It is a problem solution report.
problem 1 : satisfying investors expectations
solution 1 : general solutions
problem 2 : investors do not like high risk investment
solution 2: banks should give an insurance in the cash to the investors to get them investing in high risk investments
Thesis statement is: Thus, banks should create cash insurance companies
to satisfy investors expectation and reduce their fear from risk.
How To Satisfy Investors Expectations In Banks
For the last few decades, the financial industry has undergone unprecedented changes, many of which are a source of concern for most banks. Some of these changes include emerging competition from FinTechs, which have recently invaded the industry. Most notably, fintech is described as the “use of technology to provide new and improved financial services” and may include cryptocurrency and blockchain (Thakor, 2019). These Fintechs are a source of banks’ problems because they meet the emerging customers’ needs and expectations and offer lower-risk investments, thus driving customers away from investing with banks. For example, fintech, such as blockchains, enables investors to trade with minimum involvement of the banks. The high customer turnover rate, mainly caused by a lack of satisfaction with banks’ services, is also a significant problem among financial institutions. Unfortunately, competition from Fintechs and high investor unsatisfaction rates has detrimental effects on a banks’ performance and ultimately reduces investments, which are revenue sources for the financial institutions. Therefore, for banks to mitigate these concerns, they should create cash insurance companies to satisfy investors’ expectations and reduce their fear of investing in high-risk investments.
As noted, investors demand satisfaction is a significant problem facing banks today. Customer satisfaction is attributed to banks’ multiple benefits, such as increased investment through the bank or high consumption of an institution’s services (Vaslow, 2018). For example, Vaslow (2018) argues that when customers have an appealing experience with a bank, they may be willing to use the latter’s mortgage when buying homes and even open an additional account with the bank. Besides, customers with great experience in a given bank may recommend their friends to open accounts (Vaslow, 2018). Unfortunately, Seel (2016) observes that customers’ expectations of banks have been changing significantly, making banks lose customers by the millions for failure to understand and satisfy their consumers’ expectations. Fundamentally, customers’ changing needs over time and investor demand satisfaction are significant problems facing banks.
Banks can solve the identified problem by satisfying the needs of their investors. The proposed solution may take different forms, including providing investors with a competent securities analyst to help them make financial decisions. As observed in a study conducted by Wang (2014), analysts’ service quality and image have the most significant positive effect on investor satisfaction. Arguably, investors prefer to make investment decisions based on in-depth research and data interpretation of financial market securities. For example, when investors want to make an investment, they may expect the bank to provide a detailed analysis of the patterns, value, stability, and suitability of the investment. Therefore, offering securities analysts information services is likely to satisfy this critical investor expectation, which would positively affect the bank.
Banks can also satisfy investors’ expectations by getting to know the latter better and offering services that suit their needs. As argued by Seel (2016), consumers expect banks to know enough about them and to deliver services they can use when the need arises. For example, banks should have adequate knowledge of each type of investor’s needs and expectations- risk-averse and risk-takers- and offer investment options that suit their needs. Notably, banks should have adequate and diverse high-risk investments to provide to risk-takers. Similarly, if an investor is risk-averse, the bank should recognize this need and offer low-risk investment options. Fundamentally, knowing one’s customers and offering services that match the latter’s needs can help a bank achieve investor satisfaction.
Furthermore, banks can satisfy investors’ demand by keeping pace with their behaviors and the manner in which they operate. As noted by Seel (2016), customers have become used to social media, with “always-on” and immediate response, and they expect banks to conform to the same habit. Therefore, to satisfy their investors’ demands, banks should be willing to adjust their operations and adopt omnichannel procedures to match their consumer behavior. For example, some investors planning to invest with a bank may lack adequate time to visit the physical facilities to inquire about the available and ideal investment options due to today’s busy life. Instead, some may prefer using online platforms such as social media and chatbox as their primary communication medium. In such a scenario, banks can satisfy investors’ expectations by establishing consistent omnichannel experiences characterized by seamless operations.
Banks can also achieve investor satisfaction by establishing interpersonal relationships with their customers. As observed by Vaslow (2018), “the relationship between a bank and their customers has the biggest impact on customer satisfaction” (par.3). Investors prefer banks to offer products that suit their needs and make significant efforts to know and understand their consumers. Arguably, establishing interpersonal services and relationships can help provide customer satisfaction, and to greater extents, compel clients to invest with a bank.
Besides interpersonal services and relationships, a bank’s corporate reputation can also provide investor satisfaction and enhance the latter’s willingness to invest. This claim is evidenced by prior research, which suggests that corporate reputation is a determinant of initial investment decisions (Helm, 2007). Firms that have an appealing reputation are likely to trigger a feeling of satisfaction among investors, which, in turn, acts as a driving force to investment. Arguably, if a firm has a high reputational rating, investors may assume that its investment opportunities are ideal, although this can sometimes lead to detrimental stock choices. Therefore, for banks to achieve customer satisfaction and high investment, they should develop a high reputational rating in the industry.
