Knowledge Without Understanding is Peril: Using the Banking Industry as an Example.

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Knowledge without understanding is powerless, thus making it very peril. We normally say knowledge is power. Of course, majority of individuals believe that having knowledge makes someone powerful. A simple argument supporting such claim within a business context is for example, a seller has more knowledge about what he/she is selling than the buyer looking to purchase the product. In this case, the one who possesses most knowledge is powerful. It’s an advantage to leverage on that ‘secret’ knowledge to exploit others (those who don’t have it).

So what renders the above argument true is based on the assumption that one party knows more than the other. However, we are operating in ‘new’ economy, which is mostly characterized with a lot of easy access to knowledge, thanks to social media, and open networks such as Massive Open Online Course (MOOC), open innovation projects, etc. Thus making the first argument obsolete. Everyone has more or less the same equal opportunity to access a wide range of knowledge due to the advancement of the internet. Whenever you need clarification for a concept, the most popular way is to Google. Other possibility is to ask your networks on social media platforms – Facebook, Twitter, Google+, LinkedIn and the like.

Stressing on the point that knowledge is vastly available to everyone than some decades ago, I find it controversial to still believe in this famous quote: “Knowledge is power”. According to Simon Dixon, one of the most influential person I follow in the Banking and Finance industry, only applied knowledge is power. This means that merely acquiring knowledge in this 21st century is no longer a competitive advantage until it is put into practice. In order to apply the knowledge, we need understanding. As we say, you can only understand the rules of the game if you play it. Meaning that without practice we will never understand the essence of our acquired knowledge.

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Honestly, we all have some acquired knowledge that we don’t understand them. Or in other words, have acquired some knowledge that we rarely use in practice. A common example is what we studied in school versus what we rely on at our work place; what we studied or pursue as a course in university differs from the profession/occupation we currently have. Therefore, I can argue that no one will boldly admit that he/she completely understand every knowledge he/she possesses. It’s easy to know something, but it takes an additional effort to understand it well. Knowledge is within the power of knowing, while mastery is within the power of understanding.

Last week, I was watching two documentaries about the Credit Card industry from Frontline. Although I’ve watched them before, but this time I discovered some really important take away message. I’m really a fun of documentaries, and I have to admit that I prefer it to reading many books on a particular subject. Documentary presents detailed information from diverse sources – interview with experts, books, research articles, and the like. Thus, I learn much faster from it than digging into different source on my own to know about a concept. The inspiration of this article is centered upon the key message I found while watching the 2 videos: Secret History of the Credit Card, and The Card Game. Both films present an account of how banks lure consumers (majority of them) into a debt trap that apparently imprisoned many consumers into debt forever, or for decades. It’s worth noting that none of those actions are illegal. They always comply or play by the governmental/institutional  rules and regulations. Although, in order to understand or grasp the message, you need to watch the Secret History of the Credit Card before The Card Game. The former is solely based on Credit Card industry, while the latter explore further to all the available bank cards (i.e. credit card, debit card, and prepaid card). It’s an investigation within the United States of America, but since the majority of the banking practice is applicable everywhere, the lessons I learned from the documentary is not limited to one’s geographical location.

A lot of hatred has hit the banking industry due to the financial crisis that began in 2008. In my opinion, the basis of such hatred is very emotional, in which I believe most consumers or people rely their argument on to blame the banks more than the government that establish the rules and regulations. A hot topic that concerns a lot is the fairness of high bonus payment to bankers, but what mostly triggers the anger is when politicians use taxpayers’ funds to bail out banks. If we are to assign scores or scales to our enemies as a result of the financial crisis, then in my opinion, the government should have more weights than banks because they rob Peter to pay Paul. Nevertheless politicians or government have taken serious actions such as imposing fines and coming up with regulations after regulations, but the banks more or less still strive to make more money. And once they make more money, they will continue to pay high bonuses. Due to competition, they are pressured to nurture their key valued employees. Thus, risky for every bank to constantly loose their valued employees to competitors.

So how do banks continue to make more money despite such tough rules and regulations? My best guess would be that, they know more than we (ordinary people) know, even including politicians. Bringing us back to the old famous quote: “Knowledge is power”. But like I said, nowadays knowledge is easily accessible to everyone. So I believe knowledge alone is not a basis to have power over someone. Regulators have tried and succeeded for putting in place transparency within the banking industry. For instance, banks are now required to disclose a lot of information to their consumers (credit and debit card users), such as how long it will take to fully pay off the credit card debt if a person only pays the monthly minimum amount, the annual interest rate charged etc. So politicians (i.e. regulators) pressured banks to disclose all the information they knew that their customers didn’t know about. Nevertheless, banks continue to have power. And the crucial question is where do they gain the power from? Or what is the basis of their power?

In my opinion, their power is centered upon understandability. Of course, they understand their industry more than anyone else. They indeed understand the rules of the game than any other person. “Life is not fair, and if you don’t understand the rules that govern the game of finance, technology and money, you will suffer in the future” – Simon Dixon. Therefore, knowledge without understanding is peril, but with understanding one gains an incredible power. Imagine the benefit we stand to have if we don’t only know the rules of banks, but also understanding them. Look at it this way, two buddies were playing the game of Chess when a stranger came to them and showed an interest to play, but doesn’t know how. So the buddies gave him all the knowledge about the game (i.e. the rules). Now being equipped with the knowledge, the stranger is now ready to play; he takes his first chance and lose. Lost after lost every time he plays with one of the buddies because they understand the game far more than he does. The buddies are simply relying on their understanding to exploit the stranger until he understands the game well to build his own strategy to win.

The above hypothetical example can be explained simply as, the buddies being the bankers, the stranger is the consumer, and the rules of the game are the terms and conditions (i.e. the contract) we agreed to with just a signature. In reality, we’ve been given knowledge about the product (e.g. Credit card) but since the majority don’t join in to play the game, we don’t move further to understand some of the tactics within the rules of the game. Surprisingly, this is where banks gain most of the power. They know that if they give out all the knowledge, not everyone will be able to understand. Therefore, why do banks prefer us to pay off our loan in instalments for some years? And why do they normally charge a penalty fee if we decide to pay off everything earlier than agreed? For instance, let’s say the duration of the loan is due 15 years, and after a couple of years, all of a sudden you win a massive jackpot, so you decided to pay off everything now instead of 13 years; in this case, you pay a penalty fee for such early debt payment. You may ask, is this fair? From the game point of view it’s a fair play. The penalty fee is apparently the opportunity cost of the interest payment they would have received from you if the loan was to be paid in bit until its maturity (i.e. the duration). The same applies to having a credit card. The banks always hate those who completely pays off their credit card debt at end of every month because those people understand the rules of the game. On the other hand, they love those that don’t pay off their debt fully (i.e. those people that don’t understand the game). These people are indeed profitable customers because the banks generate money from them by charging them massive interest rate on the debt. Such interest rate can range from 18% to 35%. To learn more, I urged you to watch the above two documentaries.

Imagine, if society has a whole embrace to understand beyond merely acquiring the knowledge governing the rules of the game, I think we all stand a great chance to not be exploited – that’s loosing our control into the hands of someone who understands the real power of the rules of the game. In view of that I argue that “knowledge is power” is a dead concept, and what we need to turn our focus on is that knowledge without understanding is peril to any society. In simple words, power lies in the hands of the one who has understanding beyond knowledge. These are just my perspective and reflection on why knowledge with understanding is an incredible power, using the banking industry as the basis. You may agree or may not agree, thus I would like to hear yours.

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