Beating Broke

Personal Finance from the Broke Perspective

How Banks Make Their Money

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There’s been a lot of talk about the recent legislation that affects the interchange rate, and how that will affect the fees and rewards that we currently get from banks.  So, I thought it would be fun to take a look at how banks and credit unions make their money.  What exactly is it that gives them the revenue to pay the bills. It’s one word.  One that many of you who are investors will recognize.  Margin.

Specifically, rate margin.  A quick definition for those that aren’t up on their financial jargon.  Margin is the difference between two things.  The space (difference) between the print on the newspaper and the edge of the page?  Margin (or gutter depending on your profession).  So, when I talk about rate margin, I mean the difference in rates. Clear as mud?  Ok, some more detail then.

Blue cardIn order to lend money out to consumers, a financial institution must first have money.  They get that money by taking in deposits and by borrowing money from other institutions.  In most cases, they have to pay some sort of interest to either the depositor or the other institution.  They then take that capital, and lend it out to consumers at a higher rate.  The difference is their margin.  Let’s look at an easy example.  A bank has a simple savings account that is paying 0.25%.  They have 1,000,000 in deposits at that rate.  They then lend that money out to consumers at an average rate of 5.25%.  They have a margin of 5%.  They’ll pay $2500 in interest to the depositors and receive $52,500 in interest from the borrowers for a revenue of 50,000.

Obviously, that’s a small example.  Many banks and credit unions operate at a much higher level.  Wells Fargo, for instance, had $93,240,000,000 in gross revenue in 2010.  Not all of that is from lending interest, but a majority of it likely is.

In truth, the revenue from interchange rates is rather small as a percentage of overall revenue.  And changing it directly isn’t going to bankrupt any of the institutions.  However, there is some truth in the claims that it will likely mean the end of the rewards and cash back cards as well as some of the other perks like free checking.  Many of the institutions use that interchange revenue to pay for the rewards and cash back and to cover some of the costs of other perks.  Reducing the interchange amount means that the institution will have to drain money from other revenue streams to continue the programs, or shut those programs down.

This is where banks and credit unions will become differentiated over the next years.  Banks operate as for profit entities.  They have shareholders and owners who they must perform for and who expect them to make and increase profits each year.  They’ll be much more hesitant to drain from other sources to pay for those programs.  Credit Unions, on the other hand, are a not-for-profit entity.  They aren’t designed to make a profit.  While some may cut back on those programs, many will simply continue them.  Because they don’t have shareholders and owners that are demanding profit, they can cater to the owners of the Credit Unions, their members.

What it also may mean, is that we will have to be extra vigilant in watching our accounts for missing rewards, and for extra fees.  If pressure to keep the programs is significant enough, some of the institutions might reduce savings rates further, or increase loan rates to try and increase their margin and help pay for the continuing programs.

photo credit: MyTudut

Top 5 Tips for Staying Safe at the ATM

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We spend a lot of time talking about how to insure that our money is safely in a FDIC or NCUA insured bank or credit union.  We talk about finding the best ways to squeeze those last few pennies of interest out of our savings accounts and reduce the interest on our loans.  But, one thing we often overlook is our physical safety when it comes to money.

24hr ATMFirst, and foremost, I would like to inform you that having a swimming pool of gold coins ala McDuck is a really cool idea, but is somewhat hazardous to your health if you plan on diving into and swimming through said coins.  For those of us that can’t fill a pool full of coins (even pennies), the largest place that we need to ensure our physical and fiscal safety is while using an ATM.  Here are 5 tips to help you use the ATM as safely as possible, and protect yourself from ID theft (and physical harm).

  1. Choose a well lit ATM. Just because that ATM that’s hidden away in a dark alley is one of your in-network free ATMs, doesn’t mean you should put yourself at risk to use it.  Always choose an ATM in a well lit area.  The usage fee is worth your safety.
  2. Check for skimmers. The #1 most popular way of harming you at an ATM is the use of a skimmer.  A skimmer is a small device made to look exactly like the card reader that fits over the card reader.  As you insert your card into the reader to use the ATM, the skimmer reads the data on the card and stores it for the crooks to retrieve at a later date.  Some estimates say that these crooks have spent $250,000 on one of these devices, so they are very hard to spot.  Take a close look at the reader before you use it.  If you have any suspicions at all, report them to the staff at the institution that runs the ATM and then look for a new ATM to use temporarily.
  3. Check for cameras. Again, the crooks like to see what you’re doing when you enter your PIN.  So, they install tiny pinhole cameras that record you as you enter in your PIN and other information.  Also check for security cameras.  There’s usually one in the ATM housing itself, but having one or two in the vicinity is also a good sign.  Popular places for crooks to place pinhole cameras include the skimmer that they install, behind mirror housings, and as external stickies right out in the open.  Whatever it takes for them to be able to try and capture your PIN.  Which brings us to the next tip.
  4. Cover your PIN. When you go to enter your PIN, use your other hand or anything on hand (purse, hat, etc) to cover the PIN pad and your hand as you enter your PIN.  This little bit of caution can save you a lot of headache.
  5. Watch your back. One of the other popular ways for crooks to get your PIN is to do what is called “shoulder surf”.  Basically, as you walk up to the ATM, one of the crooks will walk up behind you and merely watch over your shoulder as you enter in you PIN.  If they can get the card, and the PIN, they can basically write their own checks from your account.  A quick glance over your shoulder or into the mirror on the ATM is usually enough to ensure someone isn’t taking a peek at your PIN