Besides investors’ demand satisfaction, investing is also an issue of concern among banks. Lemke (2019) notes that every individual, depending on their age, financial situation, and financial goals, has a risk tolerance. Notably, some investors prefer low-risk investments with relatively stable returns, while others opt high risk-high return investments. Arguably, most of these low-risk investors are often millennials who may not have a high-risk tolerance in investment due to factors such as their financial positions and goals. Conversely, banks prefer high-risk investments because they generate more money. Therefore, the fact that a majority of investors avoid high-risk investments is a significant problem among banks.
Investors’ decision to refrain from high-risk investments, despite their higher-than-average relative returns, can be associated with several reasons, among them, the high risk of losses. For example, leveraged investments such as exchange-traded funds have a high potential of returns. However, the risk of losses is relatively high compared to saving one’s money in saving accounts or investing in bonds. Lemke (2019) notes that a triple leverage S&P 500 exchange-traded fund can offer an investor three times the index’s return. Nevertheless, the author also notes that the leveraged EFT is based on the index’s daily returns, implying that when the market goes down, an investor can lose three times the returns in a single day (Lemke, 2019). Therefore, while leveraged products may be ideal for short term investment, their high losses reduce the number of investors willing to invest in them.
Besides leveraged products, options are also viable investment products that can generate potentially higher-than-average returns to investors. However, Lemke (2019) argues that investors trading in options can again lose large sums of money in the long run. Notably, options are traded on a buy-sell contract. For example, if an investor agrees to sell a given company’s shares at $100 and the stock trades at a lower price, they gain from the transaction. However, options can also have drawbacks and significant adverse repercussions. For example, if the same investor establishes a strike price of $100 and the stock trades at a higher price, such as $200, the investor loses $100 per share. From this information, it is evident that investors may be unwilling to venture in options despite the high returns during a favorable market shift due to their large and unlimited losses.
Furthermore, banks enable investors to trade in forex transactions that are closely linked with high returns. The bank’s role in such investment often involves undertaking speculative trades and facilitating the forex transactions on behalf of their investors. However, like options and leveraged products, forex is also a highly risky investment, notably in an unstable market. As averred by Lemke (2019), the value of currencies changes quickly and dramatically; thus, the gains from such an investment are only dependent on one’s ability to predict and act on the movements in the foreign exchange market. On the one hand, an investor who makes an accurate prediction of the currency movements can earn high returns from the investment. However, Lemke (2019) also states that a wrong bet on a currency can result in an investment loss. The author also adds that currency investments are even riskier because they are traded using leverage (Lemke, 2019). Under the leverage basis, an investor’s losses and gains are multiplied by the number of times the expected return index. Unfortunately, very few investors would be willing to invest in currencies through the banks due to the high chances of making losses.
As noted, most investors refrain from high-risk investments because of the high losses involved. Therefore, for banks to overcome this problem, they should offer investors cash insurance on high-risk investments. Insurance, in this context, can be provided in various ways, including the use of insurance companies that protect investors’ funds. The insurance companies can assume a similar responsibility to that of the Federal Deposit Insurance Corporation (FDIC) of offering insurance to depositors who subscribe to United States’ depository institutions. Most notably, the cash insurance firms can help cap the losses that an investor incurs in a single high-risk investment. For example, in the scenario of options, the cash insurance can choose to compensate investors a third of the losses incurred per share to encourage them to continue investing in the security. Arguably, creating cash insurance would reduce investors’ fear of the risk involved by assuring them of protecting their funds. Ultimately, reassuring their investment’s safety would encourage more investors to venture into high-risk investments such as options, leveraged products, and currencies.
Alternatively, banks can provide cash insurance to investors through the help of investment bankers. As observed by Baron (1982), an investment banker may persuade customers to purchase specific investment issues because they can “certify” the product to the market by putting their reputation behind it. Simply put, investment bankers may often have superior information about various investments in the market, which equips them with the power to convince investors about a given investment’s suitability. Due to the information asymmetry, investors may likely believe in an investment banker’s information and advice compared to other external parties that lack adequate knowledge of investments. Therefore, banks can leverage investment bankers and utilize their knowledge to assure investors that their high-risk investments would yield the expected returns.
In recap, banks today face a myriad of problems associated with investor satisfaction and matters of investing. These banks can solve each of these problems by satisfying the investor’s needs and expectations and creating cash insurance for their money. As argued in the report, providing investors with securities analysts, offering services that suit their needs, keeping pace with their behaviors and trends, establishing interpersonal services, and holding a high reputational ranking in the industry are many ways a bank can satisfy investors demand. Also, when it comes to investments, banks should acknowledge that majority of investors prefer low-risk high return investments to avoid the huge losses associated with high-risk investments. Nevertheless, the bank must compel clients to make high-risk investments, as they generate optimum revenue for the banks and high returns for investors. Banks can achieve this effort by creating cash insurance for investors, in the form of insurance companies and investment bankers, to get investors to invest in high-risk products.
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