Lending against talent, with Joel Frisch

Back of the envelope, according to Poets and Quants, a Harvard MBA will set you back $130,000 per year once you've added in all the extra costs, maybe knocked down to $100,000 if you get yourself a scholarship.

That's already a lot of money if you're an up-and-coming American executive, but it is it even more if you're living and working in the developing world.

One hundred thousand dollars is R1.6 million back in South Africa, which is pretty much what I got earlier this year for selling my two-bed/ two-bath house in the financial district. In India, it's 6 times what a Google search tells me is the average annual salary of a data scientist.

The rewards are worth it, but that level of outlay is simply unattainable for the vast majority of people. This is, of course, where a student loan would normally fit in, but how many Indian lenders are going to give that much money to someone they know is leaving the country? Probably none. How many South African lenders? 

Well, actually, at least one, sort of, Prodigy Finance is headquartered in London but with two out of three founders being countrymen of mine, I feel like I can round that one up.

In this episode of HTLMTS I speak to Joel Frisch, Prodigy's Head of Global Acquisition, about investing in talent and lending to international students for world-leading post-grad studies.

Because the hardest thing about getting into Harvard should be getting into Harvard, not getting approved for a loan.

You can learn more about Prodigy Finance at https://prodigyfinance.com/

You can learn more about myself, Brendan le Grange, on my LinkedIn page 

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

The full written transcript, with timestamps, is below:

Joel Frisch  0:01 

Because we are very intentional in the programmes and the schools that we support in ensuring that we understand the outcomes of these programmes and how the students are going to do so we can first ensure the ability to pay. And then lastly, because this is not your typical transactional bank relationship, but one that is really rooted in opportunity, there's this inherent desire from the student to repay the loan because they know that the access that it gave them and they don't really want to mess it up for the next guy.

Brendan Le Grange  0:37 

My first proper job, so excluding the strange ones I took on for beer money in my student days, some of which were strange, like really strange, like, accidentally helping to advertise and escort agency's Valentine's Day Special strange, but no, excluding those, my first job was in a joint venture CapitalOne had started with a South African bank. My assigned role was to act as the understudy of Ryan Steele, a young rising star who was building the banks first ever properly data-driven fraud defences on the Amex card portfolio.

And I learned a lot from Ryan, so I was a little disappointed when a couple of years later, he up stakes and headed to Paris to do his MBA at INSEAD. It turns out, though, that he wasn't just a rising star in the world of South African banking - while at INSEAD, he joined two classmates, Cameron Stevens and Miha Zerko to found Prodigy Finance, as a specialist peer-to-peer financing vehicle where INSEAD alumni could fund loans to future INSEAD students, using their enhanced future earning prospects as collateral, essentially.

Prodigy has grown tremendously from those early days, and Ryan has left now for new challenges, but the idea of lending against the future value unlocked by a top-class education is one that has always intrigued me. So today, I'm speaking to Joel Frisch, Head of Global Acquisition at Prodigy Finance to find out more... welcome to How to Lend Money to Strangers, with Brendan le Grange.

Joel Frisch  2:25 

Thanks for having me, Brendan, thrilled to be on the show. And I love talking about how strangers can lend money to folks all around the world, always particularly interesting for us, because I think we are lending to folks who others wouldn't really consider as a core borrower component for them.

My background prior to prodigy finance started very traditionally on Wall Street. After working in a variety of sales and trading roles, working a little bit in our private wealth/ private banking space, actually took a little bit of a right turn and went and built a software company in the employee management space, I think it really gave me a little bit more perspective on appreciating user experience, which added to some of my prior skill sets. And actually, it was building that company that I got connected with the concept of providing financing for the underserved.

We had been building out our engineering team and had actually hired two recent grads of universities in Philadelphia area, Penn and Drexel - and these two individuals happen to be international students. And so they themselves had found big challenges in how they're going to fund their studies - there's one individual had come from India, and the other individual had come from Nigeria. And in talking to these two guys, I came to find out the either extremely egregious terms that they had entered into on the funding or what they had gone through as far as begging others to co-sign for them.

