Money Doesn’t Buy Happiness……So What Good is It? The Future of Money.
Chapter 1
Chronicles of a Not So Distant Future
The idea of these Chronicles had its origins about a year ago when I was invited to a seminar about trends and futurism. The speakers talked about a lot of the innovations underway regarding the workplace, transaction clearing, information systems and information availability. Again, I started connecting the dots and asked them: “what about money? If everyone will have close to perfect information, what would we want money for?” Obviously, I took the speakers off guard, because in a businessmen gathering, the last question they were expecting was that of a “Commie” despising the cornerstone of the modern business world. Their answer was: “we don’t think money will disappear, it will continue to be used as a medium to clear transactions”.
Obviously, I felt nothing but frustrated. I was not satisfied by their response and my question did spawn a great deal of discomfort….in me. So armed in discomfort, I poured myself a cup of tea and started wondering: what is money good for?
There are many experts on the subject (e.g. economists and political scientists) that will find my opinion outrageous and even ridiculous, but bear with me. I think money’s main functionality is to store value to face the imminent asymmetries of information in our world. Hence, money is more of an insurance policy against the uncertainty that in the future one will have the opportunity of exchanging what one has/does for what one wants/needs.
For instance, let’s suppose I am a small tomato farmer. Tomatoes are of a perishable nature. And I have the need to pay my electricity bill. In a moneyless world, I would have to wait until someone from the Electricity Company wants my tomatoes and feels like exchanging them for a few kilowatts of energy at a fair rate. The risk is that, my tomatoes may rot long before the guy from the Electricity Company wants them.
In this example we see clearly one of the roles of money, besides making less attractive people look better (Donald Trump ears are burning). I, as a tomato farmer, will sell my crop to a middleman who pays me a certain amount of money and he in turn sells them for even more money. In this way, I get enough resources to pay my electricty bill. And for the sake of argument, let’s assume that with that money, the guy form the Electicity Company goes and buys some chairs for his office.
The middle man sells my tomatoes to a chair manufacturer. This manufacturer had to sell its chairs somewhere else to get money and buy tomatoes from the middleman. Would it be possible to do this trade (chair-tomato-energy) without using money?
I think that until a few years ago, that was virtually impossible. Bartering has been only possible in small and closed communities where everybody had access to very similar information. Bartering was considered a less civilized way of clearing transactions.
But what money actually does is making bartering (pardon me, exchanging) happen in a different moment in time. Coins are little time machines that move things, actions and people between different moments in time. Money only works, because we “believe” it will get us what we want, because we have “faith” that the rest of the people around us will accept it. Hence, our monetary system is a “Fiduciary” system: In Bucks We Trust!
So, today we have incredibly fast and complete information systems. Is it possible, with today’s technology, to replicate a large scale bartering system? I think it is. I believe that in the future, people will be able to upload to a system their assets/abilities and this system will help them connect with others that need exactly that. Or in turn it will allow triangulation of the chair-tomato-energy type to happen efficiently.
Information will be so complete, that we will have exchange rates between things we didn’t think possible before, such as baby back ribs to apps, apples to planning processes or chicken burritos to Ferraris.
When I get to the chapter of how work will evolve, we will see that exchanging our experience for goods and services will be different to what we do today. Very different.
Obviously, this change will not be immediate. There’s a long way to go before we get there. However, the role money plays and the way value is created will change.
In the meantime, we will continue to use Banks and other institutions to handle our money. But these Institutions will also change, and they will change sooner than we expect.
Today, we are used to put our money in a savings account at the local branch of the least horrible bank of our choice. The more sophisticated and wealthy might have a broker to manage their portfolio. Our money is used by Banks to lend it to people demanding credit and the profit from this transaction is shared with the owner of the savings account.
When we need money, we go to a bank and we apply for some kind of credit (credit card, mortgage, working capital loans, etc.). Banks charge a “reasonable” interest for this money to help us achieve our dreams.
If you have been, as I have, on both sides of the equations, either as a lender or as a borrower, you may have noticed that there is quite a gap between the interest the Bank charges and what is paid to lenders.
If a Bank charges 20% for a credit, why do we get only 0.000005% as interest in our savings account? Who gets all the cheese? Well, it turns out that being a banker is not an easy thing. It is necessary to have a wide network of branch offices to serve clients. In these branch offices, it is imperative to have lots and lots of people to make us angry and waste our time in order to get our checkbook. Corporate offices hire specialists that analyze credit applications to ensure money will be lent to honorable people and that they will be able to share some profit with the “savers”.
