Fear of financial insecurity or financial literacy – why is it such a difficult choice?

Here it comes – every April since 2004 has been designated National Financial Literacy Month by the U. S. Government.  According to surveys that track this issue, U.S. adults are at best in the middle of the pack compared to the rest of the world when it comes to understanding basic financial concepts such as compound interest.  Yet efforts to educate Americans is hard to encourage, as evidenced by financial literacy survey results.  According to the Wall St. Journal, only 57% of Americans passed a basic financial literacy test.  For the average American the fear of financial insecurity is very real and permeates their daily thinking.  It can affect their mental health and the stress  associated with financial insecurity can lead to physical health issues as well.

Financial-Literacy-1We owe it to ourselves to become educated on financial matters because we are our financial advisor.  From monthly budgeting and bill paying to retirement planning, we are our own best advocate to ensure our financial well-being both today and in the future.  It’s not that Americans don’t want to become starter about money. Most adults wish they had financial coursework. Only 5 percent say they were taught about money by a teacher, and 40 percent say they would give themselves C’s, D’s and F’s on their grasp of personal finance concepts. A full 85 percent of American parents believe that financial education courses should be a requirement for high school graduation. And 52 percent of teenagers want to learn more about money, and they’re most interested in budgeting, saving and investing.

How to get started on the road to better financial self-knowledge?

  1. List questions you have about your personal finances.  Making a list of things you’d like to know more about allow you to free your mind and get your fears on paper and out of your head.
  2. Start a financial journal.  If you don’t know where you are you’ll never get where you want to go.  Track your spending for a month.  Then total up where you spend your money and what you spend it on.  Ask yourself if your money is going to things you truly value.  Which expenses can you do without?  Which expenses can you cut?  Is there any opportunity to save a little money, even 10% of your take-home pay?
  3. List your financial goals.  Everything from this summer’s vacation to how much you want to retire with.  This list of goals is your financial roadmap.
  4. Meet with a trusted advisor to answer your questions and discuss your goals.  For most people, an hour with a personal banker at your local financial institution will be enough time to answer your questions and help you become familiar with the products and services they offer that can help you achieve your financial goals.

The Life Cycle of a Credit Card

Credit card use has a life cycle with three distinct phases, according to a Federal Reserve Bank of Boston study of Equifax data, which plotted out how credit card debt and credit limits change over time for Americans ages 20 to 80.

Youths start out with not much credit, but they quickly gobble up most of it. From there, credit card debt starts rising, but credit card limits rise even faster.

A cardholder’s late 40s see the start of phase two, where median debt begins tapering downward. Because credit limits continue rising to a peak in people’s mid-60s, credit utilization — or the percentage of available credit being used — drops from 16 percent at age 47 down to 8 percent by age 64.

The third and last phase typically begins in an Americans’ late 60s, when credit limits stop climbing and begin to descend. With debt declining as well, credit utilization falls below 5 percent around age 74.

The study, “Consumer Revolving Credit and Debt Over the Life Cycle and Business Cycle,” by Scott L. Fulford and Scott Schuh, drew from a 5 percent sample of every credit account in the United States from 1999 to 2014 from the credit reporting agency Equifax. Demographics of the sample were determined to match the overall population very closely since the vast majority of Americans over the age of 18 has a credit bureau account.


The Internet of Things and Auto Insurance

It is becoming familiar to read about the “Internet of Things” (IoT) and how this will increasingly impact our lives.  If you think the impact will occur sometime in the future, think again.  Twenty percent of Americans participated in a usage-based auto insurance (UBI) program, according to a recent Nielsen survey.   Usage-based insurance involves using IoT devices to monitor and assess a customer’s driving activity — i.e. how likely it is that an insurance company will have to pay out a policy to a client. With this extra data, low-risk customers are rewarded for their good driving habits with lower insurance premiums, whereas high-risk customers are sometimes charged higher premiums.

My son was offered one when he insured his auto through Progressive Insurance and he took it.  Among other thing it measured his acceleration rates, speed, and braking patterns.  He said having it in the car made him more aware of his driving habits and if that made him a safer driver, all the better.  While not mandatory today, UBI auto insurance coverage will become the norm over time so that your future auto insurance rate will be primarily driven by your driver rating, as well as your neighbors’ driver ratings and the ratings of the drivers who frequent your commuting routes.

For today however, if you’re a safe driver or wish to become safer, it may be worth your time to look into a policy of this type.  Your safe driving could translate into real savings.

Other highlights from the survey:

* Between 2013 and 2015, US adoption of auto UBI rose from 13% to 20%.
* 27% of Americans say their auto insurance company does not offer UBI policies.
* 41% of American consumers still do not know if their auto insurer offers UBI policies. This was slightly up from 40% in 2013.

My time at Harvard

Last week I attended Karen Webster’s Project Innovation 2016 conference held at Harvard University.  It was first time visiting the campus and I must say I was impressed with the history the campus preserves so beautifully.

The theme of the conference was Payments on the Edge and there was much discussion among attendees about financial inclusion; the delivery of financial services at affordable costs to disadvantaged and low-income segments  of society.  The attendees heard again how difficult it is for traditional banks to serve these segments profitably due to the low dollar amount of the accounts (whether deposit or loan accounts).  They claim that compliance costs are a large part of the cost structure that makes these accounts unprofitable and unattractive for bank and customers alike.

