Daybreak - Are school-fee loans the next goldmine for Indian fintechs?

Episode Date: November 24, 2024

 Regular CBSE schools just don’t cut it anymore for the aspirational middle class parents in India. But considering how the annual fees at most of these schools can range anywhere between Rs 3 lakh to Rs 25 lakh, sending a child to one of them is no joke. Almost 90 per cent of parents who take the step can’t afford to pay the full fees up front. In fact, for most, even paying half the fee in one go is not an option.In come the fintechs. Companies like Grayquest, Jodo and Leo1 are partnering with a growing number of schools to offer a simple solution to these aspirational parents – zero cost EMIs. How does it work? And what’s in it for the fintechs? Tune in. Daybreak is now on WhatsApp at [phone]. Text us and tell us what you thought of the episode!Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

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If you have some more feedback for us, you can write to us at podcast at the rate the hyphenken.com or text us on WhatsApp. Our number is 8971108. 379. We will also add it to the show notes of this episode. Thank you. And now on to the episode. Until a few years ago, taking a loan to pay your child's school fees was unheard of. Taking a loan to pay for higher education? Totally normal. But loans and the kindergarten to class 12 segment didn't really go together. Until now. You see, education costs have been escalating like nobody's business in India.

recent Bank Bazaar report pointed to a pretty concerning trend. It indicated that education expenses could potentially double every six to seven years. At the same time, there is also a very clear increase in the demand for high quality education. The thing is, parents are not willing to compromise when it comes to their child's education. And for a lot of them, particularly in Tier 1 and Metro Cities, regular CBCAC schools do not cut it anymore. The Ken, had previously reported on how Indians cannot get enough of international schools and how even middle-class families are increasingly enamored by international baccalaureate-affiliated schools. Not just international baccalaureate, there are also a bunch of other popular international boards like IGCSE

and schools that follow alternate curriculums that are popping up across the country. But considering how the annual fee at most of these schools can range anywhere between 3 to 25 lakh rupees, sending your kid to one of them is no joke. Almost 90% of parents who take that step cannot afford to pay the full fees upfront. In fact, for most, paying even half of the fee in one go is not an option. Take the case of Anurag, for instance. He is a software engineer and he recently relocated from New Delhi to Pune.

Now, he told the Ken reporter Lifia Khan that between rent deposits, buying furniture and all the expenses that came with the move, he had to figure out how to pay for his six-year-old and three and a half-year-old's education. After asking around and a little bit of research, Anurag told me how he finally found a no-brainer solution, a zero-cost DMI. You know the kind you take up to pick up a new cell phone or a car? So these days, FinTechs are offering loans to parents like Anurag. To be honest, taking a loan for school fees was quite unheard of until recently. But now things are clearly changing.

thanks to the buy now pay later model made popular in consumer durables and now apparently school fees. More and more parents like Anurag are going down the zero-cost EMI route. You see, as the financial strain on the middle class family, chasing elite education for their children grows, some of these schools have started partnering with fintechs like GreyQuest, Joro and Leo 1 to come up with these new EMI solutions. Even banks like IDFC and others have jumped into this segment in the last five years or so. And thanks to the premiumization of education here in India, kindergarten to class 12 financing has turned into a growth market for fintechs and non-banks as well. But the education space is notoriously brutal.

The margins are tight and then there is always a risk of defaults. So the question is, are these fintechs punching above their weight? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Da Sharma, and I don't chase the news cycle. Instead, every day of the week, my colleague Rahal Philipos and I will come to you with one business story that is worth understanding and worth your time. Today is Monday, the 25th of November. In many ways, this zero EMI model is a win-win for everybody involved. It is great for the parents, obviously, but in the end, they also get to send their kids to that fancy school.

School is also winning because it gets to pocket the full fees upfront. Typically, at International Baccalaureate affiliated schools, parents are expected to either pay the whole amount up front or pay 40% and the rest in two to three installments over the year. But it is in the interest of the school to get it all in one go. That way, they have access to more money with which they can make CAPEX investments or fund other plans. Some schools also choose to reinvest money. Alifia spoke to Rustam Kerala, the founder of Vibjore Group of Schools. The chain of schools has partnered with a Mumbai-based fintech startup called Greyquest to go down the EMI route.

