Financial Genome Project – Chapter 5

Chapter 5 – The Payment System

“When the scheme faltered [John] Law resorted to a number of rescue packages, many of which have their echoes 300 years later. One was for the bank to guarantee to buy shares in the Mississippi company at a set price (think of the various government asset-purchase schemes today). Then the company took over the bank (a rescue along the lines of Fannie Mae and Freddie Mac). Finally there were restrictions on the amount of gold and silver that could be owned (something America tried in the 1930s).” ~The Economist, 2009[1][i]

The quote in the beginning of this chapter is about John Law, a banker and gambler, which fundamentally changed France’s financial system. His bank controlled many parts of France’s payment system, and it collapsed in four years. Understanding all the parts of the financial genome can help expose and proactively avoid financial failures. This chapter will help you with your personal finances.

In Chapter 4, we discussed the “involuntary” healthcare deduction from your salary before you receive your salary (current sequence pictured below). Before we discuss what we spend our money on, we’ll spend time looking out how the payment system works. We’ll look at it broadly at first and then dig down deeper when we go through individual expenses. The main reason we should look at it broadly first, is to understand that while spending money, you’re either losing money while spending money or you’re earning money to spend money. How we spend our own money is a choice we can control. You can work against you by costing yourself money, typically through hidden costs that we’ve accepted as a society. We can avoid these costs. Conversely, the genome can also reward you as you spend money. I’ll show you how to be rewarded and avoid some costs in this chapter. I’ll put potential costs in red font and potential rewards in green font.

CURRENT GENOME SEQUENCING

                In most countries with a modern banking system, employers directly deposit salaries into employees’ bank accounts; although, some may still give physical checks directly to employees. Checks require the employee to go to a check-cashing facility. Most people go to their own bank and deposit their check directly into their own bank account or get the money in cash; however, some people go to check-cashing facilities and get the money in cash. These type of non-bank facilities charge a fee to cash the check based on the value of the check. This is one way people can avoid costs, by cashing checks at their own bank versus using a check-cashing facility. Technology has helped us avoid costs by allowing us to cash checks using our smartphones directly to your bank.

According to a 2015 Federal Deposit Insurance Company (FDIC) report, only 7% of households were “unbanked” meaning they didn’t have a checking or savings account (.7% lower than 2013). Additionally, a total of nearly 20% of U.S. households obtained financial services outside of the banking system (like check-cashing services).[2] This means that people are being charged to gain access to their own money. Having a bank account doesn’t necessarily mean you avoid fees though.

Like we discussed in Chapter 1, banks can charge a variety of fees that you need to avoid. The most basic fees involve just having a bank account and those need to be avoided. Banks shouldn’t make a profit based off fees, they should reward people for trusting them to use their bank so they can loan that money out. This is called fractional reserve banking and we’ll discuss it in more detail in future chapters. If you use a bank account properly, you can earn rewards. Interest is the most common reward for keeping money in a bank. The interest you earn depends on interest rates, which are incredibly low right, but it’s better than paying fees.

So to recap the flow of income, your employer paid you by direct deposit or a check. You can cash the check by directly depositing it to a bank account or exchanging it for cash. You have two methods of accessing your money: 1) by using the money that was directly deposited into your bank or 2) by using cash. When money is directly deposited, you can use it by transferring it from your bank to the vendor’s bank with an automated payment, utilizing debit and credit cards, writing checks, or withdrawing the money from an Automated Teller Machine (ATM). This is quick chart of what the payment system looks like.

PAYMENT SYSTEM

Automated payments are becoming increasingly popular as technology increases. Consumers often automate their bill payments which sends the money directly from a consumer’s bank to a vendor’s bank. Large companies offer this service for free. The company has to pay for this service but it’s such a negligible cost to attract the hundreds of thousands or even millions of customers. Small companies or services may charge for automated payments, and people should avoid those payment methods if they can.

