We all know the financial system makes more off of us than we can even fathom.
By simply depositing a few dollars into a savings account and earning 2 cents each year, commercial banks go ahead and invest our deposits and make a handsome return trailing the S&P 500.
Since the influence of the Robber Barons in the late 19th century, the financial system has been programmed to be a bit greedy and constantly on the look out for more profitability.Â
Some may argue its goal is to maximize profits for shareholders and others believe they are democratizing finance and reducing climate change. As a FinTech student, I prefer to view all industries, especially business from a glass half-full perspective. Iâm only 20 so I need to be an optimist and I do believe we are headed in the right direction within this industry. Whatever the verdict may be, what we can all agree on is that money can be a drug and simultaneously helps run the world. Without it, it cannot thrive.
It is addicting and all companies in all industries that choose to be leaders want to gamble, experiment, and play like Adam Neuman.
From the Great Financial Crisis of the 1970s to the Housing Crisis in 2008, Dotcom bubble in the 2000s to March 2020âs hiccup, there are recurring patterns in crises that couldâve been prevented. After all, history repeats itself so none of them shouldâve happened or been as bad.
The marketâs volatility is normal yet a steep meteoric drop in price within several hours is deadly. Let alone shares of meme and unprofitable stocks such as AMC to GameStop and now BedBath&Beyond surge is crazy.
The reason why fear and frothy asset prices lead to instant turmoil every 8â10 years, the typical timeframe a recession hits, is due to a few things:
-Uncertainty
-Exuberance
-Irrationality
-Unalculated bets
-Excess leverage
-Securitization
-Inflated Ego
Wall Street has ties with Washington. We are in a debt state where the U.S. govât relies on borrowing. The elite are the largest owners of public debt and they own companies that need to be bailed out in times of crisis. In return, the govât lowers taxes and laws are negated to allow for profit making to occur.
FinTechs are in the same boat and have enticed broke GenZers and Millennials to a greater extent with their âbuy now, pay laterâ schemes and margin lending practices to only get them more into debt. With no barriers to entry, easy peasy, frictionless, accessible platforms of FinTech apps, they are disguised to work for the consumer yet in reality, there hasnât been any substantive change on bridging the wealth and racial and gender pay gap or in the low-value add asset class of ESG.
Profits > Impact still seem to be the enticing motive most companies carry and I hope FinTech takes a more equitable and ethical stance on increasing prosperity in this economy not diverge from it further only benefiting shareholders.
This has lead to a rise and fall in consumer optimism, reliance, and support for the FinTech space. This is party due to the fact that 6% of households or a staggering total of 14.1 million American adults are still unbanked according to the most recent National Survey of Unbanked and Underbanked Households by the Federal Deposit Insurance Corporation (FDIC). This is happening in the wealthiest nation in the world where the richest leaders hold more wealth than most European countries.
Similarly between the government, there is a growing distrust by Americans to stash their wealth in elegantly designed UI FinTech platforms as they are charged a whooping 20%+ of interest on late bills to only earn a peanut on their savings each year. Plus FinTech companies have decidedly taken POV out of the picture and controlled their customers. Back in January during the retail frenzy, Robinhood randomly decided to halt trading for certain meme stocks, preventing traders from exiting their speculative positions or Chime has been randomly closing hundreds of accounts for no real reason.
Many are also wary of investing from the start since majority of Americans donât have any financial literacy background or the budget to afford expense ratios and front/back-load fees for managing their wealth when they cannot risk to invest themselves.
Unfortunately gullible, lazy, and non-educated customers are the most lucrative customers for business as they draw in profitable easy commission. Airlines thrive off of this practice with extra heavy baggage, tardiness, and upgrades.
The root of the growing hesitancy and mistrust in the government and FinTech systems lie in the abundance of choices, too good to be trueâ quick schemes, and a lack of financial literacy.
Mission Possible
Education is the greatest propellant in our lives and there is clear correlation between wealth and knowledge. A degree is an economic premium that cannot be replaced.
By providing more educational resources to help the bottom 90% become millionaires instead of the top 10% to become billionaires is the least costly and time efficient economically feasible way to get the unbanked banked and the system working properly.
Oneâs earnings rates skyrocket once they learn more as they are in-demand, reliable, and can be a crucial part of a globalized innovative world. I believe the financial and institutionalized education system need to increase accessibility and affordability into their programs instead of working in the interest of shareholders, private institutional clients, and alumni through legacy giving incentives. Yet education alone wonât crush growing inequality. A wealth tax on unrealized gains, a crackdown on billionaires tax bill, and UID (United Income Distribution) may unite.
Too Much Dependence
Throughout history Americans have become less dependent on bank tellers and instead become independent through the market as skepticism has risen. Yet the only problem is, they donât have any other choice than to rely on FinTechâs offerings, especially younger generations whoâve only grown up with mobile wallets and banking apps. Retail trading platforms and new hip FinTechs in the crypto to merchant banking space are attempting to solve this problem on face value but in reality are taking advantage of consumers even more, especially the most skeptical kind of all, GenZers.