Rustam explained that today parents don't like being sent constant reminders to pay school fees. They would much rather hand it over to a third party, which works well for schools like Vibjur. This sort of a partnership also helps to drive enrollment. finance options like these make these schools far more desirable for aspirational Indian parents. So for these schools, it is fully worth the small cut that they give to the fintech with every transaction. The cut is usually about 4 to 8.5% of the total amount, which is typically also the discount amount that they offer to parents who pay their full fees upfront. But that haircut and the fee is more than compensated for between high enrollments, elimination of late payments, as well as the manpower that they would have to otherwise employ

to collect the fee. Meanwhile, these fentecs do have nothing to lose. Jair DeCosta, the chief executive of the Orchid Schools, which is a chain of ICSE and CBCSC schools across the country, explained how it works to us. He said that this is a great market for lenders. Unlike the ed techs, the dropout risk is quite low. Since most students continue in the same school for several years. It is also highly unlikely that a parent will default on a child's school fee because of the consequences attached to it. And that is because unlike schools, which are bound by law and have limited options to recover fee from defaulters, fintechs can bank on the impact of credit scores to keep default slow. So they are very likely to get their money back with

interest, of course. Higher the fee and the bigger the chain of the schools, the more revenue they can earn. But it's not all sunshine and rainbows. Stay tuned to find out more. Despite all of its promise, the school fee financing space has seen as many exits as it has seen entrances. For example, fintechs like Propel and Cradilla, which tried their hands at school fee financing for a short while, have exited the space completely. There are other examples too, like Neve Finance, who were one of the first to enter the market. yet they've not been able to take off really. According to Rishab Mehta, the founder of one such fintech startup, Greyquest, there are two reasons for this.

Number one is seasonality. Customers can only be sourced at the beginning of the school year, so between April and June. And number two is fragmentation. School chains are far and few in between. So scaling becomes a little difficult because it involves convincing thousands of standalone schools to take that leap and introduce these finance options, which is why Mehta says that this is a market that restricts the number of parents adopting education financing to single digits. Another founder of one of these failed fintechs candidly admitted to our reporter,

O'lifia, that this whole business is too hard and it has very few rewards. Now, the said company's founder has pivoted to solely focusing on higher education financing. Some of the people that Alifia spoke to told her that the unit economics equation in this business is simple but brutal. On an average, a lender gets 4 to 7% discount from the schools which becomes the rate of interest on the loan given to a parent. But within that interest that the company charges, a large chunk is taken away by the bank or the NBFC which is actually financing the loan. These includes the like of Advancy, Access Finance and Aditya Birla Finance Limited among others. So in the end, these fintechs are left with not more than 1 to 1.5%. And added to that, eventually it's only the schools that are looking to expand aggressively

or have cash flow requirements that would be open to these partnerships. So these fintechs have to think on their feet. Just pitching themselves as mere lenders is not going to be. cut it anymore. They have realized that they need to sell something more. I'll tell you more about it in the next segment. Today, most fintechs, including the likes of Greyquares, Joro and Leo 1, are not merely financing partners. They position themselves as payment solution providers. They offer a gamut of services like enterprise resource planning and software as a service solution to schools. Take Leo 1 for example. This Mumbai

based fintech introduced a new product recently. It is a student lending card which, unlike its name, goes beyond just lending. It is given to every student for free payments and if they pay on time, they can earn points to be redeemed for offers or freebies. So like a credit card, but specific to school fees. For most of these up-and-coming fintechs, loan accounts for a very small percentage of their overall business with schools. Most of their money comes to. from other payments, like JORO offers an online payment suite, complete with tailor-made gateways and an all-in-one fee management platform. With services like these, schools are able to take the whole fee business to the next level.

They can build customizable fee schedules, manage due dates and late fees, and even figure out a tech solution for reminding parents to pay fees on time. The whole point of all of this is to sweeten the deal that these fintechs can offer to schools. The sell is that they're not only lending partners, but they can also really amp up the whole fee-paying process for them. The biggest problem for these companies is still low margins and even lower adoption rates. But the silver lining in all of this is the parents. The aspirational middle-class parents, to be precise. They still want their kids to go to these elite schools, but more often than not, they don't have the money to do it.

So as long as their demand for these international schools keeps in-grisks, increasing, these fintechs will not become redundant. But for now, they have barely scratched the surface of the private school market in India. They have a long way to go. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. To subscribe, head to the Ken.

and click on the red subscribe button on top of the Ken website. Today's episode was hosted by Snikda Sharma and edited by Rajiv Siyah.