There is a way to address regulatory concerns and increase financial inclusion, but it will take a collaborative, systemic approach to innovation and regulation.  When it comes to financial inclusion, existing regulation can hinder access to financial services.  Existing KYC requirements drive current account opening procedures at financial institutions that could be considered overzealous for a given situation.  How much verification is really required to obtain a $300 loan?

Further, existing regulations can hinder the emergence of alternative financial institutions more suited to the needs of lower-income consumers. From 1990 to 2008, over 2,000 new banks were formed, however from 2009 to 2013 only 7 new banks were formed, according to a 2014 Federal reserve Board study. In addition, high minimum capital requirements, limited funding structures, and heavy supervision further suppresses new entrants..

Fintech companies and financial institutions that partner to solve a particular problem need to prototype an end-to-end solution that addresses the risk presented to the financial system.  They also need to include regulators early in the process to educate them on the solution.  Regulators need to shift from regulating the individuals to regulating the systemic solution so the compliance burden is born only once in the system by the appropriate party.



Six forces that will drive personal financial management (PFM) solutions (Part 2)

Recently I wrote about three of the six major trends today that will shape the future of PFM solutions.  I discuss the final three trends below.


  1. Commerce rails development

I define “commerce rails” as the means to transfer monetary value from on entity to another – it could be person-to-person (P-2-P), a person paying a business, or a business paying another business (B-2-B). Historically there were three types of commerce rails, the card associations such as Visa, MasterCard, American Express and Discover, the Automated Clearing House (ACH), and wire transfers facilitated by the Federal Reserve Bank (FedWire). The ACH rails are how checks clear and how bill pay on your online banking site transfers funds.


These commerce rails are today facing three constraints; first, the time it takes to settle a transaction can range from hours to days. It takes 2-3 business days to settle an ACH transaction (again, think about the two days it takes for the money to be received by your utility when you pay via the bill pay function in your bank’s online banking site.) Credit card transactions, while generally quicker, many times settle a day or two after the transaction. Checking your credit card statement transactions’ transaction and posting dates should confirm this.


The second constraint facing these rails is the security of identity and transaction information. Data breaches have affected most players in the payments ecosystem and the point here is not to point fingers, but to note that security is a concern for consumers and everyone in the payment chain who is entrusted with this information.


The third constraint is cost. Different transaction types cost different amounts, and these amounts are generally charged to the payee. For most transactions it is the merchant who bears the cost of the transaction. A typical $100 sale to a consumer who pays by credit card will yield the merchant roughly $97 in cash, the remainder split among the intermediaries who settle the transaction and post the information to the account.


New payment rails have emerged with their mission being to overcome one or more of these constraints. Person-to-person (P-2-P) ecosystems such as Dwolla have as their mission to reduce transaction costs to $0, and they have succeeded. ClearXchange, a payments network owned by a consortium of the nation’s largest banks is rolling out same-day settlement of transactions between any customers of the participating banks. And then there’s blockchain…


A topic for another day, the blockchain is a fully verifiable, transparent record of transactions and exchange of ownership. Financial services institutions worldwide are exploring the possibilities of the technology and I believe this will involve the transfer of financial value.


  1.   Authentication and Security

The goal of authentication and security when it comes to payments is to keep your identity sacred and your transaction information secure. Historically, authentication has been achieved through in-person verification with the help of government-issued forms of ID such as driver’s licenses or passports. Other familiar authentication methods are passwords and PINs, fingerprints, and soft tokens. Recently launched authentication methods include device signing, transaction verification through messaging, and device authentication. Emerging methods include palm, facial and retina biometrics, voice recognition, geolocation and pressure sensitivity signatures through your keyboard.

The future of authentication will be the emergence of platforms that allow you, the user to choose any combination of authentication methods in the order you choose, changeable at any time.

Transaction security is being addressed today through recent rollout of payment account controls being placed in the account holder’s hands, through which they can report the card lost or stolen, turn the card on and off, and notify the bank of any travel plans. The future of transactions will be single-use tokens that will be assigned to each transaction through the payment system so if a fraudster gets hold of the information it will only affect the one transaction, not the account or the account holder.

  1.   Mobility

The payment solutions of the future will continue migrate to any device the consumer desires – from smart phones and tablets to automobiles and clothing.

According to Gartner, IoT devices will encompass more than 6.4 billion connected objects in use by 2016, a 30% rise from this year. In turn, that number is expected to further explode by 2020, where the IoT market will include 20.8 billion things. A report released in 2014 by IDC projected that the worldwide IoT market would grow to $1.7 trillion in 2020 with a compound annual growth rate (CAGR) of 16.9%, led by devices, connectivity, and IT services.

Payments will evolve to where humans are proactively initiating only a portion of their payment transactions, the remainder being initiated by their home, household appliances, and personal assistants such as Amazon’s Echo.

I invite you to think about how you manage your personal finances today and think about these three questions:

  1. Can you extend trust toward a PFM solution like this?
  2. Are you comfortable with a PFM solution knowing more about you than you may consciously know about yourself?
  3. Are you confident that if you extend trust to this solution and are comfortable with the information it holds about you, this solution can help you to achieve your personal financial goals?


I invite you to leave a comment with your thoughts.