Financial engineering isn’t something that can be officially classified as a specific branch of economics, but its existence as a widely practiced concept in the financial sector is every bit as real as its effects. Financial engineering is basically just the deployment of various constructs of the financial sector for the enrichment of the institutions which are in control of the sector.
Bank fees charged by banks are an example of financial engineering, a practice through which the banks basically take advantage of the compliance laws governing the manner in which we are made to handle our finances. For example, it’s virtually impossible to function as an economically active individual without a bank account, whether it’s for receiving the wages you earn through your work or in many instances if you want to make a significant purchase.
In this particular instance, we’re forced to do everything through the banks and so we’re basically at their mercy by way of how they engineer profits through the charges they levy.
This is but just one of many, many examples of the financial engineering we’re all subjected to, a practice which undeniably makes the institutions on the right side of that fence wealthy beyond measure, but as an individual one can look at how these institutions practice financial engineering on the large scale that they do for some clues as to how to go about practicing some micro-financial engineering for improved personal finances.
It’s not as complex as it may appear to be. All you really have to do, generally that is, is pretty much try and do the exact opposite of what the big financial institutions push you so hard to do. I’m not talking about radical stances such as deciding not to get insurance coverage or anything like that, but rather about the manner in which you handle your finances.
I’ll use just one example to demonstrate exactly what I’m talking about…
Why do banks not charge any fees for Point of Sale (POS) purchases? They charge no fees whatsoever…
The reason they don’t charge fees is because there isn’t really any service associated with a POS transaction they can justify charging fees for. What happens is the money which changes hands doesn’t move physically between a vault somewhere with your name on and the vault of the vendor you’re paying.
It’s all just digitally represented records of transactions and banks encourage consumers to use less physical cash and make more use of their debit cards to complete purchases because it’s easier for all parties involved. Consequently, the banks don’t have to constantly concern themselves with the logistics of moving money in correspondence with the transactions, which is a passive form of financial engineering as the overall fees they charge aren’t eaten-into by what would otherwise be unnecessary overheads.
As an individual however, that form of macro-level financial engineering can be turned on its head to a micro-level. The best example of this is eliminating a centralized financial service provider to complete your transactions (and charge you for that service) altogether. This can be achieved through the adoption of cryptocurrencies as a your first step on the path to micro-financial engineering for improved personal finances.