By: Antonieta Castro Cosío and Hans Frech La Rosa *
Batches, raffles, cundinas, tambourines, susus, associations, societies. These are just some of the approximately 200 names used in different cultures and countries to refer to one of the most common financial savings mechanisms in households around the world, including Mexico. In fact, according to the World Bank, in 2017 13% of Mexicans saved using a batch or some similar mechanism, while in countries with similar income the percentage was 6%.
Rotating savings and credit associations (or THREADS for its acronym in English), which is the generic term to refer to them, are defined as associations “formed by a group of participants who agree to make regular contributions to a fund that is delivered, in whole or in parts, to each contributor in a rotary. ” As they are not part of the regulated banking system, these groups are considered “informal”, so it is difficult to know exactly the magnitude of their presence in household finance schemes.
However, it is estimated that, in Mexico, 63.2% of adults use some informal savings mechanism, which includes loans between peers and mechanisms such as tandas, among others. In this way, it is clear that, since they are present in more than half of the homes in Mexico, they are practices that deserve to be studied in order to understand and evaluate the reasons why they are so helped in such diverse contexts, even with the disadvantages they also present.
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TANDAS: OPERATION, ADVANTAGES AND DISADVANTAGES
The first documented investigations on these practices date back to 1962 in Indonesia, although it is known that they existed from before in different geographies with mechanisms and principles similar to the batches. Saving certain variations, the batches work as follows:
A group of people, usually with close ties for various reasons, agree to contribute an individual savings amount to the group amount, as well as the frequency of savings and contributions. For example, let’s imagine that the group consists of 5 people who save 1,000 pesos each week, thus, the amount saved by the group will be 5,000 pesos. Then, an order of receipt of the total amount is defined, which can be predetermined or random. Each week, one of the group members will receive the total amount saved and will continue to make their contributions for the remaining weeks. Thus, all members of the group receive the full amount at least once.
The batches offer multiple benefits. When carried out between people linked to each other, they function as a commitment mechanism to stimulate savings due to the social pressure they exert. The order in which the money is received also matters; For the person who receives the amount in the first installment, the batch works as an interest-free loan (I receive 5,000 pesos in the first week and pay 1,000 pesos each remaining week), while, for the last person, the batch works as a savings bank (I save 1,000 pesos every two weeks until reaching the goal of 5,000).
Even when they do not carry out formal risk analyzes, these groups have certain tacit criteria of their members’ ability to pay. Thus, the most recent members are the ones who receive the total amount until the end, since they must first have proven their solvency by making all their contributions on time. As they strengthen their reputation within the group with timely payments, their ability to choose the position in which they can receive the full amount increases.
However, being an informal or semi-formal mechanism, the batches also have disadvantages. For example, they are completely dependent on trust ties between group members without any kind of legal contract to back them up in the event of a problem. In addition, if someone does not make their savings on time, the whole group is harmed by not completing the entire sum. Money is usually handled in cash, which implies security risks for both contributors and the recipient. Finally, saving in batches does not earn interest or contribute to strengthening the credit history of participants, so it is not a profitable strategy to invest in the future.
TANDAS FROM THE PERSPECTIVE OF BEHAVIORAL SCIENCES
Despite the disadvantages and risks they present, tandas are positioned as a useful mechanism to save and access larger sums of resources, mainly among more vulnerable communities or those with less financial inclusion. From a behavioral science perspective, the rounds offer some lessons on how to solve some of the behavioral challenges we face when making financial decisions:
Our preferences are inconsistent in time
What we decide or choose today is different from what we think we will choose in the future. Let’s imagine that we are trying to reduce our expenses and save for some goal. If today we are tempted to indulge ourselves and eat out, it is very likely that we will, with the expectation (usually wrong) that tomorrow we will be able to control ourselves and we will not make that expense. The batches help to overcome these temptations, since they imply a commitment to the group; the amount that corresponds to save is inaccessible until it is time to receive the total sum. It is a strategy similar to using a piglet, with the addition of social pressure to meet the savings goal.
For example, in a field study with Hispanic groups in New York, it was found that the majority of the members of tandas who could choose their position preferred the last places to force themselves to save, instead of taking the first ones that gave the option of take “loans” at no cost.
We guide our behavior according to what others do
To make decisions, we look for clues in the environment and in our reference groups. While in ordinary situations we do not usually observe the saving behavior of others, the batches make the saving behavior visible. Furthermore, groups tend to build ties of transparency and trust, further reinforcing social norms. We not only see what others are doing, we also perceive what we are expected to do. Confidence is key to the success of the batches.
In times of scarcity, it becomes more difficult for us to make decisions
The batches not only help users achieve their savings goals (and therefore avoid times of scarcity), but also offer a support network for group members, providing some flexibility to navigate financial difficulties and make better decisions. .
You might also be interested in: The 4 biases that prevent us from saving
Tandas have great potential to drive the development of formal and digital financial tools. To achieve this, it is necessary to take into account certain fundamental principles and barriers:
- The starting point should be to understand how users make decisions and what influences their behavior.
- It is essential that the financial tool or organization inspires leadership and generates the level of trust that the leaders of the tandas cultivate in their communities
- It is crucial to understand and replicate the monitoring and social pressure processes that occur naturally in the batches, to increase the fulfillment of goals without being excessively vigilant
- Targeting digital channels is paramount to attract younger audiences to formal financial instruments
- Finally, design products and services that are simple, easy to understand and transparent, as the experience of belonging to a batch results for users.
Understanding the mechanism and level of commitment surrounding the batches can be a great opportunity for financial institutions to design tools and processes that respond to the needs and characteristics of people who demonstrate great discipline in saving and investing in ROSCAs.
As a starting point, being transparent with the processes that occur “behind the scenes” and the efforts that the financial product makes for the welfare of the user, can increase trust and appeal to reciprocity. On the other hand, social comparisons are complex, but providing users with social support channels that interact in similar languages and codes can increase trust and, especially, their financial health.
Antonieta Castro Cosío and Hans Frech La Rosa are researchers at the Common Cents Lab., A laboratory of behavioral sciences applied to improve financial well-being and part of the Center for Advanced Hindsight at Duke University. Antonieta Castro is a senior researcher with a Bachelor’s degree in International Relations, a Master of Science in Development Management and a PhD in Public and Urban Policy. Hans Frech La Rosa is a member of the team that leads CCL’s global initiative in Latin America, has a degree in psychology and a master’s degree in administration and public policy.
The opinions expressed are solely the responsibility of their authors and are completely independent of the position and editorial line of Forbes Mexico.