And I just found it to be fascinating, because I saw the talent level of these individuals. I knew what their future potential was, even just with our company. And I realised that someone had to have been trying to solve this problem. At the time, this was just when a lot of lenders and neo providers in the US were popping up to give folks alternatives, but I really didn't find anybody on an international level... until I came across a young nascent brand in Prodigy Finance, based in the UK and with a big presence in South Africa, because our founder, Cameron Stevens, is South African. And I just reached out to understand what they were doing.

And came to learn that Cameron Stevens, who had attended INSEAD and himself encountered some challenges with putting together how he was going to pay for school, had that classic story of going to the bank and saying, hey, will you help me with a loan for school? And them saying, sure, no problem, go ahead and put the same amount of money into the bank as collateral and we'll give you a loan based on that... and he said, well, if I had that money, I wouldn't be coming to the bank for help with financing! And then once he ultimately got to school, the following year found that not only was his story pretty common amongst others, but there there was a considerable amount of students who had applied to school that actually couldn't even consider attending, because they didn't have the ability to put the funding together. And so it really just resonated with me and what they were trying to do.

At the time, they were just supporting a few European business schools and really trying to prove out the model, and so I jumped at the chance to help them. And this is back in late 2014, early 2015. And from those early days of helping a handful of top European business schools, we have now expanded to support over 850 schools globally, with large concentrations of schools in Western Europe, Canada and the US.

We support postgraduate programmes, primarily across Business, Engineering, Science, Health Sciences, Law and Policy, and provide students with with access to over 4,000 courses, these are going to be anything from a one year, one and a half year, two year postgraduate or master's degree, where they're really using the programme as a stepping stone to either make a pivot in their career, or for access toward a greater role in their field. And it's been an incredible journey, as we've been able to support about 25,000 students and have lent out over $1.3 billion. I think we're just getting started.

Brendan Le Grange  6:06 

You know, if I think back to my economics classes at university, when we looked at the government scale, we'd talk about if you build new roads, you're going to borrow now, pay it back in the future, but in the future, you're gonna be earning money off those. So that's good borrowing. And if you're going to borrow for consumption, yeah, that was not great borrowing, maybe at best, it was neutral, depending on the project. And if we scale that down to the consumer side, mortgage helps people build wealth, but often it is questionable about whether it's valuable to borrow for certain types of quick consumption. And student loans have sat in the middle, in general a positive thing, but depending on the quality of the course, the quality of the school, there are certainly people that are getting caught up with big student debt, and actually not really having an upside to that. But what you're doing with top quality schools, top quality students, you have to stand behind that that education is adding value to their future.

Because if they're coming from - and i saw, 80% of your loans, or there abouts, going to consumers in developing markets - if you're giving them a loan that covers a Ivy League postgraduate degree, unless that really does add value to their lives, unless it really does give them that pivot, your loan's at risk. So you really do have to stand behind the student loan as a tool for wealth production, or at least 'life change' production, it's not always going to be chasing money. But unless this really is the right thing for the student, it's not the right thing for you, either.

Joel Frisch  7:36 

And I think that by by providing loans based on an individual's assessment of future potential, it creates that natural regulator in it, because as I look at the US market, which you could argue, is one of the most mature student lending markets, that actually those those loans are not really based on the individual. Because you have government backed loans, which is basically the government co-signing on behalf of the student, or you have a lot of parental loans, which is the parent signing. And I think that's one of the reasons why it's been ripe for abuse, and you have a lot of scenarios of individuals borrowing when it may not have been the best decision for them in the long run, and overborrowing.

Obviously, we are responsible lenders, and it's a key component of our model to ensure that we are providing students up to a level that they can afford to repay, based on how we've seen others who attend those courses, get job placement and their incomes afterwards. But just the idea of actually looking at the individual on their own and not including collateral and not including co-signers, really starts to lean more towards that kind of positive lending that you're talking about.

Brendan Le Grange  8:37 

Yeah. And it's hard to overemphasise how life changing, it can be to get into one of these universities, especially to the 80% of your customers who come from emerging markets. It's a little bit cheesy to say, I guess, but you're now saying we believe in you and here's a route to achieve your full potential. So of course, we're not saying that suddenly everybody can go to Harvard or to MIT or to Yale. But you're putting these highly talented students from around the world on the same footing as an American student, where even if their family couldn't afford the tuition, there would have been funding opportunities available to them. And in the past, their situations would have held them back. It would be impossible for many talented people just afford that outlay that investment in themselves. And that's what you're freeing up.

