If you want some financial insurance against life’s setbacks, here’s a new way to bring yourself a little security: an online savings club called Puddle. Put in a little cash upfront, encourage your friends to do the same, and you’ll always have a pool ready for emergencies.
Launching this week, the San Francisco startup is part of a new wave of social finance sites that allow people to borrow from peers instead of financial institutions. You contribute a minimum of $10, which immediately gives you access to $50. To get more, you need to encourage other people into your “trust network” (basically people you want to be part of a “Puddle” with). You can then borrow up to five times what you contribute: $2,500 against $500, say.
The idea is a modern take on an old idea. People in the developing world have been forming savings clubs for years, helping each other make investments or protecting against mishaps. Puddle is a sophisticated version, allowing you to manage your relationships and rate people for their trustworthiness.
CEO Skylar Woodward sees a market for the platform among millennials who are excluded from mainstream finance. “We have this group of people who are too smart to take a payday loan, but they want a reasonable tool for credit,” he says. “With people coming together on Puddle, they can create their own liquidity and get the little financial boosts that they need.”
Woodward expects people to borrow perhaps $200 to $600 at a time, assuming their trust network is big enough to allow that. That might help them pay the rent or make a payment on a medical plan. Then, they have up to six months to repay, with monthly fees based on how much was borrowed. $201 to $600 costs $5; $601 to $1000 costs $8, for example. These rates create an incentive to repay quickly, though Woodward says social pressure may be an even bigger driver. People might not want to let down their friends or gain a reputation as a late-payer.
The Puddle model shares a lot in common with peer-to-peer lending sites like Lending Club, but there are differences. For one, lenders on Puddle can’t make a profit–a person’s incentive to lend is that they might themselves need money one day. For another, they’re more likely to get credit. Sites like Lending Club are known for being picky.
Woodward founded the company with Matt Flannery, who previously started Kiva, an organization that was a pioneer in microfinance. Woodward was one of the first employees there. They, and another co-founder Jean Claude Rodriguez-Ferrera Massons, received $2 million in seed funding from investors including Andreessen Horowitz, Google Ventures, and Draper Associates.
There are probably two big questions that need to be answere if Puddle is to succeed. First, is there enough incentive to contribute funds to the Puddle if there’s no financial return? Second, will people trust each other enough if there’s nobody standing behind the transaction?
In theory, the internet should allow us to completely bypass financial institutions. The infrastructure exists for us to borrow and save with each other and never have to use a bank or loans company. In reality, the financial giants have an advantage because, believe it or not, they’re trusted. When you make a deposit at a bank, you have a reasonable expectation the manager won’t run off with your dough. Nobody has figured out a way for online peers to be as trusted in financial relationships as banks are today, though someone might before too long. Whether Puddle is that company, we don’t know. But it’s a start.