Over the last few weeks I have been spending some time exploring business models that address issues related to access to financial services and products for base of the pyramid consumers. Through this effort I came across eMoneyPool, a Phoenix, Arizona based business venture which is using technology to revolutionize an activity practiced across the globe by many different cultures for hundreds of years – money pools. Money pools are essentially shared savings programs where groups form contribute savings to a shared fund and take turns withdrawing large sums from those “pools”. eMoneyPool is revolutionary, because it is bringing these group savings mechanisms online and expanding dramatically the potential customer base. It is a concept which got them initial recognition and funding from the Phoenix based incubator SEED SPOT, featured on the White House Business Council as well as more recently investment and recognition from the SOURCE and Accion Venture-Lab. Read on to find out more.
WHAT IS THE BUSINESS ABOUT?
eMoneyPool is an online financial services platform offering a 21st century format to a traditional savings and credit tool known as “money pools”. Money pools have been widely used for centuries around the world and by different cultures. One of the most well-known is the Tanda in Latin America (others include Chit Funds in India or ROSCOs in US). Essentially money pools are an incentivized savings system in which all participants pay a set amount during a month into a pool of money. The pooled money is then awarded to a different participant each round (or example every month or every 15 days, click here to see a visual explanation). The size of the contribution and group is determined by the participants. In exchange for a 5% coordination fee for each user, eMoneyPool automates the entire process through an online marketplace model, reducing group administration costs (collections and distribution), enabling groups to be spread over wide geographical areas, and encouraging participants to form pools with those outside their normal social networks.
WHAT IS THE IMPACT?
The overall goal is to expand access to basic financial services for the 68 million under-banked Americans. Additionally it hopes to encourage those who have trouble saving to keep money out of reach (in the pool shared by others) and nudging regular participation by having the big reward come only when it is their turn to receive the pot of money. The results are impressive, it allows low-income earners to save for big items; such as school fees, a new laptop, medical expenses, etc. in an easy and affordable manner. The platform has grown quickly, to date US$ 643K has been moved on the platform over more than 6717 successful payments.
HOW DID IT START?
The venture was started in 2012 by two brothers who grew up in San Diego and observed through their Latino family routes the power of the tandas to help their family members and friends manage their money and overcome discipline problems when it came to saving. After graduating from college they realized that no-one in the United States had tried to bring these traditional platforms online. Considering the logistical and geographical constraints the tandas had on users, they decided putting the platform online would save considerable time and effort by users. They put a business plan together and pitched it a several business plan competitions before raising their first seed capital from SEED SPOT. Since then the business has grown dramatically, and now has the potential to become a mainstream savings tool for the benefit of all.
WHAT IS THE SOCIAL NEED IT ADDRESSES?
Microfinance guru’s like Jonathan Morduch, Executive Director of the Financial Access Initiative and Sendhil Mullainaithan have done extensive research showing that the poor tend to under save relative to their ability to do so. This is mainly due to behavioral reasons such as loss aversion, hyberbolic discounting and scarcity’s impact on decision-making. Thus the theory goes by providing nudges such as reminders, goals and or formal mechanisms to encourage participation (such as money pools) you can correct these errors, especially for the poor. eMoneyPool is a novel idea which addresses this key challenge so many people (myself included face).
WHAT IS THE BUSINESS MODEL?
- Value Proposition – Their are two large value propositions which differentiates eMoneyPool from traditional money pools. First it reduce collection and distribution costs and second it allows users to gain access to wider network of partners
- Customers/Channels – Customers are the Americans who either don’t have formal savings accounts or don’t have access to credit which will allow them to finance larger purchases given their limited incomes
- Revenue Streams – eMoneyPool collects a 5% coordination fee from each user. For example, a $1,000 money pool requires ten payments of $105, totaling $1,050.
- Cost Structure – Digital infrastructure; cloud storage and data security systems; programmers and basic business team to drum up business and keep track of books
- Key Partners/Resources/Activities – Government regulators; FDIC’s, banks and digital encryption software providers
WHAT ARE SOME CONCERNS I SEE WITH THE MODEL?
- Security – The obvious first concern anyone should have with putting money pools online is related to the financial data and security of the large number of transfer payments which will be required to make the system work. The system needs to have a bullet proof, zero-defect security system. The moment one consumer is compromised the trust in the system will evaporate.
- Delinquency – by users in groups who get paid back earlier in their groups cycle will probably be high, especially since users are not heavily screened via applications. Thus the penalties for this delinquency must be severe enough to discourage this activity or the whole business will eventually collapse.
- Fraud – Along with security over data and user information, there is also a high potential for fraud and money laundering. Vetting users will be critical as even if users who get paid early and then don’t pay in can be notified by regulators of bad credits and payment notices, this won’t matter very much if users are fraudulent.
- Barriers to entry – A more business related concern are the barriers to entry. There is nothing unique about the infrastructure the founders have built, it would be fairly easy for new entrants or incumbent financial services providers to come in and offer the same service at lower costs (less than 5% transaction fees). This is worrisome for a long-term sustainability and profitability standpoint.