Global fintech industry finds more new ways to help customers reach their financial goals quickly, conveniently, and without banks.

VC.ru reports that Digital Horizon has noticed increase of interest toward projects that reimagine traditional forms of mutual financial gain.

Banks have never been the only place where people could borrow money. Relatives, neighbors, private lenders are all viable options that have been in use for hundreds, if not thousands of years. However, this P2P lending has its disadvantages. For instance, collecting a large sum can be a problem and in case the borrower finds it difficult to pay off the debt, it is not just the money but the personal relations at stake.

An interim solution is a credit union and its simple versions. This institution is well-known to people in developing countries and now, thanks to fintech startups, it is expanding to Europe and USA.

In this context, let us consider ROSCA (Rotating Savings and Credit Association). It is a mutual support system for purchase of durable goods, which helps its members to reach their financial goals faster.

For instance, someone wants to buy a motorcycle that costs USD 1,000 but they can save just USD 100 a month. It means that without a loan, they will be able to make the purchase only in 10 months. However, if not one person but 10 people have the same goal, they can unite efforts and reach the goal faster. Every month the members of this group will chip in USD 100 each and every month one of them will be able to buy a motorcycle. The turn is determined randomly. The number of the participants depends on the required sum: the more members the group has, the more money it can collect monthly.

When ROSCA is planned by people who know each other well (such residents of the same settlement or colleagues), the likelihood of issues with payment is minimal. But when the model is transferred to a large-scale situation, a different approach is needed.

The option, in which the benefit fund is managed by a third party and it accepts into the group those who comply with certain criteria can be called ROSCA 2.0. Such organizations are most popular in Brazil, where they are called consortiums.

Brazilian ROSCA funds are run by local banks that offer the funds as a credit product. Although the participants themselves bear the credit risk, the banks check the applicants’ credit worthiness. If it is low or if the applicant does not have stable income, they will be rejected.

The ROSCA concept is going through the next stage of transformation now, adapting to the digital environment. Some fintech startups have already taken on the idea and designed a new version – let’s call it the third generation – of ROSCA based on mobile apps.

The business model of such fintech solutions is usually based on two scenarios of monetization:

- charging commission fee from each payment for the administrative servicing of the process;

- taking compensation from partners: the money for the product is directly transferred to the car seller or the mortgage bank, for instance, bypassing the settlement account of the group member, and the administrator gets commission fee for attracting clients.  

A successful example of ROSCA 3.0 is the British startup StepLadder, which helps people save money for the first mortgage payment. The startup focuses on those who are buying real estate for the first time and solves a serious social problem – purchase of housing by young families.

In order to identify the correct group, StepLadder analyzes the credit worthiness of clients through open banking tools and the information provided by traditional credit history agencies. When the group members get their first payment amount, StepLadder transfers it to the partner bank, which issues the mortgage.

Egyptian startup MoneyFellows, which works in the UK and Middle East markets, offers a wide range of goods that can be acquired through ROSCA. Over 150,000 people are already using the startup’s services. Recently, the project raised USD 4 million from several venture funds to further develop the product and expand to neighboring countries (including African states).

The new generation of ROSCA is in the very beginning of its journey now, and it has every chance of attracting the attention of consumers in advanced countries.

On one hand, the decline in lending market and decrease of the number of approved loans forces consumers to seek alternative options for borrowing money. On the other, mandatory saving, which ROSCA secures, increases the consumer’s chances of reaching their financial goal. That is why, although people in Europe and USA are hardly aware of ROSCA mechanism now, it can change very soon.

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