8 Fabulous Money Innovations

August 3, 2010

The world has changed quite a bit in the last 15 years. Think back to 1995, what do you remember about that year? The show Friends aired it’s second season, the Braves won the World Series,   Netscape debuted an alternative browser to Internet Explorer, and the tragic Oklahoma City Bombing took the lives of 168 people.

So you can probably remember some of those moments but do you recall how you managed your money? For most of you it was likely a mix of cash, paper checks (with handy check registers), and maybe some credit cards. If you’re a budgeter you might have kept your budget on paper or an early Windows computer program.

Fast forward to today and think of all the financial innovations we’ve seen over that time. A lot has changed! Just how much? Here’s a list of fabulous money inventions that didn’t exist in 1995:

Health Savings Accounts (HSAs)

The law approving HSAs went into effect January 1, 2004. Health Savings Accounts allow you to set aside pre-tax dollars for healthcare costs throughout the year. You own the account (not your employer) so you can take any leftover funds with you to your next job. Both you and your employer can set aside dollars in your HSA, and you avoid paying taxes on the money as long as it is used for medical expenses ranging from over the counter medication to doctor’s visits.

Roth 401(k)

A law signed in 2001 allowed for the creation of a different type of 401(k) program starting January 1, 2006. A Roth 401k is an employer-sponsored retirement plan that mixes the benefits of a traditional 401k and a Roth IRA. With a traditional 401k your contributions to the account are tax deductible, and you pay taxes as you withdraw money in retirement. There is a yearly cap on the amount of contributions ($16,500 in 2010).

A Roth IRA is an account not tied to your employer that allows you to set aside post-tax dollars for retirement. You pay tax now and never pay income taxes again; when you retire you simply withdraw the money as you see fit. There is also a lower limit of $5,000 per year (in 2010) that you can set aside for retirement.

Thus a Roth 401k is an employer-sponsored plan that allows you to set aside post-tax dollars for retirement. It is just like a Roth IRA except your employer sponsors the plan, chooses which investments to offer you, and can match your contributions. (Note, however, that employer matching contributions are put into a pre-tax traditional 401k.) 

Online Savings Accounts

Many of our financial innovations are a result of the widespread use of the Internet. Online savings accounts like those at ING Direct, HSBC, and Ever Bank allowed consumers to abandon traditional brick-and-mortar banks that paid little interest on deposits. The online accounts had low overhead for the banks, and when interest rates were higher you could find these banks paying  interest rates in the 4% to 5% range.

Even with historically low interest rates mandated by the Federal Reserve online savings accounts continue to trump most brick-and-mortar institutions. Better interest rates, better customer service, and online account access 24/7 have made these accounts quite popular.

Online Savings Accounts:

  • ING Direct
  • FNBO Direct
  • HSBC Advance
  • Ally Bank
  • Ever Bank

Mobile Banking

So you’ve got an online savings account and a smartphone. You’d like to access your account information, transfer funds, or check your balance. No need to go to your old brick-and-mortar bank or look at your paper check register. These are modern times and mobile banking is a reality! Open up the browser on your phone, go to your bank’s website, and login.

Mobile Banking:

  • Bank of America
  • Citibank
  • Chase
  • Wells Fargo
  • USAA

Peer to Peer Lending

In the past if you needed to borrow money you had to deal with a banker or loan shark. If you wanted to consolidate your debts into one payment while lowering your interest rate you didn’t have many options.

Today with services like Lending Club and Prosper you can go online, create a loan request, detail why you need the funds and how you have the funds/income to cover repayment, and wait. Individuals, not banks, will assess your loan’s risk and lend you money. There are thousands of success stories of individual’s consolidating credit cards at 30% to 15%, and paying the loan off on time.

Another service, Kiva, allows individuals to lend money to individuals in developing countries. Generally the loans are very small amounts of money, so this sector is called micro finance. You would be surprised what a $50 loan to buy some livestock can do for the livelihood of someone in a developing country.

Peer to Peer Lending

  • Lending Club
  • Prosper
  • Kiva

Peer to Peer Payments

In the past you could send money directly to another person’s bank account via a check, handing them cash, or (for a hefty fee) through a wire transfer. All three have downsides– delay in payment, security, and cost.