Joel Frisch  9:29 

I agree. And I think the reality is that there are five and a half million international students in the world, there are one and a half million postgraduate international students in the world. But there is a huge component of the population that is not even considering trying to go for higher ed because they don't think that there's any way that they could actually afford to pay for it. And I think that one of the challenges in lending money to strangers, if you will, is educating the market that there's access to this type of finance.

And so I think for us, particularly when I think about the impact that we're having. Absolutely, to your point, you know, the majority, over 80% of our customers, are coming from emerging markets all over the world - but I still think we are just scratching the surface in educating the market, that there is even an option out there for you.

And so even kind of embarking on this journey for higher education, and depending on the country, in the culture, some of that comes down to educating the students, some of it comes down to educating parents and families. Some of that can be accomplished through working with undergraduate local schools within these countries, partners and platforms that these students are already engaging with within their home country. That's the big focus is how do you really spread the word so that an individual who is sitting in their room in the middle of Lima, can think, hey, you know what, I am going to try to go study abroad because like, if I can get in there, then there are people who can help me get to school.

Brendan Le Grange  10:53 

Yeah, I think the sort of the downside of funding such a big idea. I'm going to go and study at Harvard or MIT is such an audacious concept that people don't even think about looking at is there a student loan?

...you're listening to How to Lend Money to Strangers with Brendan le Grange. If you're enjoying it, now is a great time to hit that little plus button to subscribe. Let's get back to the show...

Joel Frisch  11:17 

You have this very high quality group of borrowers, you could call them prime, some would argue they're even super prime when you're looking at their placement post-school. And they're stuck in the middle because you have home banks who are very risk averse to give loans to an individual to leave the country. And you have host country or you know, the school country banks, who don't really have a model to assess new residents with no credit. I mean, you know, you've had some incredible guests on the show of other companies like Nova Credit who are trying to help banks look at this, but there really isn't an established framework for like, how do you assess Brendan who just showed up so that they haven't proven themselves yet, but we know that once they do, they're going to be incredible borrowers.

Brendan Le Grange  11:58 

I think there's also just a logistical headache... where's your student visa, because I can't give you a loan until I see your student visa, but I can't get a student visa until I'm accepted and I won't be accepted until I've paid, and I can't pay until I get the student loan. So you get that Kafka'esque run around, most lenders are just gonna say it's not worth it. You know, for me, I get two a year who apply and all the things I have to, I think a lender will just say it's not worth my trouble.

Whereas when you take it from the approach of let's find a solution for these individuals, and built a global business, which I think is also worth maybe diving in here, I was working in collections ages ago. At that time, we even struggled to do collections using outsourced call centres because as soon as a customer heard an accent and thought, well, this call centre person who's phoning me to collect the money is abroad, collection rates drop. Come and fetch it, I've got the money here on my table at home, come in fetch it. Even though the bank and the borrower both in the same country, because they heard that the person phoning them was outside, they wouldn't really be bothered. Now you've got the real problem that you're in one country, your borrower might be in a second country and they might be studying in a third country. How do you approach those logistics and keep an entirely global view.

Joel Frisch  13:20 

We have students coming from about 125 countries and so, with regard to things like document verification, there are certainly challenges that we've had to go through and ensure that we can review the the appropriate documents. I think that some of that has gotten easier over the years being able to tie in directly with things like credit bureaus, you know, working with vendors and solutions who can do things like document checks, bank statement reviews, but there's still an iterative process of making sure that we can do that for all the countries of origin with regard to like the disbursement of the loan.

Also we disperse all of our loans directly to the schools, which does simplify things a bit, and that we're not having money run all over the world obviously gives gives surety to our investors that the money is being used for education is being sent to the schools. Our loans could be a combination of tuition and living costs, but all that is sent to the schools - particularly schools in the US have a very established process for receiving funds up to cost of attendance and then crediting back to the student for a surplus above tuition that the student can use for living expenses.

