Tandas And The Informal Economy of Mexico

Millions of workers operate in the informal economy of Mexico.

In Mexico, over 77 million people are without access to bank accounts. This begs the question — how does one save money without a savings account?

In the United States, it’s relatively easy to access financial services. A whopping 94% of citizens over the age of 15 have a bank account.

Enter The Informal Economy.

What is the Informal Economy and Why Does It Exist?

The Mexican National Institute of Statistics estimates the informal economy makes up a stunning 23% of Mexico’s GDP.

The informal economy consists of millions of citizens and businesses that operate “off the books” due to lack of trust in the government and financial institutions. They operate in cash and exists outside of the reach of the government. After all, if a corrupt government offers little protection or social welfare, why pay your dues?

The informal economy is neither good nor bad. Transactions settled in cash may prevent taxes and interest from landing in the hands of corrupt institutions, but also prevent citizens from building credit history or settling disputes.

The informal economy touches virtually every aspect of life. According to LSE Cities:

– c. 60% of housing construction occurs informally;

– over 60% of jobs are in the informal economy;

– c. 25% of the 105,000 taxis are unofficial;

– c. 25,000 street vendors operate in the Historic Centre alone, this number has increased by 40% in the last 5 years and doubles each December;

In fact, it’s quite admirable to see entrepreneurs operating on the streets of Mexico with little regulation or government interference. You will notice people selling tamales and quesadillas right through the window of their home or car.

For members of the informal economy, there are few advantages in signing up for a bank account. The banks charge high monthly maintenance fees for simply having an account, and refuse to lend to those without credit history. For the lucky few that can get a loan, the interest rates are ridiculously high.

This had lead to a culture of “trust backed finance” in Latin America.

Many businesses give IOUs to customers because citizens are unable to obtain credit or trust traditional institutions. Groups of citizens also operate “Tandas” as a form of social lending.

Fundary is using cryptocurrency to both systematize this process as well as provide financial incentive and opportunity to those that take part. Social trust has always existed, but we’re bringing social trust back to finance.

Let’s take a deeper look at Tandas as a form of “trust backed finance”.

What Are Tandas?

Tandas are rotating savings groups, between friends or co-workers.

A common cultural practice in Mexico, Tandas are based on confianza, which translates to trust.

In fact they are so common that 31% of the Mexican population participates in Tandas.

Here’s how it works:

Every member of the group puts money into a pool — in some cases their entire paycheck for the week — and then the pool is rotated between group members. This allows individuals to make a major purchase that exceeds what they could normally afford with their weekly salary.

Think of it like a short term loan — except the money is held by people instead of bank and there is no interest collected. The group decides how much to contribute and how the pool will be awarded. Some Tandas set a predetermined order for the rotation, while others are decided at random.

Tandas are not just for friends and small businesses. It’s quite common for employees at Fortune 500 companies in Mexico to participate in Tandas as well.

For example:

Marcos has an emergency medical expense and needs money to pay for it. Six coworkers pool their paychecks together for the week (or a predetermined portion of the paycheck), contributing 5,000 pesos each. Marcos now has 30,000 pesos to pay off his medical expense. The group trusts that Marcos will contribute his paycheck to the pool every week in the future. A different group member will receive the pool next week.

Why Do Tandas Exist, and What Are The Advantages?

Tandas exist because of a lack of trust in financial institutions and the government. The few who are able to obtain a loan from a bank do so because they have robust credit history and the income to afford high interest rates.

Tandas have several advantages which make them popular:

1. Social trust. Instead of trusting a potentially corrupt government or bank, they are trusting friends, co-workers, and family members with the money.
2. Access to a lump sum of money for emergencies, celebrations, and major purchases.
3. A “forced savings plan” for those who do not want to pay fees to a bank account and those who lack the discipline to save

Problems With Tandas

For all the advantages of Tandas, there are also major drawbacks that prevent citizens from prospering financially.

1. Distribution of the pool is not always fair. For example if Maria hadn’t planned her shopping ahead of time and it’s Marcos’s week, she may not have the money to buy groceries. The rotation is often decided randomly, though sometimes it is determined upfront.
2. There is little incentive to build long term savings because the money is rotating between group members on a weekly basis. Further, group members earn no interest for their participation in a Tanda.
3. Carrying such a large amount of cash is risky.
4. Not having access to money for emergency expenses is stressful.
5. Informal lending doesn’t build an official credit history. Thus, members will not be able to receive a loan from a bank. Lack of history can delay or entirely prevent life changing loans.
6. When someone doesn’t pay, it breaks confianza (trust) between friends, and stresses close relationships.
7. With large Tandas, payouts are infrequent. Members may wait months for their turn to collect the pool. The earlier participants may also leave the group before they’ve contributed their fair share.

Advantages of Cryptocurrency vs Tandas

There are a few advantages of using cryptocurrency over Tandas, that fiat does not have.

First, cryptocurrency allows for inexpensive identity verification and credit scoring. Just this week we saw Hello Bloom raise over 25 million dollars (and counting) for this purpose.

By decentralizing the currency, it is much more secure than leaving it in the hands of one person.

With smart contracts, if a member does not fulfill their obligation, their credit score can be dinged and collateral can automatically be taken to pay off the debt.

Vice versa, if one successfully fulfills the obligation, they can be rewarded with a bonus, a higher credit score, and the ability to borrow larger amounts than the Tanda pool could offer.

And finally, one can access crypto backed capital on-demand instead of waiting for their turn in the Tanda.

Will Mexican Tandas Resist Change?

This leaves the question: Will members of the informal economy resist change as we enter la revolución de cryptocurrency in Mexico? There is certainly a technological curve, however Mexico is far more tech savvy than you might think. As of 2016 over 90 Million people in Mexico have smartphones, and cryptocurrency can be exchanged for fiat at over 130,000 locations via a simple text message. This is accomplished using the Bitso network. Soon Beluga Pay merchants will accept cryptocurrency payments as well.

At Fundary, we are working to help businesses offer formal credit to their customers via a cryptocurrency backed peer to peer lending platform. Our ambassador network will reward participants and lower risk of default for investors and businesses via collateralized credit.