Understanding Derivatives

Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later.

Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans). Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in  Detroit .

By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities then are bundled and traded on international securities markets.

Naive investors don’t really understand that the securities being sold to them as AAA secured bonds really are debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.
Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and Heidi’s 11 employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS prices drop by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from their cronies in government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi’s bar.

Sound familiar?

Banking Apps: The New World of Technology

The world of banking is very complex. The ability to effectively prescreen customers, lend the right amount of money, make good financial choices and continually modify and hone customer acquisition strategies are all important for the life of a bank. Banks will need to enhance all their service offerings with the latest technology in order to better serve their customers.

We’ve all been bombarded with the apps. From the newest phones to the most exciting new computers and handheld devices, it is now easier than ever to have banking at our fingertips. We can pay our bills, transfer money, check the balance of our accounts and manager our budgets all with the click of a button and a handy app to help us do the job. With the way that technology is advancing, it is only a matter of time before we can do even more. Will we be able to apply for small business loans via our apps or perhaps apply for a credit card?

Banks are going to need to stay on top of the latest technology in order to keep their best foot forward and to keep their customers happy. In this ever-growing age of technology, customers are looking to online first when making many of their choices. For example, a consumer may not choose a company if they don’t have a website that is up to date or if they don’t have a website at all. Customers look to the internet for information so they can make quick decisions.

Apps and similar technology open up a lot of choices when it comes to banking. Is there a way that apps could be tied into your banking information so that you could receive offers electronically when you are approved for a credit card or a specific line of credit or loan? Perhaps it is possible for banks to offer information via apps that is helpful to customers – such as money management tips or budging rules. They could even translate this into podcasts. Perhaps you have an hour session on the importance of building up a savings account or paying off debt.

With these new technological advances also comes the problem with security. More prudence is going to be necessary in order to ensure that customer’s information is protected. As more technology becomes tied together and while more personal data is accessed, it becomes essential to change passwords often and to make sure that security is top notch at the bank or financial institution.

It is unbelievable to look banckon where we were 10 years ago with banking and consider now how many more things we do online. Think back to when you wrote checks for all your bills or all your shopping purchases. Now, we are tied to our computers. They have helped us in many ways to become more efficient and continue to allow us the opportunity to have a lot of information at our fingertips. Banks will need to utilize the newest technology in order to keep customers happy.

With the growing amount of handheld devices making their way into homes, it is only logical that banks work on ways to have a presence. Go where the people are so that you can reach them and communicate with them in ways that will be effective in maintaining and building business relationships.

About the Author: Rebecca Beckett is a freelance writer for Innuity. If you would like more information about Prescreen or Customer Acquisition go to Zoot Enterprises

Watching the Economy Recover

Consumer confidence in financial institutions, in the government and in life in general plays a big part in economic recovery. We’ve all seen the bleak picture as we wander the mall or drive through our favorite part of town; small businesses declined dramatically during these economic hard times. Small business lending was difficult to obtain. Customer acquisition was near impossible because people were looking for the best deal and often times couldn’t get that from the smallest businesses.

Financial institutions have had to change a lot of rules, policies and regulations in order to buckle down during difficult times. We’ve seen banks change hands, government bailouts granted to assist and general bank difficulties rise. It would be a welcome relief to see things change course.

With the economic recovery, small business owners are probably better off with small business lending and positioning. Hopefully this recovery does mean as well that small business lending will start to recover and that the tight constraints placed on the lending will ease up. Often times communities may forget that small businesses are an important part of community. With so many continuing to close down we can also guess at the influence this might have on communities.

It’s important to realize that spending money gives people confidence. This confidence then translates into more spending which means that businesses can afford to increase inventory, hire new employees, and relax on tightening things down. People want to have confidence in businesses and their financial institutions.

In order to keep customers, financial institutions need to make sure that they are building consumer trust and confidence. This is one of the most important customer acquisition strategies. If a consumer trusts a business they will continue to go back to that businesses and will more than likely increase spending over time. If a business is loyal to a customer then the customer will be loyal in return.

It may be slightly different with a bank or financial institution; however, they still need to build confidence so that consumers feel safe. With the economic downturn and all the changes that were happening with banks, consumers were left really wondering who they could trust. Mortgage companies were bought out, loans changed hands, banks closed and accounts moved around. This does not invoke the sense of safety and trust. This is why those banks and financial institutions that were doing all they could to really build consumer confidence will come out ahead as the economy turns.

I’m sure that we’ve all buckled down our budgets in some way or another. By cutting out eating out expenses, paying less for entertainment or other ways of managing the budget, we’ve all found a way to survive. Businesses have done the same thing. Expenses, including employees being cut, inventory slashed and cutting general costs. Now, with the economy recovering, we should see consumer confidence rise along with changes in business spending.

While shopping at the mall and seeing the amounts of people spending money doesn’t necessarily mean the economy has recovered it does feel good. Relaxing the budget, having confidence in maintaining a job and paying the bills all go along way to paving the way to a better, more confident tomorrow. We hope the same confidence and hope is found in small businesses as well.

