Cash & Loans Advice Blog

Remember about the role you play in a credit

When we work in partnership, it is important that we honor our word and do what we agreed to do. When we do this, we demonstrate in action that we are willing to deliver what we’ve promised. Thus we enable others to feel confident that we will do our part and to concentrate on keeping up their end of the agreement.

Failing to do our part undermines the alliance. Rather than working to complete the task, time must be spent to rebuild the trust in the relationship. Over time, the partnership will dissolve because one party or the other will no longer find value in the relationship.

A primary reason partnerships are formed is to help us accomplish a task we do not have the skills to do ourselves. It is important that partners accurately assess their competencies and technical capabilities— both their strengths and weaknesses. When a partner is caught offguard by the other’s failure to deliver what he promised, this has serious repercussions on both the task and relationship elements of the alliance. It undermines the trust in the alliance and, consequently, the relationship.

Protection related to credit events

CDS are used to transfer the credit risk of a reference entity from one party to another. One party (the protection buyer) pays a periodic, fixed premium to another (the protection seller) for protection related to credit events on the reference obligation. If there is no credit event, such as default during the life of the swap, these premiums are the only cash flows . If a credit event occurs the protection seller is obliged to make a payment to the protection buyer. For physically settled contracts, following a credit event, the protection buyer delivers the defaulted reference obligation.

Cash settlement (par minus market value) is the alternative to physical settlement and is used less frequently in standard CDS but overwhelmingly in tranched CDOs. The 2003 ISDA definitions further clarify the three types of credit events:

• Bankruptcy
• Failure to pay
• Restructuring.

Just like cash bonds or loans, CDS transfer credit risk. To remove the interest rate component of a cash bond, a synthetic floating-rate note can be created via an asset swap which eliminates the duration and convexity exposure of the cash bond. An unfunded position in the bond would have to be financed in the repo market. A CDS is equivalent to a financed purchase of a bond with an interest rate hedge (selling protection through a CDS or buying a corporate bond, asset swapping the coupon to floating and financing the holding in the repo market).

Building credit loyalty online

The internet makes it easier to achieve three key elements of customer loyalty: making it easy for customers to do business with you, satisfying your customers and ensuring that they come back. Furthermore, this can be accomplished at a fraction of the normal cost and, by building greater customer loyalty, sales costs are often reduced. There are several factors in building customer loyalty online.

Customers will come back to a website if they feel comfortable and believe it is relevant to them, but more needs to be done to develop customer loyalty. Customers must feel that the website is simple, helpful and intuitive; in other words, it must be easy to use.

The website must be responsive, understanding what customers want without marching them along a predetermined course. (This can be bad enough when a sales person does it; when a computer steers you in an unwanted direction it is particularly annoying.)

The information should be accurate as well as immediate. Customers should be offered the chance to question or change choices before confirming details without worrying that the service will be incorrect.

The website should be valuable, offering an element of service that is unique and cannot be found elsewhere, with options that are likely to suit the target customer. If an organisation can include all this in its website, the likelihood is
that returned shipments, adjustments to orders and dissatisfied customers will decrease, combining cost reduction with an increase in customer loyalty.

Reducing sales costs and improving credit efficiency

The internet enables sales people to have the latest, most up-to-date information to promote sales. This might include product information, testimonials, details of special offers and customer or market intelligence.

This information is particularly valuable when in-depth product information is needed, and it can be provided directly to distributors as well as the salesforce.

The internet allows products to be evaluated quickly and easily without assistance, which can be particularly valuable for complex products or rapidly evolving markets. As a result, product and technical experts can be used for greater value-added activities. Furthermore, if the sales system is effective, complex, customised price quotations can be prepared for customers, possibly without sales people intervening. This has various advantages: it provides an immediate response to customers’ enquiries, reduces the lead time for sales, ensures accurate hand-over of order details, and saves time and effort in taking and transmitting orders. In effect, everything is done better, more quickly and more costeffectively. It also provides accuracy, another hidden benefit of the internet. This not only increases speed but also leads to great reductions in waste. Furthermore, depending on the industry and product, it can lead to reductions in inventory costs as products are made to order.