Now, once the student has graduated, and you know, comes up on repayment, which is six months after graduation, our servicing of the loan is a combination, yes, of service in the US, but depending on where the student is living, primarily service out of the UK. And we've done a couple things. So we've certainly spent a lot of time building a global enforcement model that takes advantage of some legal arrangements between countries to uphold decisions and enforcement. But I also think it starts to come down to a few key components of our model: number one is the credit worthiness of our customer, we are very intentional in the programmes and the schools that we support in ensuring that we understand the outcomes of these programmes and how the students are going to do. So we can first ensure the ability to pay, right, because if you think about repayment, you're talking about ability and desire. So I think for us first is that screening on ability. The second is looking through on that concept of desire, we have built a pretty robust probability of default model that we do implement in the beginning of our application process to give us a real sturdy risk screening, we have a predictive scorecard that we've built over the last 14 years, that's a combination of internal external data repayment data from all the various vintages since 2007, that allows us to identify what are the most impactful variables of a student's application as far as where they're going to that type of programme how other students have done. And then lastly, there's certainly a bit of social pressure built into our model. And it's really natural, it's not necessarily something that we've created. But I think when you talk to our customers, because this really is a pretty unique relationship that they have with us, this is not your typical transactional bank relationship, but one that is really rooted in opportunity. There's this inherent desire from the student to repay the loan, because they know that the access that it gave them, and they don't really want to mess it up for the next guy.

We have incredible organic growth every year. And that's because our borrowers share their experience with the future students. And if you go into many of the countries and cultures that we support, there's a very strong connection to to their seniors or their elders. And that's where a lot of aspiring students or what we call kind of explorers are looking to get information. And so because it's this very tight community, this idea of the importance of repaying your loan really does help drive a lot of that behaviour.

Brendan Le Grange  16:57 

I went back and looked at some of the early discussions, and it seems like the initial model of Prodigy was built around this idea of INSEAD alumni funding future INSEAD students where it had that helping hand ethos built right into it. And you've expanded up to now 850 schools, so well beyond INSEAD, but it's good to hear that that ethos is built in. And I guess to some extent, it's a natural part of the alumni process. Some of its self-serving in that your career is only as good as your reputation. So it is built in to that as well. But there is, beyond just that, that is still a core part of the Prodigy mindset and model that it is still about helping the next person follow your path to success.

Joel Frisch  17:42 

Firstly, to your point of it being a community, we absolutely embrace that. That's how we identify our new customers and kind of how we approach our existing customers.

And then I do think that it is a very mission oriented business. And I think if you talk to any of the team members or employees, we have a Prodigy, that's what drives them. Yes, we are trying to build a borderless credit platform, but the key is that it's it's unleashing this emerging potential all over the globe, just by providing this access to the power of education. I mean, you talked about it before, the hardest part is that individual was trying to get into that top school who's trying to get into that programme for computer science or, you know, marine biology because of what they want to do and bring to the world and their communities. We're just trying to act as a catalyst, a connector to actually make that happen.

And I think that's been validated in the market by looking at some of the folks who have participated alongside us. If you look at the impact investors who have have joined, we've done some work over the years with large banks, impact investors, developmental financial institutions, big monumental transaction for us, with the US developmental financial institution just called the DFC. And even more recently, looking at large scale asset managers that do care about impact, like the Canadian Pension Plan, which which just joined us recently that everyone that we're trying to surround prodigy really understands the mission of the business and sees that this is quite an interesting product that, of course, offers a financial return, but really offers impact.

Brendan Le Grange  19:12 

The product really fits it, as we said at the start, but it's grown from, you know, a fairly idealistic model to as massive business and it's great to see that that is still inherent. I think many MBA projects this get this big, can lose sight, you know, once it gets the funding, and you could scale it up to do every university in every course in the world. And you would lose that link about really, could somebody pay this back? Or could they pay it back comfortably after doing this course.

And it almost feels to me that that is a spin-off business. And I don't know if you monitor it, but you must have some of the best data on actual school impacts and costs impacts. I know when I did my MBA, they used to in their marketing talk about the average increase in salary, but it was based on a little survey they sent to each of us by email that said, what did you earn before and what did you learn after? And I'm sure it's helpful, but it was so vague. Whereas you've got to get some skin in the game, then to actually is this adding value beyond the the tuition fee?

