The future of household savings and borrowing is taking a page from the past.
Across the country, millions of Americans are struggling to pay their bills, to raise capital to start a business, to make a big-ticket purchase that can improve their quality of life. Banks won’t lend to them because their credit score is bad. Their credit score stays bad because they are largely excluded from the mainstream financial system.
According to the Center for Financial Services Innovation, 57% of U.S. adults weren’t able to meet their financial obligations and in 2015. And the Federal Reserve said in a report on the economic well-being of U.S. households that around 40% of adults lack the funds “to cover a $400 emergency expense, or would do so by borrowing or selling something.”
Enter so-called rotating credit and savings associations, a centuries-old cooperative system where members deposit money into a common fund, usually in regular monthly payments, and at the end of an agreed-upon funding cycle a single member withdraws the funds. A different member receives the funds at the end of the next cycle, and so on.
The system gives participants access to a larger pool of money than they would have saved otherwise. The funds are typically used for large purchases such as education fees, launching businesses, purchasing homes and medical emergencies.
Now one company, Esusu, has modernized the idea to address financial insecurity. Users download the Esusu app and then invite trusted friends and family to join their savings group. The group sets a savings goal and a schedule for payments. The app then automatically withdraws contributions from each member’s linked bank account and directs the pooled funds to one person in the group on a rotational basis.
In addition to giving users access to larger sums of interest-free capital than they could amass individually, Esusu reports every payment to major credit-rating firms as a loan repayment. When a group member keeps their savings commitment, their credit score improves over time.
This same mechanism helps prevent the first recipient of the group’s funds from not paying back into the system. Delinquent payments are reported to the credit raters, which can hurt credit scores.
Mary Kay Gugerty, a professor whose research explores issues in rural development and community development institutions in Africa, believes two of the main benefits of rotational-savings groups are that they serve as insurance against unexpected expenses and also condition people to save more than they would otherwise.
Dr. Gugerty believes that while the social element that makes up part of traditional savings clubs is missing from Esusu, “it looks like a great idea that might be appealing to a younger generation of people that are used to app-based approaches to the world,” she says. “You could recruit 10 or 15 other people to be in your club to help you meet a savings goal, and it would also be sort of fun.”
Esusu’s co-founders, Abbey Wemimo and Samir Goel, were driven to create the app by their own experiences growing up living paycheck to paycheck in immigrant communities. Messrs. Wemimo and Goel, with $400,000 from their preseed round of financing and over 5,000 users in their ecosystem, are hoping to draw upon the success of this model and take it mainstream. The company charges a $10 subscription fee per pay-in cycle.
“Our parents and grandparents were excluded from the traditional financial system and turned to rotational savings to pay for our school fees and put food on the table,” Mr. Goel says. “We understand first-hand the power of community savings.”
Appeared in the August 11, 2018, print edition as ‘Age-Old Savings Concept Gets New Look.’