About the Author: Rebecca Beckett is a freelance writer for Innuity. If you would like more information about Small Business Lending or Customer Acquisition go to Zoot Enterprises.

Understanding the Credit Cards that Rule our Lives

It seems that most consumers have credit cards already, if not more than one. But, even credit card companies need to market. Credit Card Origination allows credit card companies to find customers. Even though it’s hard to remember, credit card companies are still providing a service. In order to provide better services, companies use a credit card application processing system in order to enhance their interactions with their customers.

I don’t know about you but I find myself forgetting that credit card companies are actually a business and are creating a service for me. Instead, I find myself surrounded with junk mail and bombarded with e-mails and ads from them. Plus, you can’t help but hear all the negative news in the press about credit card companies.

Just recently I was reading about how these days credit card companies are looking for ways in which they can drastically cut the spending limits on their customers. In fact, they might cut them as much as 80%.  For example, if you charged a therapy appointment, the credit card company might assume you were getting a divorce and cut your spending limit because you are at risk. Simple things like this that you might not normally charge become a much bigger deal because credit card companies are watching your every move.
It might be a good thing that consumers have to watch closer what they are charging. With the current economic climate, everyone has to pinch their pennies a little more. Grabbing the plastic out of our wallets when the tough times roll in can be an easy way to get buried in a burden of debt.

So, what is the balance here? Credit card companies are in the business to get us to use their product and we are struggling to stay afloat and carefully follow our budgets. That is probably why so many debt counselors are able to make a living in the world today. People like Dave Ramsey have made a great living helping us to better manage our debt and possibly live without the debt.

Creating a specific budget is a difficult task for many people and something couples may disagree with from time to time. It is often hard to agree on the best things to buy and the most important things to save for. And, we often want instant gratification so we quickly and easily sign up for that credit card. Even if we do use credit cards in the right way, it is essential that we understand the basics of creating and sticking to a budget in case a financial hardship may come your way. The knowledge and understanding of how to keep up with a budget will serve us all well. If you struggle with putting together a budget on your own, utilize the help of someone that you know that is good at it, or take a financial seminar so that you can get on the right track.

Learning to live with credit cards and all their marketing techniques may be more difficult for some than others. However, understanding the fact that credit card companies are providing us a service and putting that service to use for our best interest is essential in maintaining the relationship. 

About the Author: Rebecca Beckett is a freelance writer for Innuity, Inc. If you would like more information about credit card origination or credit card application processing system go to Zoot Enterprises.

Understanding that Pesky Pre-Screen Junk Mail

I don’t know how many times I’ve checked the mail this week only to be disappointed that all I have waiting in the box is one of those preapproved or prescreened credit card offers. I’ll admit that I automatically place them in the shredder but I have wondered how they get the information, why they prescreen me and if this affects my credit in any way.

How do they do that?

Similar to instant prescreen offers that can happen on the spot when you are waiting in a bank for an answer or shopping in a store, creditors can basically establish a certain set of data and then use that data in order to sift through a consumer reporting company and choose those people that they are going to prescreen. For example, they might choose to target people that make a certain amount of money or have a certain credit score. Second, a company might just send a list of customers they already have in their database to the consumer reporting agency and that agency will identify people who meet that same or a different set of criteria. So, now you know that the special envelope you thought was meant just for you was actually only sent to you because you met a certain criteria.

Can I Opt Out?

At one point in our lives, my husband and I were receiving three of four of these offers in the mail per day. Finally one day we decided that enough was enough and we decided to opt out. Other people may prefer to opt out because they don’t like the idea that companies are accessing their credit report information. One thing to consider is that you really can get some benefits from those offers. Often times if you are in the market for a new credit card or are shopping around for insurance than it is great place start because it will allow you to easily compare costs.

What about my credit score?

You will be happy to know that opting out does not hurt your credit score. Also, staying in does not hurt your credit score either. If you do check your credit report you will be able to tell which companies have accessed the information. However, it will not affect your score at all.

Junk Mail vs. Store Offers

So, you are not only bombarded with junk mail from companies wanting your attention and money. But, you are also sucked into the instant offers in the store too. Many stores now have the ability to do instant prescreens on the spot in order to approve you for a specific service. This can be a tremendous asset for companies because they can quickly and easily offer you something. It also plays into our sense of wanting immediate gratification and can be dangerous if you don’’ weigh your options before you have the prescreen done. Sometimes having a moment to mull the information over is a good idea.

We are in the age of instant answers; we don’t have to look far to find what we need. However, those prescreen offers can get irritating if we don’t keep them under control. Understanding the benefits and drawbacks can keep you balanced when making decisions about all that junk mail and whether or not you will opt out. Good luck as you make your next trip to the mailbox.

About the Author: Rebecca Beckett is a freelance writer for Innuity. If you would like more information about Prescreen or instant prescreen go to Zoot Enterprises.