Now you can go online and send money immediately to another individual for almost nothing. Websites like PopMoney, ZashPay, and Revolution Money Exchange will let you send money with your phone. The person receiving the money also have to an account with the service, but that seems to be the only catch. And it sure beats PayPal’s fees!

Peer to Peer Payments

  • PopMoney
  • ZashPay

Rewards Checking Accounts

This is one of my favorite recent innovations. As interest rates on online savings accounts dropped banks fought to gain customers back by offering eye popping rates with certain catches. My bank offers a 3.61% interest rate on funds up to $25,000 if you do the following each month: have 1 direct deposit or automatic bill pay, swipe your debit card 10 times, and receive your statements online.

The terms change from bank to bank. I’ve seen deposits up to $50,000 get the rewards interest rate with requirements of swiping your debit card 12 times per month.

At a time when online accounts are paying 1% to 1.5% on deposits this is an amazing deal simply because most people won’t have to change their spending habits to get the rewards.

Online Personal Finance Software

No more paper check registers. No more paper budgets. You can even abandon Excel spreadsheets if you so wish.

Online personal finance software like Mint and Yodlee will import your transaction history from your bank accounts and credit cards to create a summary of your spending habits. You can use that data (in handy and easy to understand graphical form) to create a budget.

To top it off the websites will continue to track your spending against your budget. As you get close to spending limits on certain categories the services can e-mail you to let you know to stop spending.

Online Personal Finance Software:

  • Mint
  • Yodlee
  • Rudder
  • Buxfer
  • Geezo
  • Money Strands
  • Budget Pulse
  • PocketSmith

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Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, ING Direct, and many others.

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10 Responses to 8 Fabulous Money Innovations

  • Nick H

    @Kevin: You make a good point. A flat fee is much better than a percentage-based fee for many (many!) transactions.

    You should take a look at the ZashPay terms of service, IIRC they don’t prohibit business transactions explicitly, but they are quite restrictive. (You can’t use them for donations, and you can’t use them to pay for something when you don’t have the goods yet — I read this as prohibiting auctions and sales of goods online.

    They are also quite restrictive on transactions related to many products… Tobacco, alcohol, anything defamatory, offensive, or vulgar … not allowed. In the end it probably doesn’t matter too much: Will anyone say “Thanks for the beer, too bad I can’t pay you back using ZashPay…”? Doubtful. However, they dissolve many of the consumer protections in the case of prohibited transactions, and I think PayPal historically serves as a good example of how a payment network can be abusive towards the consumer if you fall afoul of a broad ToS.

    In the end, I think P2P services need to mature quickly, add features, and acquire marketshare to grow the value of their networks. When I can scan a Q-code to pay someone, ZashPay goes truly mobile, or an API is developed to send (or request!) money — then I’ll be impressed.

    In any case, thanks for the rundown of all these companies and services, I have a “Banking 2.0” file I keep, and you just saved me a lot of work.

  • Kevin

    @Nick H: I was thinking of Zash Pay for business transactions rather than personal transfers. Looking at the website it isn’t clear if you can technically use it for business transactions. That is you could send/receive money that way if you had the other person’s information, which you could acquire during a business transaction. I’m just not sure if the terms of use would allow transactions that aren’t “personal”.

    If you could, then for any transactions over $15.52 you would come out ahead paying the flat $0.75 fee from Zash than with PayPal. Under $15.52, and PayPal’s fees are lower.

    Bigger picture than PayPal, and Zash Pay / PopMoney (no fees currently), and Revolution Money Exchange (no fees currently) are still great innovations. Compare the $0.75 cost (or free!) to wire transfer fees at your favorite bank. Still coming out way ahead.

  • Nick H

    Hey Kevin,

    You state in this article that the new P2P services beat PayPal’s fees. At first, I was really excited to try ZashPay for this reason; however, it’s not really the case. PayPal is free, ZashPay isn’t.

    For PayPal personal transfers (from bank account to bank account, no credit card involved — like ZashPay), there is absolutely no fee. ZashPay charges a nominal fee — about $.75.

    I’m not sure I see the compelling argument for ZashPay yet.

  • Mark

    I especially like the peer to peer payments and online personal finance software sites.

  • Jonny

    For me one of hte most interresting financial websites and money inventions is Zopa – The idea of people lending to people and not being judged by the big banks! A definate top ten for me!

  • Moneymonk

    ING direct also have mobile banking. I love it


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