ATMs have become such a common thing in many of our everyday lives that we give very little thought to our own security while using them.  More often than not, ATMs are just as safe as going in to a branch and talking with a teller, and banks and credit unions do their best to make them ATMs as safe as possible.  Despite all of that, credit card fraud is a $1+ Billion dollar industry. Observing these 5 tips will help you avoid the risks that can sometimes occur and help you conduct your banking safely.

photo credit: ⓆiaoⒹaⓎe錫濛譙大爺

Early Morning Reality Check

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Early yesterday morning, I awoke to my wife jumping out of bed.  “Do you smell smoke?” She asked.  Let me tell you, there are few things that will pull you out of that just woke up groggy state than a question like that.  And, sure enough, I did.  A quick check told me that there was no visible fire or smoke in the upstairs portion of our house.  It wasn’t clear what the source of the smell was.  I quickly ran downstairs to check the rest of the house, fully expecting to find a smoldering spot somewhere.  Nothing.  Down to the basement.  Nothing.  Back upstairs.  Still nothing, but the smell is still there.  I went from room to room, floor to floor, sniffing the air trying to pinpoint where the smell was strongest.  The good news was that it wasn’t getting any stronger, but I still didn’t have  source for it. The only thing that I can find is that the furnace doesn’t seem to be working.

By this point, my wife has gotten the kids up, and is working on getting them dressed just in case we have to make a hasty exit from the house.  There isn’t any immediate danger, I don’t think, but you just never know.  It just so happens that a close friend is a member of the rural fire department here.  We’re in the city fire department district, but it doesn’t hurt to ask, so we called him for some quick advice.  I quickly fill him in, and he suggests that I call the city fire department and have them come check the house for carbon monoxide and also do a hotspot check with their thermal imager.  I certainly didn’t have to be told twice, so that’s exactly what I did.

A couple firefighters show up, give the house a quick once over and come to the same conclusion that I have.  The furnace has gone out.  And, for some reason, has filled the house with the smell that we awoke to.  They can find no hot spots, and the CO tester is not indicating any CO threat.  We cut the power to the furnace, and everyone agrees that there is no immediate threat.  We can go about our business.  Well, with the exception of calling the furnace repair folks in to figure out what’s wrong with the furnace.  Some of you might not think it’s a big deal, but we still haven’t seen 30 degrees in March.  The nightly lows are in the single digits.  In just the short time that the furnace has been out, the temperature in the house has dropped 10 degrees.

Gas Furnace Blower Motor -- IMG_9823I called the furnace repair company, and, to my surprise, they sent one out right away.  Luckily, I caught the guy as he was headed out the door for a call, so he could easily be rerouted to our house.  A couple hours later, and we had a working furnace again.  Turns out, the blower motor that pushes the air through the ductwork and into the house had stopped working.  It lost its bearings.  Literally.  The result was that it started to leak some lubricant oil and actually melted some of the electrical work in its housing which is what made the stink.  The company bills for the repair, so we only have an estimate as to what the cost of the repair will be.  The repairman thinks less than $200.

We’re lucky.  We’re lucky, because our house didn’t catch fire.  We’re lucky, because we aren’t trying to figure out how we can live out of a motel room until our fire damaged house can be repaired, or, worse, until we can find a new house to replace our destroyed house.  We’re lucky, because we aren’t trying to figure out how we’ll replace any of our belongings.  We’re lucky, because we’re safe.

But, to a lesser degree, we’re lucky, because we can afford the repair.  It wasn’t that long ago that an unexpected bill for $200 would have had us wondering if we were going to have to choose bills to go unpaid.  But, we took control of our finances.  We’ve got a long way to go, but, a $200 emergency doesn’t mean that a bill goes unpaid.  And, that makes us feel safe too.

photo credit: stevendepolo