Source: Next Billion
Traditional savings circles have existed in different forms for centuries and are popular in both immigrant communities in the United States and emerging markets around the world. Structured as a collective fund, a circle requires that each member make regular contributions of a fixed amount, and the collected sums are then distributed to different members on a cyclical basis. Economic benefits include lowered transaction costs, improved flexibility, and greater access to credit (in the form of being able to borrow from the existing pool or leveraging that pool to connect with formal banks). Default rates have been close to zero across the board, due in large part to peer pressure. Numerous studies and experts (Yale, the University of Leicester, the University of Salermo, and the U.S. Federal Reserve, among others) have shown that savings circles are immensely beneficial for their users from financial and social perspectives: usage of savings circles promotes asset accumulation, consumption smoothing, human and social capital, self-empowerment, network integration, financial literacy, impulse control and long-term framing – just to list a few benefits.
Startups in the digitized savings arena have significant potential to impact the social and financial inclusion of both existing users of savings circles and currently under-banked potential new users worldwide. For existing users, digitized circles expand the potential pool of participants and eliminate many of the traditional model’s logistical and organizational bottlenecks. Customers we’ve interviewed rave about this aspect: one told us, “I really like using this service even when I don’t have a specific savings or borrowing need – I just create a pool, set it, and forget it. I don’t even miss the money, and a few months later, I’ve saved $1,000!” The result is accelerated participation, the ability to join multiple savings circles simultaneously, the potential to tap wider social networks across a diffuse geographical area, reduced friction, and involvement from participants outside of a given social network. For individuals who are new to savings circles, these companies offer compelling opportunities to begin to participate in this centuries-old financial vehicle safely and securely. Although digitized savings circles currently rely largely on users having access to a computer, mobile applications could further facilitate usage of digitized savings circles in the future.