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Edtech’s imminent crash is teaching fintech a lesson or two

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Good Morning [%first_name |Dear Reader%],

On a hot summer day, two waves were chasing each other in the wide open sea. They were almost neck and neck, gaining height as they neared the shore. A gust of wind pushed one wave slightly ahead and it was quick to take on the momentum. But just as the wave behind was gathering speed too, it noticed something peculiar.

Wave 1 had crashed unexpectedly. In its watery wake, Wave 2 was now stuck in an awkward position. Should it follow its companion? Or learn something about the nature of highs and lows?

That’s the key question on the minds of fintechs which have created a whole suite of financial products for edtech consumers—EMIs, low-interest loans, buy-now-pay-later (BNPL) schemes… Fintechs wedged open the door for edtechs. And edtechs, in turn, have allowed fintechs to fatten their loan disbursements stats.

But such relationships only work when all parties concerned hold up their end of the bargain. What happens when edtechs begin to fail their promises?

Fintechs are finding out. The hard way.

Twinned fates

Edtech was India’s third-most funded sector in 2021, with US$4.7 billion finding its way into edtech companies. Only two categories—ecommerce and fintech—were ahead. Fintech firms raised a total of US$8 billion in the same year, ecommerce raised US$10.7 billion. 

“Edtech was pushed through aggressive sales and fintech provided the lever,” says Ankit Mehra co-founder and CEO of GyanDhan. GyanDhan is one of the many fintechs keen on creating new-age financial products for edtech courses. Fintech makes it easier to swallow the high rates that edtechs demand for their products—Rs 20,000 (~US$260) in five instalments of Rs 4,000 each is a much smoother sell. Paired with an edtech’s spiel of better marks/learning, you’d think this would be a win-win-win proposition for all stakeholders.

Except that it’s quickly turning into a lose-lose-lose.

Mehra is worried, and for good reason. Edtech startups are struggling to justify their valuations, laying off staff, facing weak retention levels. It’s like everyone woke up one day and decided that K-12 edtech is, well, over.

The fate of at least some fintechs are tied into this massive downsizing of edtech. The relationship between them looks something like this:

Lenders like Capital Float and Zest Money usually get a revenue share from the edtech company concerned. This is the tricky part—if customers refuse to pay their instalment amounts, and edtechs wash their hands off post their sale, where does that leave the fintechs?

Mehra foresees an edtech-like reckoning for fintech. While the exposure for edtech lending products might be low—Rs 100-200 crore (~US$13-26 million) lent is the ballpark—it’s a house of cards waiting to not just collapse, but implode.

There were already early indicators that fintechs with exposure to these loan products may be in for a tough time. This is a trend The Ken reported on back in 2019, when we spoke about how 50% of Capital Float’s loan book was loans (mis)sold aggressively to economically vulnerable parents. With the astronomical growth of edtech, the fintech problem has also multiplied.

“Don’t call it a loan”

Mehra tells me GyanDhan has refused to be the fintech conduit for a number of edtechs. “They told us we can’t do a clarification call after the loan has been approved. They also barred us from using the word ‘loan’. The edtechs want the transaction to look like a subscription,” he says.

Many fintechs seem to have forgotten the “fin” part of the deal, says Mehra—the simple fact that a loan has to be repaid. Fintechs are also in a race to maintain high AUMs [assets under management], and this focus on top line growth dims their focus on risk assessment. Who gets a loan, and who doesn’t, is a decision not based on any risk profile, but the selling ability of the edtech-fintech combine. 

Basically, no one—not the edtech, the fintech, or the customer—is worried about repayment at the time of the transaction. Edtechs don’t have to think beyond the sales, fintechs are pushing their topline, and parents… well… parents don’t often know what they are signing up for.

[A collage of consumer complaints posted on Voxya, Quora, and LinkedIn about edtech sales agents signing them up for EMIs, without their knowledge]

Part of the blame lies with the customer for not “reading the fine print”, say industry experts. But sometimes, the obfuscation (by edtechs) is just too sophisticated, or downright illegal. Here’s a few possible ways in which this can happen.