I’ll dedicate an entire chapter to using debit and credit cards, but the costs have become transparent. Companies like Visa (V) and MasterCard (MA) charge vendors a percentage of every sale. Most companies simply add this cost to every commodity and it becomes transparent (actually, just hidden in plain sight). To avoid this hidden cost, I recommend you use a rewards debit and credit card that offers rewards on every purchase—only if you can pay your balance in full every month. By not doing so, you’ll be charged the finance charge, at double-digit interest rates, and negate any savings.

Switching to check usage, some banks charge to provide checks, so there may be costs in using checks. Over time, writing checks will become obsolete. If 90 checks cost $15, each check actually costs 16 cents. If you’re writing a $10 check, then 16 cents represents a 1.6% fee. Lastly, and most unsettling to me, is the cost of withdrawing cash from your bank. Finding a bank that doesn’t charge you for checks or avoiding using checks is a great way to avoid those fees.

According to data pulled from the National ATM Council, the average ATM withdrawal is $60.[3] ATM owners often charge $2 or more for cash withdrawals. Bank-owned ATMs don’t charge their own customers to withdrawal cash. A $2 withdrawal fee on $60 is a 3.3% fee. A $2 withdrawal fee on $20 is a 10% fee. For some reason, avoiding ATM fees is not a priority for consumers and it should be. Cash provides anonymity of purchases—an ideological side benefit. Interestingly enough, businesses that have an inherent requirement for cash such as gentlemen clubs [so I’ve heard] or casinos charge the highest fees for ATM withdrawals. Some ATM fees at these clubs are as high as $8. An $8 ATM fee for the average $60 ATM withdrawal is a 13% fee. To avoid ATM fees, try using your own bank’s ATMs or find a bank that reimburses ATM fees. Planning ahead and budgeting also helps prevent unnecessary or impulse needs for cash.

So whether you pay a vendor using automated payments, debt or credit cards, a check, or with cash, the money will eventually make it to the vendor’s bank. This is important to note. Almost every step in the payment system requires a bank. Banks issue debit and credit cards managed by Visa, MasterCard and other card companies. Banks wield an extraordinary amount of power in the financial genome, and we should be very mindful of that at all times. As I’ve mentioned it before in previous chapters, transparency and access are nice, but can also lead to nefarious dealings within the genome. Here’s what our current financial genome sequencing looks like now. The payment system is not outside the genome, and we’ll start making connections in the next couple of chapters.

CURRENT GENOME SEQUENCING

 

[1] http://www.economist.com/node/14215012

[2] https://www.fdic.gov/householdsurvey/2015/2015execsumm.pdf

[3] http://www.statisticbrain.com/atm-machine-statistics/

Financial Genome Project – Chapter 1

Chapter 1 – It All Starts With You

“We shouldn’t expect immediate major breakthroughs but there is no doubt we have embarked on one of the most exciting chapters of the book of life,” Professor Allan Bradley, director of the Wellcome Trust Sanger Institute.[1]

     Like the movie, The Matrix, there is a complex system operating around you. Instead of operating off of sleeping humans, like in the movie, the system operates with our finances. It impacts you every day without you knowing it. I’ve called this financial system the Financial Genome; comparing it to the Human Genome Project. Once you know about the financial genome, then you’ll be able to influence it to secure your future, protect your family, and understand the world around you. It is like the galaxy, infinite in all directions with complicated networks of connections. We’re going to start small and then expand farther out making “connections” with various parts.  Every day that passes without you knowing and understanding it, the greater the influence other people have on you and soon you won’t have any more control.

I want you to embark on an exciting adventure as we explore the Financial Genome together—known as the genome from here forward. Exploring the genome can help you with your personal finances; though it’s not a personal finance book. Economic principles will be the highway as we explore the genome, but don’t worry, it’s not an economics book. This isn’t a self-help book either, but one of the key concepts of this book is that time will continue to push and evolve the genome, whether you understand, believe, or participate in it.