Joel Frisch  19:41 

You know, it's something we talk about all the time of the true ROI of programmes. I think that there's probably kind of a sensitive crossover point of why students are going for education and we don't want to just be guiding students just towards the highest ROI, but I do think there's an opportunity for us to create our own benchmark of saying, like, hey, these are really the best programmes that you should be looking at, if you're interested in, you know, civil engineering to help guide students so that it's in their best interest.

Brendan Le Grange  20:40 

So obviously, baked into the product is this idea that you're helping somebody get from country A, usually a developing country, into country B, usually a developed country. And that's sort of the core part of the business. We've just been through, call it two years now of COVID lockdowns when, particularly getting from a developing country into a developed country would have been really difficult. Do you want to talk about what you saw happening in the COVID? Sort of the worst of the COVID, lockdown years? And what you're seeing now? How's that education market changed for international students?

Joel Frisch  21:18 

Yeah, so as March 2020, came upon us, I think being at the intersection of global mobility and credit markets is probably the last place that anyone would want to wish upon their neighbour. And and I think that was really the big question for us is what what was going to happen to students, were they still going to attend school, were they going to try to attend school, what was going to happen to kind of higher education, and then you know, what was going to happen to global credit markets, after an initial pause just of uncertainty, I think what you saw is a few things. One, we saw extreme resilience in our students, of doing whatever it took to start their programmes...

Brendan Le Grange  21:53 

You've got the sort of person you're after and you can say, I'm going to take a big bet on this person's talent, being able to shine, that's the sort of person who's going to be able to find a way to survive is going to find a way to make it work. And maybe it's gonna take them a year longer now, to get it all together. But because you're spending all this time actually looking for high quality people, you get high quality people. And that means that they could even win with a time so that you're saying person I'm lending to is the asset, they are the security as much as any kind of financial asset. And it's proving itself through a long history now, including some very tricky times.

Joel Frisch  22:31 

I think the schools were incredible as far as how they tried to be flexible with students, allowing them to start online and then matriculate into on campus programmes. Whether that was like a one term later, we saw a lot of schools, allowing students to defer. One of the interesting outcomes of that is that last January, so January 2021, we saw this incredible growth of January start programmes, which you didn't typically see. And if you fast forward a year, we've seen about 85% of those have stayed. So I think that's that's one of the big outcomes we've seen in the school side is that you typically think of school starting in the north northern hemisphere, starting in kind of August, September, and kind of running through May, we're starting to see a real big second cycle, this January start, that I do think is here to stay.

With regard to the credit markets, I think, you know, everyone around the world saw that slowdown. And I think we were also affected in the same way of, but I think as we came out of it, we looked at ourselves even stronger than we were before. And I think that was culminated in us having a very successful first of its kind, ABS deal, you know, asset backed security deal tied to our international student loans of about $300 million - heavily oversubscribed. That was tied in with social bond principles, as well as the the UN SDGs, which really sets the stage for the future, because it shows that this is an asset class that investors have interest in, that they do understand. And I think it's going to help Prodigy as far as accessing additional channels of capital. And I also think it's going to just help international students in general, because it's going to set the tone that like we talked about a few minutes earlier, that these are the same high quality students, and even though they're coming from another country, and coming here, they're coming from a developing country going to a developed country, that the profile really is the same. And so that was that was a huge outcome coming out of a very tough to

Brendan Le Grange  24:20 

One obvious move that you might have seen in the headlines or people might have been speculating on as travel became impossible - and as people started doing virtual courses - was perhaps Is this the new approach to these top quality degrees? Are we going to see more Harvard MBA run fully online, and all that change the need for people to migrate into the states? But it seems from what you're saying there that there's even more hunger than ever before to get there to get onto campus to network with other students? Is that what you're saying? That still the hunger is really to to get there in person if possible.

Joel Frisch  25:01 

Yeah, look, I think the demand for high quality programmes is absolutely still there for a few reasons. One, because these are very high quality, well established brands. The second thing is that they are very well established networks that do provide a lot of assistance to students as far as placement post graduation, which is, which is something that students are very interested in. So I think the resurgence of demand to get to campus is absolutely there. I do think that coming out of an experience like COVID, it has accelerated schools plans for offering their programmes in a variety of mediums and formats of hybrid programmes that could be on campus off campus. I think the idea of full online or full remote programmes is still being worked on, it's certainly an area that we're looking at.

