Digital savings circles: Challenges and the road ahead

Saija Solidarity Group in India

For decades, traditional savings circles (also called ROSCAs in the U.S., tandas in Mexico, chamas in East Africa, chit funds in India, arisans in Indonesia, among other names) have been a widely popular alternative for individuals without access to formal bank accounts to save and borrow money with a group of people that they know and trust.

The concept revolves around the idea that each member of the circle contributes a chunk of money each month — and every month, a different member of the circle receives a lump sum.

Back in 2014, our team wrote about the trends and potential of digitizing savings circles for the base of the pyramid— how the rapid adoption of mobile phones and the internet across the world could bring the centuries-old concept into the digital space and eventually encourage the un- and under-banked to save.

We have since come across a variety of startups that are trying to take advantage of the idea of digital savings circles and grow them into impactful and sustainable businesses. In March 2014, we invested in eMoneyPool, an online platform that automates saving circles in the United States. By digitizing clients’ saving circles, the platform reduces group administration costs and time, enabling groups to be dispersed across wide geographical areas and encouraging participants to form pools with those outside their immediate network.

In addition to eMoneyPool, we have also been intrigued by a number of other models out in the market. Moneyfellows allows individuals in the UK, UAE and soon Egypt to leverage their social network to get cheaper loans. Money can be paid out to accounts all over the world or can be used to purchase items from a number of retailers at a guaranteed discount. Mapan, a product of Ruma, builds upon the widely popular arisan scheme in Indonesia, enabling a group of friends or community members to save money collectively to purchase consumer goods from Mapan’s catalog. Chamasoft provides software for chama administrators in Kenya to manage member payments and loans and chama financial accounts. These models and other new entrants seek to harness digital savings circle user behavior and serve them more efficiently by leveraging increased access to technology, including:  Ahorro Libre, Tutanda (Mexico); E-Savings Club (Uganda, Benin); Osusu Mobile (Nigeria); Chamasoft, m-PESA Chama (Kenya); BankSouSou, Clearstreet, Elikya, eMoneyPool ,Monk, Puddle (US); Ma Tontine (Senegal); MoneyFellows (UK/Egypt); Ngwe.Su (Myanmar); Arisan Mapan by Ruma (Indonesia)

We believe there is a huge need to provide individuals with options to save money, in particular, to weather potential shocks. A large population around the world does not have a savings account at a financial institution: in the U.S. only 54 percent of the adult population has a formal savings account, while in developing countries the proportion of adults with formal savings account is even lower – 26% in Indonesia, 12% in Brazil, and as low as 9 percent in Tanzania. Digital savings circles could not only open access to accounts but reduce friction and time through automation.

Moreover, formalizing savings circles could address the lack of trust many users have for traditional savings circles. In the 2016 FinAccess household survey by FSD Kenya, even though many Kenyans use chamas/ROSCAs (over 36 percent use chamas weekly), only 2 percent of men and 7 percent of women consider them their most “trusted financial provider.” On the other hand, while a bank account is used by fewer Kenyans (only 16 percent have a weekly bank activity), 42 percent of men and 34 percent of women view banks as the most trusted financial provider. We do believe formalizing savings circles through digitization could create greater transparency to what is a largely unregulated practice.

Despite the sizeable number of people currently using traditional savings circles worldwide, startups have faced substantial challenges in transitioning these customers to the digital space. As we look at these new models, we see several key factors that are both the biggest challenges facing companies and the biggest opportunities for innovation:

  • User experience: For many users, savings circles are an important link to their communities. Does digitizing take the appeal out of savings circles? How can companies transfer the social experience and the trust that exists within the communities, which is arguably one of the biggest benefits for traditional savings circles, to the virtual space and build upon customers’ social networks and connections?
  • Customer acquisition: Digital savings circles require, not surprisingly, digitally savvy customers. What is the best way to find and sign up those customers in a cost-effective way? How can startups leverage partnerships with financial providers, mobile network operators, or distribution partners to access customers?
  • Required conditions for adoption: Given the importance of customer engagement and automation, there are specific conditions necessary for digital savings circles. Customers may need to have access to smartphones in order to participate in a compelling user experience or require bank accounts (or mobile money accounts) to route payments and disbursements. Since many users do not have access to these products or services, how do new models effectively serve target customers? How much behavior change is required of customers to start using digital savings circles?
  • Use cases for funds: We have started to see models tieing savings circles with e-commerce sites and other retailers, where customers benefit from discounted prices or simplified purchasing process. While this may strengthen the value proposition for some customers, we need to be mindful of the consumption nature of these models and carefully assess any potentially negative implications it has for its customers.

There is still a lot to learn about digital savings circles and we are eager to see more stakeholders experimenting with solutions all over the world.  The size of the global unbanked population indicates the need for alternative savings models that have the appeal of traditional, informal, socially-appealing methods but are done with greater benefit and efficiency. However, serving traditional savings circle users digitally requires immense behavior change for users, so we expect companies to need to innovate along several dimensions of the model.

As a result, we are excited to see how a broader area of stakeholders – donors, startups, existing financial institutions, telecommunications players — can come together and create innovative solutions to expand access to savings for base of the pyramid customers. While there may be a market for fee-for-service savings circle startups, we are eager to see other types of players get involved in this space and experiment. For example, the models that may have the best chance to scale might be tied to existing financial products rather than as a standalone offering. Rather than provide a savings circle on its own, providers instead could use savings circles to increase customer engagement with or as an activation tool for a broader set of products, such as bank accounts or credit cards.

Savings circles are an important tool for millions of customers around the world, and we believe that there is an opportunity to leverage this tried and true model to improve access to savings, whether through a startup or other consortium of players.

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