The Money Guards
By MetLife Foundation
Blanca is a 64-year-old immigrant living in the South Bronx. Just 12 miles—and a world away—from Wall Street, Blanca operates two tandas, a form of the neighborhood rotating savings and credit associations that are a common feature in Blanca’s native Honduras (and in many developing countries)—but which also serve 6 percent of Americans, to the likely surprise of mainstream financial services providers. Through a grant to researchers at the New School, MetLife Foundation wanted to find out what attracts people like Blanca to a rotating savings and credit association, or ROSCA, when they presumably have ready access to better and safer formal financial services.
ROSCAs differ from place to place and from community to community, but the core structure is fairly consistent. Every week, each member pays in a set amount of money—this is called the “hand.” In Blanca’s tanda, the hand is $200 per week, and there are 15 numbers. Each round of the tanda lasts for a set number of weeks (the “round”), in this case, 15 weeks. Each member of the ROSCA gets a number that corresponds to the number of a week. The member with number one gets the first bundle of money, called the “drawer,” and the member with the number 15 gets the last.
For those with the lowest numbers, the ROSCA operates as an informal loan fund—these members get a large sum of money quickly and then effectively pay back the loan over the ensuing weeks. For those at the end of the list, the ROSCA operates as a savings mechanism. It’s impossible for a ROSCA member to withdraw money before it’s his or her turn to receive the drawer—a setup quite different from a bank account.
ROSCAs rely on social capital—the trust, norms and networks that operate within a community. The role and status of the banker are key. Everyone in Blanca’s tandas has some connection to her. Those at a further remove must cultivate the relationship before being accepted into the group, and Blanca minimizes the risk of accepting newcomers by giving them the last numbers.
Sometimes members don’t want to get their money when it’s their turn to receive the pot. They appreciate how the tanda forces them to save, and they ask Blanca to hold the money for them longer. In such cases, Blanca functions as a “money guard.” She provides this service only for people in her tandas, but it’s a relatively common request. Let’s say a tanda member works cleaning houses and gets paid in cash. Perhaps she doesn’t trust herself not to spend the money. Or her husband gambles, so she doesn’t want him to have access to the money. With the tanda, she can give the money to a trusted friend or associate—a money guard—to hold until it’s needed.
When tanda members can’t make it to the South Bronx for one of the weekly meetings, they deposit their “hands” directly into one of Blanca’s two bank accounts. Policymakers and consumer advocates tend to see the mainstream and informal financial-services systems as separate, but as this example illustrates, in some cases the banks are part of what enables the informal system to function more efficiently.
Blanca herself offers a window into the complexity of informal financial services. In addition to the tandas, she also makes loans of a couple hundred or a thousand dollars to her tanda members. When asked what she charges for this service, Blanca shrugs. “Nada. Pero cuando me pagan, me regalan algo. Si yo presto mil dólares, me regalan como cien.” She doesn’t charge interest, but her borrowers typically show their appreciation by giving her some money when they repay her.
Policymakers and consumer advocates are concerned about the large number of Americans who are unbanked (they have no bank account) or underbanked (they have a bank account but also use alternative or informal financial services). The most recent Federal Deposit Insurance Corporation (FDIC) Survey of Unbanked and Underbanked households found that 7 percent of Americans are unbanked and another 20 percent, like Blanca, are underbanked. Yet many of these Americans, like Blanca, are quite happy with the mix of products, services and arrangements they’ve chosen to get their financial needs met.
Researcher Lisa Servon, who served as principal investigator for MetLife Foundation’s year-long study in the South Bronx, believes that both policymakers and financial services providers can use the research findings to understand what makes ROSCAs an attractive option even for those with many choices. ROSCAs entail obvious risks—if an operator turns out not to be quite as honorable as Blanca, its members could be robbed of money they can ill afford to lose. ROSCAs have other, less dramatic drawbacks too, not least the fact that the members’ funds earn no interest. But for people who prefer not to do business with faceless institutions, who perhaps have been treated disrespectfully by banks in the past or who feel that the tanda membership strengthens their community standing, the homespun alternatives clearly hold a genuine attraction.
Blanca is essentially operating a very small savings and loan for the people within her circle of trust, facilitating savings, borrowing and money-guarding for about 25 people. Her success, and that of homegrown ROSCA operators like her, suggests that mainstream providers could study and learn.
The Unbanking of America: How the New Middle Class Survives (Houghton Mifflin Harcourt) by principal investigator Lisa Servon will be published in January 2017 and will include analysis of some of the MetLife Foundation-funded research from the South Bronx study.