Analysis

Lending to international students studying in the US with no defaults

According to reports, every year there are more than 3 million US students who are ineligible for traditional student loans because of their inability to provide collateral, don’t have a co-signor or they do not have a FICO score or its equivalent. Nearly 15 percent students at US institutions drop/postpone their studies or change the courses/institutions midway merely because of financial constraints. Students lack funds even after receiving scholarships, federal grants (available only to US natives) and family funding. Students, especially at prestigious institutions, have a lot of future potential but this potential does not translate directly into a FICO score, which leads to US-based traditional bankers often refusing to finance such students.

MPOWER

Washington D.C. based MPOWER Financing was founded in 2014 to cater to the growing niche of financing for international students studying in the US. It empowers US based or international students to have higher education in top U.S. based academic institutions in their desired field by providing them with easily accessible finance in a hassle-free manner. The unique sales proposition of the company is that it has originated more than 2 million dollars worth of loans and has a zero default rate. Amazingly, the startup does not take FICO into consideration and its models are based on the students’ future earning potential.

The Team

Emmanuel Smadja is the CEO and Co-founder of the company. He has worked earlier with large financial houses based in the U.S., Europe, and Africa including CapitalOne and Vistaprint. Mike Davis is the CTO and Co-founder of the company. Mike is a professional technologist and has helped create a majority of MPOWER’s technology platform and models. Both Smadja and Davis understand the pain point of their customer base, as they themselves were foreign students in US and were found ineligible for student loans.  The company has been able to raise $1.3 million in seed capital. Its investment partners include 1776, Baltimore Angels, Panther Angels, Ruppert International and Village Capital. The company does not have a p2p model and the students are financed through an off-balance-sheet funding structure. They have partnered with Goal Structured Solutions (GS2), who also have experience in partnering with SoFi for their off-balance-sheet loans, as the primary off balance sheet lender. Ken Ruggiero is the Chairman and CEO of Goal Structured Solutions and has joined the MPOWER board.

Operations

The Company is lending to students at 145 schools across 14 states and 22 programs. It can lend to students from over 180 countries and students from BRIC countries and Eastern &Western Europe form the major chunk of borrowers.   Family income or nationality of the students is not the criteria – rather the criterion is the student’s potential. This power potential algorithm is calculated based on a lot of factors including borrower’s educational institution, course, time to graduation, grades/scores, internship/work experience, etc. Future earning potential of the borrower is taken into consideration so as to judge repayment capacity. The loan origination process is online and is supported by Cology, LLC – a well-known Fintech technology company.

Loan Terms

The loan amount varies from $ 1800 to $ 25000 per annum. However there is a lifetime maximum loan limit of $ 55,000. This loan may be used for the payment of college/university fees, tuition fees, boarding and lodging charges and health insurance premiums. Payments are directly made to the college/university and the service providers. Rates of annual interest vary from 7.99% to 13.99% & no guarantors, co-signers, or collateral securities are required. A flat 5% origination fee is charged, which acts as the principal revenue for MPOWER. Borrowers can enjoy a concession of 25 basis points through Auto ACH and further 25 basis points after making 24 on-time repayments. The tenure of the loan is 3 to 10 years. Monthly repayments for principal amount start 6 months after completion of borrower’s graduation. Monthly repayments on account of interest start 30-60 days after disbursement of the loan. The monthly interest repayments during graduation are less than a typical cell phone bill and thus deemed reasonable by the founders. The startup is not targeting students with prime FICO scores as they would have cheaper alternative financing available to them.

Traction

MPOWER Financing began disbursal of loans in May 2015. 1000 + loan cases have been handled so far, most of which pertain to graduation courses. There has been no default to date. Though nearly 50% students leave the US after completing their education, yet it is pertinent to note that they will usually have the capacity to repay the loan. The founders rely on the maxim that no student from an Ivy League school would like to spoil his/her career with a malafide intention of defaulting, just because he/she is not in the US anymore. Moreover, these loans have international legal enforceability as per US laws.

Being a B-corp

MPOWER Financing is collaborating with leading private and institutional investors who are looking to park their funds in the safe haven of educational field – yielding adequate safe returns and promoting the cause of education. To ensure the highest standards of transparency & accountability and to keep its focus on removing financial barriers to higher education, the company has taken a very unusual step of registering itself as a B-Corp.  Benefit Corporations differ from traditional C corporations in purpose, accountability, and transparency, but not in taxation. Some famous B-Corps are Salesforce Foundation, Ben and Jerry and Etsy. The company has also partnered with USA FUNDS ® to offer financial literacy and debt management programs to its borrowers. This will be a win-win, as the student will receive free financial education and MPOWER will get a more responsible borrower.

The Future

The company is looking to leverage its relationships with the students to expand its product horizon by providing various utility services to students including pre-paid checking card, competitive cell-phone plans and health insurance. Volumes have been about $2 million and are projected to shoot to $20 million by the end of 2016. The company has been listed as a partner lender on the Harvard website and it is in the process of collaborating with other prestigious educational institutes for listing MPOWER Financing on their websites which would create automatic awareness among the student community looking for lenders. The company is looking to hit profitability in the current financial year already which is a commendable goal for a fintech lender. Though the company will take a few more years (especially during an economic downturn) to prove whether the model works, MPOWER seems to have created a valuable niche among the foreign students, which can be leveraged not only for loans but creating a sales funnel for other financial products.

 

Author: George Popescu and Heena Dhir

George Popescu

 

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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