Being in the traditional banking system is very expensive and needs lots of people. And on top of that, they are quite terrible at what they do. Bad debt rates are very high and this hinders the interest we receive in our savings accounts.
Additionally, bankers like “lavish” lifestyles (remember 2008). A few months ago I had a meeting at the offices one of Mexico’s largest Banks. The meeting was at the Executive Dinning Hall. This hall, is a rather luxurious house in a prime location in Mexico City. A huge team of people was hired to serve all the high executives working there. They are not in the payroll to find better deals or take better care of our money. These individuals feed the bank executives. These expenses eat away the profit and makes lending and credit more expensive and less attractive.
Why do we keep using banks if they are so inefficient at doing their job? Because we do not have the time nor the technical knowledge to take care of our own money. It is not safe to keep it at home, it is difficult to analyze credit applications and most of us do not have the bandwidth to identify investment opportunities.
Some individuals outside the banking system do this, and they are called “loan sharks”. They identify the need for funds and lend the money. This is done in general, more reactively than proactively and their enforcing methods are somewhat questionable. They lend to people that do not have access to the traditional banking system and that are forced to accept the Shark’s extreme credit conditions.
Technology is leapfrogging the financial industry through Crowdfunding platforms. Individuals funding individuals. Crowdfunding is the love child of Mother Theresa and your local Loan Shark.
This works as follows: on one side you have the demand of money and on the other side, you have the supply of money, this is small “savers” like you and I. In the middle lies the Crowdfunding platform that allows the people with money to lend directly to each individual in need of those funds.
Crowdfunding companies conduct a due diligence on people applying for credits in order to exclude as many bad apples as possible. They grade each application in terms of the risk of not being able to get the money back. This helps the selection of credits by money suppliers easier and in accordance to their level of risk craving or tolerance.
As a result, the Crowdfunding (Shadow Banking) industry usually pays better interest rates to lenders and for the borrower is way cheaper, compared to traditional banking. This is achieved through lighter corporate structures that use the Internet rather than a physical network of branch offices to operate. This translates into better conditions for everyone.
SHUT UP AND TAKE MY MONEY! That’s what many of us might be thinking at this point. Well, I’d say hold your horses and don’t go running to a Crowdfunding platform just yet. This industry is still suffering from growing pains (if not birth pains), and there are several things to consider if you want to be a pioneer lender in this industry:
1. People who ask for credit in these platforms do not have access to traditional forms of credit. And one of the main reasons is that in the past they have not honored their debts. As their options are exhausted with the banks, they try to catch someone off guard within the Crowdfunding platforms. It is not the rule, but there are many that fit this profile.
2. The Crowdfunding platforms have put a lot of effort in having rigorous and robust screening process to single out bad blood. They have a long way to go. Most of them keep doing what traditional banks do in order to screen people, and we have already mentioned that they are lousy at it. This is a decision on the person, rather than on credit worthiness or soundness of the project. New tools to assess the values of the people need to be incorporated (tools that already exist) in order to be more effective.
3. At the end of the day, Crowdfunding companies want to make money, and they face the following conundrum: to increase volume or to maintain the quality of their portfolio. Being us humans, we usually favor the more hefty short term decision, which is, to increase volume regardless of the quality.
I’m not saying screw Crowdfunding all together. I’m not saying you should not consider it as an alternative for investing or getting funded. But I do want to share my experience, which has not been the greatest. I have lost money. I learned the hard way. If you are getting in it, put the least possible amount of money in each project. Spread your risk across as many projects as possible. There will always be some level of bad debt and the only way to control this is by butterspreading fine layers of your money across all the projects. You will be able to protect your downside and capture greater upside.
Having said that, the financial industry is headed towards disintermediation and will be transformed into a “connector” business. Investment decisions will be made by individuals. Banking will be a peer-to-peer business. Banks’ huge corporate structures will get thinner to be able to compete with this middleman-less model.
This will take financial institutions, both traditional and non-traditional, to compete zealously to keep their clients. They will lower credit interest rates and they will pay higher profits to lenders. This will translate into cheaper money for everyone. And when money becomes ridiculously cheap, and information increasingly available, we will stop using money altogether.
And so, back to square one, a world without money.