In many cases, sales agents punch fake sales to get better incentives. For example, they may share the PAN card and Aadhaar card of the same people with 3-5 lenders and get loans done from all. It is tough for the fintech companies that don't do video/Aadhaar-based OTP verification to figure out these fake sales. We have seen, in many ineligible cases, fake salary slips and bank statements being sent by sales agents to us.

Or,

At times, to close the sale, sales agents make false refund promises. This happens with a lot of mid-level edtech institutes where the management itself is ill-intended. Consumers from tier-3 or -4 cities usually become prey to this as they don't know how to escalate it legally.

The murkiest, in my opinion, is when…

(The) sales team makes false promises to students, like doing a certain course will give a huge impetus to their career. However, that's not a possibility with all the courses. Once students realize that the course is not adding any value, they lose interest in the course in the middle and default on EMIs.

If you’re good at design, an expensive design course makes sense, says Mehra. If you know Grade 1 level English, then certain courses will be better suited to you than to someone who doesn’t know Grade 1 English. That’s the distinction that edtechs don’t make when it comes to selling their products—unwittingly or otherwise.

This is not a new problem. The one-size-fits-all approach is the sad basis of Indian education. Edtechs can be blamed—partially—for perpetuating the old stereotype.

But are fintechs simply followers and finishers?

“If a sales agent is selling a loan without making it seem like an obligation, then both the edtech and fintech are to blame. If the edtech is mis-selling and the fintech partner knows, then you’re walking into this with eyes wide open,” Mehra says.

A cauldron of problems is brewing. The sad part is, a consumer loan product actually does help finance students who want to do short-term courses that can help advance their studies or careers. And that’s a profile that the big lenders won’t touch with a bargepole. 

The path from here, though, is unclear for fintechs—chase growth? Follow edtechs? Or take some tough decisions right now, and create a distance from these shaky lending practices?

Back bench

We’ve become accustomed to several different kinds of “boiling point” issues in education, so news about actual hot weather could go completely unnoticed. The heat wave sweeping most parts of north India is nothing to scoff at though—and it’s causing a disruption in the school year. Again.

Teachers in Gurgaon, a city near Delhi, reported students fainting during lessons. Students in Kolkata complained they were unable to focus during exams. On April 29, the government in Punjab, a northern state where temperatures reached nearly 115°F this week, said that it will send students home on May 16 for two weeks of online classes. Until then, school hours are shifting forward, so that students can learn from 7 a.m. to 12.30 p.m., and return home for the hottest part of the day. The states of Chhattisgarth and Haryana announced similar plans.

Schools and parents are just about starting to grasp the academic wreckage caused by Covid. While those stoppages have ceased, the impacts of climate change risks on schooling could be persistent and much more damaging. 

And the number of climate-related reasons for school closures are only growing. In a 2020 survey by UNICEF sampling 25,000 students from eight South Asian countries, 25% said they couldn’t concentrate on their studies due to excessive heat or flooding.

Who can blame them? The effects of climate change (at least excessive heat) have been documented in this 2019 paper. A change of 1° fahrenheit in temperature reduces that year’s learning by 1%. 

To put it simply, 

Students can be motivated to make up learning gaps that widened due to Covid. But remediation+heat+climate change effects makes for a really tough situation in schools, especially in low income areas.

Institutes have a new way to gauge success. Move over placements. The race to produce the most number of unicorn start-up founders is here. Seems like IIT-Delhi is leading the pack.

That’s all from me for today, folks. What do you think? Will the great edtech fall impact the fintech lenders tied up with them? Will fintech learn an early lesson? Do you have tips, thoughts, or suggestions on the topic? Write to me at [email protected]

And before you go, I also have a little announcement: We won’t have an ESG edition next Thursday because I’ll be travelling through the week. But I’ll be back as usual the Thursday after next with a cracker of an edition.

Until next time!

Regards, 

Olina

This newsletter has been discontinued. But you can read The Stack which includes our newsletters around cleantech, fintech, personal finance and e-commerce in India!