We're also looking at programmes where you know, students are doing their first year remote and then getting to campus the second year, which if you think about for an international student, may end up being the best combination of, you know, expensive utilisation, that the first year is a little less expensive, and then they get to campus the second year and get access to that network.

We are very interested in looking at the fully online space, both in traditional and technical or vocational schools, some of the, you know, boot camp platforms, as an example that have started really are showing great results for how, you know, some concentrated jolts of education can really help change someone's trajectory. And I think for us, it just comes down to really understanding those outcomes. And I think we're gonna be very comfortable entering into that space. And then obviously working through any of the legal or regulatory requirements, because it does change it a little bit if the borrower's is not leaving their country.

Brendan Le Grange  26:35 

If you are willing to take the bet on this person because of their talent, it stands to reason that they would want to be surrounded by the other people who make that same cut. And I think that's where the online degrees are going to struggle the most. I've done online masters through an American university, it was a very good course, I got a lot out of it, individually, but because you move through a modular type approach your first course might be somebody else's 10th course, you saw some people that were on the same sort of trajectory as you, and you've got a bit closer to two or three people, but it's just not the same as sitting after class and having a drink or seeing the same person in class from day one to two years later. And part of the reason you want to go to Harvard is because of the other people qualified to get into Harvard. But as you said, there are other types of courses, and there's other short courses. And I think online is a great alternative.

So in terms of Prodigy's growth, and next steps, where do you see that going? Do you explore new markets for new schools to send people to new markets to capture students from? Or is it a bad looking at other business lines?

Joel Frisch  27:49 

I think first strategically is we are absolutely committed to being a provider of education loans, I think we also look across the macro environment and see the growth of the population. So if I said before, that we have about 5 million international students studying abroad, looking at estimates of that growing to about 8 million students across the next 10-15 years, based on growth of middle class and the expected movement into tertiary education. That is super exciting, as as you see that access. And we certainly see that on regional levels, you know, China and some parts of Latin America that, you know, students away from big cities are looking to study abroad, we are certainly looking to expand our support of a host countries.

So as I mentioned, before, a majority of our students are headed to the US, with a good amount of going to Canada and Europe, lots of opportunities for us to expand within Canada, lots of opportunities to expand within countries like the UK, France, Germany, we are going to be looking to expand in a country like Australia, which is a huge destination for international students all over the world, but particularly students coming from Southeast Asia.

I also think that there's there's an opportunity for us to focus on really understanding where the student demand is headed. And so being intimately aware of where students from Mexico who are looking to study abroad are going and making sure that we're there, and we're supporting those programmes. But those are really the main drivers. And then I think, like we were saying a little bit earlier of looking at slightly different formats of the programmes. So as the world continues to offer more connectivity online, how can we be aligning with schools to go after this programme? So a lot of room to run even in this, you know, near term strategy.

Brendan Le Grange  29:28 

Yeah, and, good luck for that. As I said right at the start, I really like these business models where the lending is clearly for an investment, and often that investment is a physical investment, like a mortgage, but yeah, human investment, I think, is an even clearer benefit for society. So I look forward to seeing how big Prodigy can grow. And thank you again for your time.

Joel Frisch  29:48 

Thank you. I really appreciate that.

Brendan Le Grange  29:49 

And thank you for listening. And not just to this episode, but to the first season of How to Lend Money to Strangers, which we'll wrap up next week. I like to think the show has grown a lot already, but I have some interviews lined up that will take Season 2 to a whole new level. Make sure you subscribe so you don't miss it.

And if this topic was of particular interest to you, I spoke to Craig Smith, founder of JustLend in episode 9 - discussing how borrowing from friends and family could be another route to funding these sorts of studies -  and in episode 11 I spoke to Misha Esipov co-founder of Nova Credit about how they're helping immigrants to borrow once they've already landed in the US. You may find those interesting too.

How to Lend Money to Strangers is written, hosted, and edited by myself Brendan le Grange and recorded outside the actually not that rainy city of Maidstone, England. The theme tune and show music is by Iam_Wake and you can find show notes written transcripts more in depth articles and details on how to book me for speaking engagements at www.howtolendmoneytostrangers.show. I'll see you again next Thursday.