) in monthly instalments.

However, this option is often not available to potential mobile users in LMICs (or “rest of world,” as the corny term goes). This means people in the region generally have to fork out a significant sum to make, what is to them, a costly one-off purchase.

So, in parts of the developing world where financial inclusion, credit access, and formal credit scoring systems are typically less than optimal, phone sellers and lenders have found a way to get smartphones into people’s hands while minimizing the risk of losing money due to non-payment.

That’s where collateralised smartphones come in. They are essentially devices that come with some sort of phone-locking technology that can shut out a user or limit key functions in the device when the user defaults on their installments payments.

These restrictions are incorporated to nudge the user to pay up, and some companies report that it reduces consumer default risk by up to 50 percent.

Where it’s all happening

The U.S. company, PayJoy, is known to have adopted phone-locking tech to finance smartphones in developing markets since 2015. Currently, the company also offers cash loans and has footprints in Mexico and over 20 countries, including Colombia, Guatemala, India, Indonesia. Defaulting on cash loans also results in users being locked out of their phones.

Similarly, Datacultr, an Indian startup, is another company that has developed technology to aggressively nudge customers to repay loans, though “nudge” in this case actually refers to “irritating customers by hijacking their phones and causing their devices to behave abnormally until they pay up.”

It is understood that some of India’s largest consumer lenders, such as Bajaj Finserv and TVS Credit, have incorporated Datacultr’s technology for debt recovery into many of the smartphones they finance. On its part, Datacultr has seen its technology reach other countries like Malaysia, Bangladesh, and even Côte d’Ivoire.

All those markets have something in common: a large developing market where formal lenders haven’t kept up with the pace of smartphone and internet usage. It’s a fertile ground for these sorts of ‘loans-for-phones’ contraption.

The same is true for much of the African continent where Kenya seems to be the headquarters for collateralised smartphones at present. Apart from the earlier mentioned ‘pay-as-you-go smartphone’ product by M-KOPA, Kenya’s largest telecom operator, Safaricom, has since July 2020 unveiled a loan-for-phone product that seems to be holding its own.

Dubbed Lipa Mdogo Mdogo (which loosely translates to “pay bit by bit”), the smartphone financing initiative was developed by Safaricom in collaboration with Google to enable customers on 2G devices to upgrade to better and faster low-cost 4G smartphones.

The telco had reason to propel this offering. By 2020, Safaricom had poured KES 36 Bn (USD 334 Mn) into 4G network upgrades in Kenya. But even with 77 percent coverage, only 17 percent of mobile connections were on the network. Plus smartphone penetration stood at 45 percent in Kenya, according to the Communications Authority (CA).

So, Lipa Mdogo Mdogo made sense, as it appeared to align with both business and ‘uplifting the people.’ No wonder it seems the platform has grown considerably since launching a year ago.

“As at close of our financial year in March 2021, over 240,000 customers had acquired devices through this initiative, demonstrating its importance in efforts towards bridging the digital divide,” the company told WeeTracker.

“Customers looking to acquire devices through this initiative consent to a credit scoring process, which respects and enforces all privacy obligations to our customers under both local and international laws and best practices.”

When it launched, Safaricom required individuals to make an initial deposit of KES 1 K (USD 9.28) and take ownership of the phone while making daily payments of KES 20.00 (USD 0.19) spread across months. That initial amount has since collapsed to KES 500.00 (USD 4.64) with daily installments starting from KES 20.00 (USD 0.19) but could be higher for certain phones. 

At first, Safaricom only offered a KES 5.9 K (USD 55.68) Neon Ray Pro phone that cost customers KES 6.5 K (USD 61.07) on the Lipa Mdongo Mdongo service, the company has since expanded the catalogue to include several Samsung, Nokia, Oppo, and Nokia phones.

Like other collateralised phones, Safaricom’s Lipa Mdogo Mdogo phones come with a phone-locking app which the company says was the result of a collaboration with Google. The BNPL phones are bundled with Android Lock, which is implemented on the operating software.

In the event of a default in payment, users receive reminder notifications. On the fourth day after the repayment deadline, Safaricom locks the device, limiting its use. Should the default continue to the seventh day, the user is barred from all outgoing calls and SMS.

Should the default continue for 30 days, the user is blacklisted and disqualified for subsequent device loan facilities and the user’s details are forwarded to the Credit Reference Bureau (CRB).

Pros and cons

The collateralised smartphone model does seem a bit crude, inelegant, and even brutish but it appears to be functional; a pragmatic approach that mostly works. And it seems to be seeping into Africa, generally quietly, probably because there is some apprehension around the subject.

In 2019, PayJoy announced compatibility with Africa’s top smartphone manufacturer, Transsion, and other leading manufacturers (TCL/Alcatel, D.Light via Skyworth and Hisense, building on existing compatibility with Samsung and LG), through PayJoy Access.

PayJoy Access is free firmware technology developed by PayJoy to facilitate fast and efficient integration of PayJoy Lock, its smartphone locking technology for Original Equipment Manufacturers (OEMs).

As at press time, none of PayJoy, Google and Samsung have responded to repeated requests for comments from WeeTracker on critical aspects of phone-locking tech, as well as its broader implications in Africa. On their part, a Transsion representative said: “As far as I know, PayJoy’s app is not pre-installed on Transsion products.”

In Safaricom’s statement to WeeTracker, the telco alluded to the internet and smartphones as elements that posses “life-transforming possibilities,” and their effort in “working to reduce the upfront cost required to access a smartphone” sounds like a head in the right place.

Nevertheless, that ought not to bury the fact that loans-for-phones services with phone-locking tech have to be managed properly lest they devolve into something exploitative and unwholesome.

Of course, collateralising smartphones has great benefits for users who are otherwise incapable of owning such devices, but the concept also comes with quirks. Like most loan systems, there is the possibility of predatory and exploitative terms; phones with obscene interest that effectively cost the user much higher than the retail amount of the device.

Furthermore, there are also concerns over the high potential for the abuse of user data, and aggressive/coercive practices becoming commonplace as a result of the commoditisation and proliferation of phone-locking tech.

Add those to the inherent lack of consumer protection in the event of phone theft, loss, or damage, and there’s the issue of loan-for-phone customers (most of whom are small-time, first-time borrowers) falling into a deeper financial hole than they were before they took to the BNPL phone scheme.

For example, Safaricom says Lipa Mdogo Mdogo customers are to report lost or stolen phones to the police but they are still required to continue to make repayments for the duration of the loan.

As a final point, there is the possibility of the emergence of an illegal reselling economy where some borrowers with outstanding payments on their BNPL phones go on to sell those same phones to unsuspecting persons on marketplaces for second-hand products, thus transferring their debt to a person who has no idea.

Some of these issues already pose problems to the endeavour and it remains to be seen how the emerging loans-for-phones industry can solve for the considerable shortcomings.

*Name has been changed

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