Investors and entrepreneurs are usually exuberant about the 1.65 billion strong global student market until they hear the bad news: the majority can’t afford anything beyond basic education. This, of course, doesn’t include the 122 million illiterate youth in the world today or the legions of non-formal and professional learners who may want to improve their skills but have little financial support. But what if they did? Enter Fintech.
In the US, a deep pool of $1.3 trillion in student debt, persistent resource inequality in schools and outright administrative waste have served as a catalyst for Fintech companies to provide solutions from alternative loan payback schemes to teacher-centric apps that help school budgeting decisions. This is to be commended. Yet as difficult as domestic problems may appear in the US, they are only a sideshow compared to the immense problems bubbling up in emerging markets, from constrained government and personal financial resources to a future with near Malthusian population growth, poor education performance but high expectations for a better life.
Tackling affordability challenges, at home and abroad, often happens in two ways. Companies can bend the cost curve by creating markets that didn’t exist previously or which circumvent and disrupt traditional institutions that stifle change. Or they can try to create easier and more effective ways for consumers to actually pay for these products and services. Within the education sector, I have chronicled numerous examples of edtech ventures that have successfully lowered the cost of access to hundreds of millions of students, from “schools in the box” across Africa to adaptive and e-learning concepts in Asia to alternative financial solutions for low income populations. Yet the vast majority of emerging market students remain severely underserved despite a massive opening for financial innovation.
So what might prompt the globalization of Fintech?
I would start with identifying areas of education finance that seem ripe for positive disruption around the world, such as creating alternative student finance and loan access; improving the procurement, management and use of resources in schools; making international study abroad more affordable and less cash-based; and increasing financial literacy.
Next, I would view these areas of potential business through the lens of developing economies. Figure 1 provides some basic perspectives:
- In the US, college is comparatively expensive (measured in both absolute tuition levels and median income as % annual college cost, or 52% in the US) but local students generally have access to federal and other forms of financial aid. In many emerging markets this is flipped: students across Asia, Latin America and Africa enjoy government subsidized tuition at leading state universities but the seats are limited. For those less gifted students, alternative options do exit through private institutions but often at a significantly cost premium and with little or no government financial support.
- Larger emerging markets such as India, Pakistan and Nigeria have a basic lack of school and teacher capacity at all levels, leaving millions of children on the proverbial street. Moreover, given the widespread household demand for basic education outside public systems, the need for fintech solutions at the K12 level–primarily funding both households and schools–is immense.
- Financial literacy, from managing loans to understanding how to save and invest, is a universal challenge. But it runs deeper in countries without sophisticated banking systems. An increasingly tech-savvy generation in search of alternative apps and tools, such as in Africa with mobile banking, provides a the perfect market opportunity for financial training.
- Administrative waste and inefficiency is practically synonymous with large, complex systems, including America. I have no idea and could not find data which measures “administrative waste” in school systems for large countries such as China, India, Nigeria and Brazil. But know first-hand that these countries are not paragons of efficiency.
Figure 1. Comparative Opportunities for Fintech in Education, US v Emerging Markets (EMs)
Developing a playbook
To develop some ideas further, globally ambitious Fintech competitors might take a look who has been doing what, and where around the world. Here are some challenges to consider:
1. Providing more alternative finance sources in far away markets for students pursuing higher education, lifelong learning and workforce training. Many readers are already familiar with non-traditional student loan platforms such as Commonbond, Sofi, Credible and Earnest which provide a combination of student loan access, refinancing and consolidation using non-traditional sources such as outside pools of investors and venture capital. This is now expanding to other stakeholders as well. A recent article by the CEO of Sofi discusses 2017 student loan changes which may include income base repayment that places colleges with “skin in the game” and some responsibility for loan repayment, and the role of employers in how they manage employees with massive student deb. Internationally, a 2014 study by EY and IFC paper cited such examples Brazil and Africa (Eduloan (South Africa), IdealInvest (Brazil), Duco UC (Chile) and innovative loan repayment and financial support methods for higher education and professional training that included crowdfunding, social impact bonds and income-based repayment loan schemes. But the amount of students serviced is a fraction of those in need, and it is largely local companies who are filling the breach. Consider that China’s peer-to-peer lending market is far less regulated than US counterparts but has grown rapidly to over US$71 billion in online loans. Led by companies such as China Rapid Finance, Jimubox and Rong360, alternative lending has long been useful to individuals and families who require debt to fund tutoring and study abroad. New entrants such as e-commerce giant Alibaba, via MyBank, can now obtain loans of up to $805,000 based on a risk-adjusted online shopping history. Chinese fintech firms are only one example, and far more sophisticated than many EM competitors.
2. Creating vehicles to fund international study abroad with the ability to track students into the workforce after graduation. The majority of the estimated 4.5 million students studying outside their home country do not rely on scholarships but pay in cash to universities and training institutes. As such, study abroad often resembles a luxury product which limits potential demand. Yet given the caliber and earning capacity of many international students, there should be more creative solutions available and some firms are responding. Early entrants such as Flywire have flattened international payments networks for cross-border education tuition by providing peer-to-peer participation. With a presence in 150 countries, Flywire is now collaborating with banks to achieve further scale and sophistication. Prodigy Finance in the UK focuses on funding foreign students who have been accepted at university but unable to get loans. Prodigy has been particularly successful–lending out $200m to 4,500 students since its launch in 2008–by using a model is that estimates potential earnings of graduates and use them for a proxy credit score that carries astonishing repayment rates of 99%. It should come as no surprise that several large banks (Credit Suisse, Deutsche Bank) have signed up on this platform, which will significantly expand the amount of available capital to students worldwide.
3. Deploying student and school-centric financial tools that are localized to specific countries and regions. Student and school-centric financial tools are at the core of the US FinEdTech sector and have clear applications abroad. Firms such as Allovue provide solutions around school district budgeting that brings collaboration between teachers, principals and other administrators. ClassWallet is streamlining and localizing the management and procurement process for schools through an education funds tracking system. In the US context, Allovue’s 2017 predictions for EdFinTech suggest that the need to conform with new ESSA (Every Student Succeeds Act) regulations will necessitate greater autonomy and transparency at the local level, presumably where more efficient allocation of resources can occur. In essence, the aim is to benignly decapitate the centralized bureaucracy and place financial choice and ultimate responsibility at the local classroom level, funded by teachers, for the direct needs of students. This is something that all countries need, but have yet to successfully address.
4. Harnessing Edtech solutions to enhance general financial literacy and entrepreneurial finance in youth populations. There are many cases to consider here and the international market is wide open. For example, improving student loan management and budgeting is served by companies such as Student Loan Hero. In Singapore, one of Asia’s leading financial centers, companies such as Knowlscape are providing immersive and gamified learning focused on financial concepts as well as digital curriculum for financial sector use in Asia and the Middle East. Playmoolah is providing gamified financial education for kids. In Africa, a severe lack of financial literacy is being met locally through competitors such as Khonology, fintech incubators such as Village Capital, and start-ups MyBucks and Branch. Finally, India fintech companies such as BankBazaar and Capital Float are setting up education platforms to drive long-term customer acquisition strategy. This list goes on.
In sum, both Western and emerging market fintech firms are racing to grab market share within a global education sector that is rapidly accelerating in the face of weak affordability and financial inefficiencies. And as we have seen in many new industries, from social media to e-commerce platforms, building early and deep networks of users in these countries can be critical to future success. With education demand rocketing in the developing world, today’s US and European fintech firms have a unique opportunity to extend their competitive presence to education consumers globally. But the clock is ticking.