Category: Finance and Banking

Clarity In Communication

Saw a newspaper advertisement for a general insurance service, with the following text prominently displayed:

No Claim Bonus

Of course, people in the insurance industry / those who bought insurance / made claims earlier will immediately understand this as:

If you don’t make any claims in the policy period, you get a bonus

However, assuming most of the  people reading this advertisement (and are primary targets) are laymen and won’t understand this “No Claim” terminology, what will they see in this Ad?

No Bonus

You may call that silly, but when I look at the words “No” and “Bonus” near to each other, I naturally assume this company is refusing to pay me bonus (for whatever reason). There is no clarity to teach me that they are actually paying me bonus, for not making any claims.

This whole  communication gap could’ve been avoided if the company did some beta testing of its Advertisement text, they would have come up with better alternatives such as:

Bonus for No Claims

Attractive No-claim Bonus

When millions of dollars are spent on advertisement, we can never ‘assume’ things, it is better to be clear, than create a wrong impression in the target readers’ mind.

Naga Chokkanathan,

Director, Presales, CRMIT

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Why New Business Models For US Banks?

Reportedly, second and third quarter was an impressive period of significant improvements for US banks, but still we get to hear some news about the stocks of large banks that declined by more than 20 percent. This is happening since the beginning of the third quarter and four out of every five people are trading below the book value. Do you know why?

Here’s a sneak peak…

While some commentators blame the fear of double dip recession or may be Europe’s sovereign debt crisis, McKinsey Quarterly has tried to draw attention to three additional factors. The undermining issues brought to light by this business journal include the new bank capital requirements initiated under Basel III international-banking regulations, impact of new US banking regulations retorting to financial crisis, Dodd–Frank Act, and continuous deleveraging of customers.

As per the estimates, if these banks continue following the current business model, their average ROE (Return on Equity) is expected to fall from 11% to 7% by the year 2015. Moreover, the investors are also willing to see bank management teams to put forward trustworthy and far reaching plans to fill this gap. This is the current scenario, but what next?

What does the current status imply?

Out of these three factors, Basel III requirement is the most significant, since without justifying actions, they could reduce ROE of some banks by 5%. And that is why, it is being estimated that US banking system will require almost $500 billion in retained earning or may be an absolutely new equity to meet new standards. The second threat is also stepping forward slowly, as an amendment caps fees on payments and there is also a requirement to move many Over-The-Counter (OTC) businesses to clearing houses. This will probably lead to more expensive and complex day to day operations.

Then the next threat is all about unwinding of consumer debt and according to the analysis, when excessive borrowing becomes the principal cause of recession, businesses tend to spend next eight years to restructure their balance sheets. So, there is a very little prospect for the companies to return from those borrowing levels and some may never even return.

Therefore, banks must constrict the most out of all the capital cash especially that they have been neglecting from more than a decade. In fact, linking to risk adjusted capital usage would prove even more helpful in such a scenario.

– Charu Mehta, CRMIT