This is simply a way of understanding the genome and exploring the exciting connections around us. There are some great parts of the genome where the smallest, marginal, influences can create a positive impact on the whole genome. And unfortunately, there are a lot of dark areas in the genome where bad influences can negatively influence the genome—some overt and some covert. Simply knowing about these great parts and dark areas are can help most of us. In our vastly complex genome, we must start somewhere.

I had a hard time deciding where to start our journey into the genome. My first thought was to start with money—but what is money? The concept of money is extremely complex and we’ll cover our concept of money in another chapter. My second thought was to start with “the why” of exploring the genome. “The why” will be explored through each chapter as we go deeper into the genome. But for now, “the why” is simply to allow you to understand where you fit in the genome and, most importantly, apply force to your surroundings—creating a change in your financial environment.

The most logical point to start to me is to start with you. Not you specifically. You as a human being, which as a species, has accepted and participates as a functioning part of the genome. It’s important not to think of the genome as some linear shape with input and output, or a hole that we can go deeper into until we meet an end. Instead, think of the earth in the entire galaxy. If the galaxy is infinite, then you’d need to start somewhere, and most of us would start on Earth. You are the Earth of the genome.

99.9% of the time, the “person”, or you, our starting point of the genome, is a plugged-in member of our genome. When we discuss money in more detail, you’ll see that the entire genome relies on our belief in the entire construct. The genome slowly evolved into the complex system it is now. Once one of our ancestors traded a product for another product, it created a connection in our genome. Those two humans believed that those two products had an equal value in which a trade was completed. Assuming these two humans didn’t immediate kill each other, and the trade went through without conflict, then the first verbal contract was completed. The majority of our genome is simply a verbal contract, growing larger and larger, and more complex as technology advances.

The modern genome relies in your utmost faith and obedience to the verbal and written contracts you engage in every day. As a human, you absorb an input, typically as an income and you produce an output, typically as you spend, save, and are taxed.

You exert influence on genome connections in three ways. 1) You exert influence based on how much you believe in the system and how obedient you are. 2) Your influence is usually greater as your income increases. In almost all cultures, the rich are able to control more connections and exert influence on genome connections that increase their control.  3) The genome can exert influence on you through your output. Governments can tax you and companies can increase prices. Your ability to manage your consent, input, and output will determine your impact on the genome.

The genome is constantly evolving around you, regardless of how much influence you may have on the genome. No matter how complex it becomes, your understanding of how you influence the genome will help you navigate through it. Despite our knowledge of the system or how powerful some connections become, there are also outside pressures on the genome as well.

There’s an external pressure on the genome, that has nothing to do with your participation, understanding, or obedience. It is time.  Time is the greatest pressure on the genome. It can be a negative or a positive force. The longer you remain ignorant of your presence in the genome, the more negative the force is perceived—like pressure building as you go deeper underwater. For those of us that become aware of the genome early, the positive force is like the wind in your sails pushing your boat effortlessly. Remember, time exerts its pressure on the genome no matter what you do.

The biggest secret of the genome is…the entire system can be altered, changed, and modified if enough connections (people in this case) make it so; however, the system has been carefully crafted to prevent that from happening. There is a surface layer that most of us know about—and accept and are obedient to. An example of a simple connection, in which we’ve accepted and are obedient to, is the 40-hour American work week. Back in the late 1800s, the 40-hour work week was actually an improvement on the average 100-hour work week that some industry workers experienced[2]. The 40-hour work week isn’t common among all countries and neither is the Monday through Friday work week. We’ve accepted the 40-hour work week and the 5:2 work-to-rest ratio. Financially independent people don’t have a 40-hour work week. They may have more or they may be completely free.  There are many more examples deeper into the genome. There are some we can modify ourselves, and some that require an entire culture to change. This is why it’s so important to explore the Financial Genome. Come with me.

[1] http://www.cnn.com/2003/HEALTH/04/14/genome.reut/

[2] http://www.businessinsider.com/history-of-the-40-hour-workweek-2015-10