Fintech Meets Rotating Savings and Credit Associations
The concept of rotating savings and credit associations has existed for hundreds of years. According to one paper[1], it may even date as far back as 13th century Japan. Details vary, but the typical model involves a group of members making set, regular contributions to a club. At each meeting, one member receives the lump sum of all contributions. Meetings continue until all members have received the funds once. As financial solutions go, this one is very established and trusted in communities throughout the world.
These programs have many benefits including access to no-interest financing, convenience and a mechanism for saving, alongside social benefits like strengthening networks and providing safe spaces for women and girls to meet. This has proved especially powerful for people with very low incomes who lack access to the formal banking system and don’t believe in paying fees to banks to access their own money.
According to the World Bank[2], 17 percent of adults who save money in developing countries do so “semiformally” — mainly through these associations (known as ROSCAs or tandas, among many other names). The practice is especially common in sub-Saharan Africa where 40 percent of adult savers reported participating in semiformal savings programs in the prior year.
So what are the so-called fintech players in the retail banking space doing today? All the UI/UX innovations don’t solve the fundamental disconnect with the underserved population; why they need to pay a financial insititution to access their own money. Fintech is busy putting lipstick on a pig. Why not learn from and modernize a 700-year-old system that still resonates with many in the underserved segment? Could technology help scale a global ROSCA? What would a global ROSCA look like? How can modern social networks provide the same type of peer group assurance to bring in many of the 2 billion people who currently live outside the formal banking system? True fintech innovation needs to go deeper than the offerings of the current batch of me-too mobile direct banks. It is time for banks to offer alternative operating models to reach the last mile in cities as diverse as Los Angeles, Dhaka, Madrid, Mumbai, Mexico City and Hanoi. The tools exist to drastically improve upon a model that has survived for over 700 years, and which could hold the key to providing underserved and millennials with the robust benefits associated with participating in the formal financial system.
ROSCAs are not without their downsides. Early attrition is an obvious risk and there’s no way to guarantee that an individual’s turn in the rotation will coincide with their need for financing. At a macro level, ROSCAs have never reached scale as their informal place-based design makes it difficult. In addition, ROSCAs lack any formal documentation or regulatory requirements. Most importantly — from the perspective of someone who spends every day seeking to increase access to financial services — ROSCAs aren’t linked to the social and economic empowerment benefits that arise from being connected to the formal financial system. Specifically, they are not a gateway to formal savings, credit and insurance products.
Like I said, there’s room for improvement. But I’d much rather spend time helping banks address those challenges as opposed to advising them on how to migrate their existing branch model into the digital world (aka lipstick on a pig).
Aligning ROSCAs with formal financial services presents enormous opportunities.
Financial institutions haven’t historically developed products to support ROSCAs because it is not cost effective and they simply can’t make money servicing the segment of the population interested in ROSCAs. There’s the proximity issue — branch banking is not financially viable in many underserved communities (that’s one of the main reasons they’re underserved in the first place). Second is the issue of time — ROSCAs are time-limited and are not typically designed to encourage long-term savings.
These are the banking challenges of generations past. The technology exists today to provide services digitally. Granted, overhauling banking technology is much easier said than done thanks to the presence of legacy systems and the need to align technology with regulatory requirements; but isn’t this the goal of every direct bank that has launched in the last decade? This is precisely why Meed has worked to develop technology and an operating model that helps banks to streamline mobile customer acquisition and engagement.
Financial institutions are increasingly engaged in financial inclusion efforts in developed and developing markets around the world. ROSCAs present an intriguing entry point for customer acquisition in that their members presumably have built-in trust for the group, understand the importance of goal-based savings and are already engaged in a basic form of financial services.
Digital ROSCAs could present a variety of benefits including:
· Increased physical safety of members by moving money digitally and removing cash from the equation
· Opportunities for members to engage in long-term savings as a complement to the short-term club
· Opportunities for members to “graduate” to other financial services products
· Scale that increases viability and can extend reach to the remotest of locations in the world
An interest in more robust product offerings for people who currently participate in informal lending communities was one of the key drivers of Meed’s SocialBoostTM product. This is where a portion of the interest paid to member banks is returned to the users within the Meed community in return for their efforts in growing the community among their social circles. It has taken the principles of community participation in savings and re-invented them.
Meed provides an enabling technology platform and access to modern social marketing tools that allow financial institutions to focus on banking, as they help their customers battle hardships associated with daily life and ultimately realize their dreams. Shouldn’t that be the true mission of banks?
[1] Izumida, Yoichi. “The Kou in Japan: A Precursor of Modern Finance.” 1989.
[2] Kunt, Klapper, Singer, and Van Oudheusden. “The Global Findex Database 2014: Measuring Financial Inclusion Around the Word.” World Bank Group, 2015.
