Susli Lie, Co-founder of Dana Cita
Clairine Runtung, Investment Manager of Convergence Ventures
Dana Cita is a financial technology lender, specializing in providing affordable student loans with the vision to make higher education attainable for all Indonesians who want to pursue it. Dana Cita was the third Indonesian company to graduate from the prestigious Y-Combinator seed accelerator program. Susli Lie, one of the Co-founders has degrees from Yale, U Penn and Johns Hopkins and led research for the World Bank and Asian Development Bank on student financing in emerging markets like the Philippines and countries in West Africa. She returned to Indonesia a few years ago eager to tackle this elusive problem.
Presidential Call to Arms for Student Financing
The President of the Republic of Indonesia, Joko Widodo made a statement in May this year, calling to arms the banking and financial sector to address the scarcity of student loans in Indonesia. Susli believes that this will become a major opportunity for the nation considering the growing purchasing power of the young population and the transitioning focus from labor to skilled workers. As such, she believes the economy is bound to demand more skilled talent and more people will be able to afford it.
If you take a look at the tertiary enrollment in geo-proximate countries, Indonesia is clearly lagging behind. Our tertiary enrollment rate is approximately 28% while the Philippines is ~36%, Thailand is ~49% and the developed markets are above 75%. To her, this is a clear indicator of the market opportunity. Why this is happening is due to many reasons, but financing is definitely one of them. The total cost for tuition for a 4 year degree is approximately 1.4x the current GDP per capita, which is high relative to the aforementioned countries. Despite the costs attributed to it, Susli believes that tertiary education has an immense power to change a person’s livelihood, which is why she thinks the President is putting emphasis on it.
Scarcity of Student Loan Products
Susli says that the lack of student loan products is not a problem peculiar to Indonesia, rather it is quite common. Citizens of developed markets feel that tertiary education is something they are entitled to and that the government should provide to everyone. This is not the same sentiment in developing markets. If we look at enrollment rates in the lower levels of education, namely basic and secondary levels, we are still playing catchup to other nations as well. Currently around 20% of our national budget is dedicated to fix that problem so you could argue that the government should probably be fixing that problem before tackling tertiary education.
From the financial perspective, the student loan market is still quite small when compared to other types of consumer loans such as motorbikes, cars and houses. These are bigger opportunities from a banks perspective. In addition, the financial history of the students is fundamentally lacking which burdens education loans with higher risk. Student loans are typically unsecured and long-term, both factors that add to the level or risk. If I were a bank, it would be difficult to make the case to focus on this market compared to the existing opportunities that they are currently going for.
The Fintech Approach
In general, fintech lenders in this space use technology to compile data and to get access to that data that we couldn’t do before. The use of data is also commonly used to lower costs for the business as well as the borrower. In the case of student loans, the target user base are young people between 18-24, who are tech savvy and have a strong online presence. So then acquisition using tech makes a lot of sense as opposed to the traditional brick and mortar legacy model. Fintech companies can partner with banks when it comes to providing specialized products, from DC, we work closely with community of borrowers, borrowers of parents and of schools, because this is the only thing we do, we can spend a lot of time understanding our consumers and nuances of this niche. Lastly, startups are more agile because they can take different types of risks, being open to innovation in every aspect of the business.
Role of Government
According to Susli, whenever you’re trying to solve a meaningful social problem at scale, you can’t escape the government’s involvement in some shape or form; whether as a policy maker or a provider of resources. When you look at highly developed markets, you see some variation but when it comes to higher education, the Government often acts as a lender of first resource. It’s often virtually free or highly subsidized. In Anglo-Saxon countries such as Canada, Australia, or New Zealand and the US, you’ll see the government partnering with the private sector, but the government usually implicitly guarantees the affordability of tertiary education while doing so. How can they do this? Simply because they have the spending power to do so from tax payer money – developing nations aren’t able to allocate as much to focus on education.
Susli believes the government could help Fintech companies and banks in accessing the data of people who are outside of the mainstream financial system today, to verify identity and have access to their prior credit performance. Secondly, the government could do direct investment in creating high-quality, job-ready education institutions, or make it easier for the private sector to come in and do that. Susli applauds OJK for allowing fintech companies to operate in this space to innovate and test the market. If the government continues to allow fintech companies to understand their customer base better, it would help significantly in becoming better at what they do as solution providers.
The Next 5 Years
Susli believes that the demand for student loans and high quality higher education will only increase. The labor market demand and the spending power of the consumers will influence this as well. She has no doubt that as the market grows, other players are going to start coming into the space. This way consumers will have options and it is important that (lenders) compete in a healthy way to allow the quality improvement of the higher education landscape.
A World Bank study showed that if you come from the lowest income quintile, you have a 5% chance at best to access higher education. and if you come from the top 20% of the population, you have a 50-60% chance of accessing it. It is not a perfect correlation, but there’s sort of an income factor here. if financing is no longer an issue, schools will have to compete not on the basis of who can afford it, but really on what they’re offering.
Susli is also wary that in their good intent to push for student loans, governments might inevitably introduce market distortions, that will result in lower competitiveness, or even worse, result in a broad perception that student loan is a bad thing. In the 80s, Indonesia had something called Kredit Mahasiswa Indonesia, which is government-backed and in the end experienced a very high default. So many people have been asking, “isn’t student loan a bad thing? doesn’t that mean were saddling them with a lot of debt?”
Susli is about to set the record straight; credit as a concept in and of itself isn’t necessarily a good or bad thing. It’s a mechanism to smooth out expenditure as people can borrow against their future earnings, and that’s what a student loan ultimately is. Susli thinks the challenge is not whether or not student loan is bad or good; but the challenge is how do you make sure that as the government sets policies, all the incentives are aligned to create something that is ultimately beneficial to the society.