Mobile wallets in many cases make it harder for consumers to pay off their debt as they end up spending more and make cash obsolete.
As with every business, it is business after all and they tend to work for their shareholdersâ interests first. Through rent-shifting behavior to taking on excess leverage, there is a big payout from USING consumers. Even on social media, a platform we assume is free, according to the WSJ each quarter Facebook earns roughly $51 from each user, as we are the products and our information is sold to third parties to optimize and personalize ads on our feeds. We are giving money to more places than we can count since our data is our most precious asset and at the same time we feel trapped and cannot do anything to stop it as we need to connect and rely on these systems to stay afloat!
We want to connect, invest, spend, get the best bang for our buck, and be a part of a community online but that all comes at a cost. Whether we blame monopolistic power, duopolies, deregulation, Washington, innovation, less friction, Facebook or accessibility, it is the consumerâs choice what they are willing to sign up for at the end of the day. Everyday more of our lives are spent online and we have to decide what the boundaries are ourselves. But what is certain is that investing should always be a move everyone should take.
Iâm convinced the abundance of options in FinTech are persuading us into the wrong direction. Hypothetically if all humans on the planet could invest, it would lead to more speculation, frothy stock prices, and no available buyers and sellers to trade ethically and responsibly so where do we draw the line?Â
How can we invest ethically and responsibly without going overboard on Robinhood?
I hope retail trading platforms democratize finance in a way that allows less developed nations and emerging markets to get involved with building their wealth in a more efficient way. It will be a long way away and take a long time. But what Iâm most concerned about is if it is the true goal these platforms have in mind. Is this their mission or is it maximizing profitability once again? According to Robinhoodâs 3rd quarter revenue breakdown with majority going to meme stocks and crypto, it seems as if they are more focused on options gambling and payment for order flow, a less traditional way of earnings than anything else.
To Or To Not Invest
America is the wealthiest, arguably most powerful country with also the highest wealth inequality in the world out of all G7 nations, the most advanced industrialized countries. It also has the most politically dysfunctional government and low vaccination rates despite being the first country to have major access to them. Wealth inequality is common in developed nations that have high concentrations of wealth amongst the shareholder class but not as bad as in the U.S. Executives of U.S. companies make more as part of the top 1% than in any other country. This erases social mobility and viable means for earning and achieving the American Dream.
Majority of these gains come from equity compensation correlated to a companyâs stock. Luckily even if youâre not appointed CEO, through aggressively saving, investing, and living below your means, you have a great chance at rising the ladder. Factors such as age, education, and exposure to the internet all play a factor in socioeconomic status. Some can be controlled and some cannot but what can be is your dedication to investing in yourself.
Majority of executives, CEOS and or board of directorsâ pay comes from vetted stock options. The rest, roughly 3â7% is performance pay on top of bonuses, rent gains (excess pay funneled back into top mgmt earnings not operations or wages), and the prestige of working in that coveted position that inherently adds leverage to their future earningsâ potential as seats are limited at the top.
It takes the average worker at a company 100 years to earn 1 year of their CEOâs pay. Even when the company isnât earning a cent and burning more cash than they have ever generated, since executiveâs pay is based on the anticipation of the stock rising and future expectations, most notably for tech unicorns, their compensation can go as high as their stock possibly trading at 70â200x earnings!
A great example of this is WeWork, which just went public for the second time a few weeks back via a SPAC this time, Uber, Lyft, and most notably, Tesla. Barely profitable yet their executives made a generous profit for years as if they had one. Work smarter > work harder. Once you get paid for your value or based on the market not time, hours worked or even output, youâre on a special path. This all starts with investing.
Yet investing isnât as simple as buying into any asset class you please. Investing in yourself through understanding your risk tolerance, appetite, and having cash on the side is king.
As weâve witnessed with crises in the past from the dot.com boom to covid, over reliance on one asset class is dangerous and shouldnât be replicated in your portfolio either.
In the 2000s, investors were pouring billions into unprofitable internet companies setting them on fire with souring valuations such as Pets.com and MySpace which lead them to drastically plummet and in 2020 if you had invested all your birthday money into cyclical airline, hospitality or tourism stocks, your net worth wouldâve crumbled. Luckily the unexpected raging bull market erased all those losses afterwards into the recovery but it was not expected and shouldnât have been so always be conservative in some area especially in your portfolio.
Diversification is a major component of building wealth and part of the reason why investing is certainly better than stashing cash if followed correctly.
Cash will always be king but not to the point where it is over 50% of your net worth. And to most investors, 10% is even too high of a number despite 20% being the recommendation.
Read here why the wealthier one is, the more cash they hold.
But in order to truly get around the pay ceiling and break free from having your wage based on the amount of hours you put in, you must invest cautiously in a diversified way. Donât put all your eggs in 1 basket. If you donât invest, as Buffett frequently pronounces, âYou will work until you die.â
Passive income only works until you put in the work first for it to work for you.
Know that the stock market is AS risky AS much as you want it to be. More risk = more return. Weigh your risk appetite carefully. This is your life and you donât want it to be on the line.
Thereâs no such thing as a guarantee anywhere, even within your savings account as it is currently deflating.