Motivators and demotivators of online financial products

Financial products or financial instruments act as investments and securities developed to facilitate sellers and buyers with financial gains (Blankespoor, et al., 2013). Financial products are provided by financial institutions like;

  • credit card agencies
  • banks
  • insurance firms
  • government bodies and
  • stock brokers

There are different types of financial products available in the market (Bessembinder, 2018);

  • shares
  • bonds
  • mutual funds
  • Treasury bills
  • certificates of deposits
  • credit cards
  • credit default swaps (CDS)
  • collateralized debt obligations (CDO)

Motivators to buy online financial services

Almost all the financial products are associated with high investment returns on the amount invested by the investors. Issuers of these instruments allow their online consumers to invest in a wide range of sub-products in order to mitigate the risks (Denisova, et al., 2017). Many of the financial instruments which remain provided by the financial institutions allow online consumers to have easy payment options to buy these instruments. They even allow online consumers to pay in terms which is an added benefit. Along with this, online consumers allowed to even sell their financial products at any time to retrieve back their money.

A transaction which involves financial products is done within a few minutes of applying, thus providing online consumers with the convenience they want while purchasing these products (Blankespoor, et al., 2013). The fact that financial products facilitate online buyers with a wide range of funds to select from also come as a motivating factor.

For example, an online consumer can either invest in a balanced mutual fund or equity fund depending on their expectation of potential return (Cici & Palacios, 2015).

Use of online sources are easier and customers do not have to physically visit the financial institution to purchase a product. Online applications even allow the customers to forecast the amount they have to pay on the basis of their budget.

In another instance, a person applying for a credit card can easily retrieve their credit score and choose the type of service needed (Blankespoor, et al., 2013).

Similarly, a customer choosing an insurance policy easily retrieve information on different types of policies available and other related information. Customers use the service provider’s online platform to calculate their returns and expenditures to ease the choice of product.

Threats of online financial services

Many of the financial products offer huge returns to the investment made by online buyers but they remain associated with a higher risk factor.

For example, CDO and CDS are the perfect examples of financial products with higher risk factors. They both were the main culprits of the global recession that occurred during 2008 (Forbes, 2011).

Investments in financial products such as shares or mutual funds remain subject to market risks as they constantly change “n” number of times within a single day (Gârleanu & Pedersen, 2013). In addition to fees and sales charges, there is another factor which decreases the profit margin such as brokerages and commissions.

For instance, every single time the online buyers sell or buy shares, they need to pay brokerage commission that reduces the profit margin.

Online buyers need to stay cautious of the fake low prices of the financial products provided by the scammers and once they fall into their trap, they are going to lose their money (Cici & Palacios, 2015). Moreover, not every customer are adept with the use of computers and online sources to apply for financial products. The cases of fake websites and identity thefts have also been reported while using online financial platforms. The use of online sources to purchase products is sometimes complicated as the customer have to upload various documents at one go, and many customers do not have all the required documents. In addition, using online sources allows telemarketers to retrieve contact information which allows them to contact customers for sales.

Which financial product has higher threats of purchasing online?

Financial products like CDO, CDS and certain bonds should not be purchased via online modes. CDO and CDS are the two financial products which led to the financial crisis in 2008 (Forbes, 2011). Although after the catastrophic events of the global recession, governments have restructured their policies and protocols related to CDO and CDS they still present high-risk factors as compared to other financial products (Rodríguez-Moreno & Peña, 2013).

With CDO, the online consumers still find it hard to evaluate cash assets like distressed loans within a market and these buyers have to rely on decisions of the managers for pricing the assets. On the other hand, CDS being a highly complexed financial product offer many problems such as termination event and the inexistence of forwarding contract in CDS. Therefore, consumers should refrain from purchasing these two financial products online. Bonds such as guaranteed stock market bonds or guaranteed equity bonds should not be purchased online due to the procedure through which returns are normally calculated often presents a complex situation which cannot elaborate how the investment might work out.

Unrated financial instruments provided by the banks are cheap and the online consumers need to conduct their own investigation prior investing otherwise they are likely to fail miserably. The online consumers need to stay cautious while investing in mutual funds where expense ratios in excess because they would remain subject to high-cost end. Products that charge extra amount for using an online source must not be bought. The online consumers also need to take extra care of sales charges and fees as higher fees would normally mitigate the investment returns.

References

  • Bessembinder, H., 2018. Do stocks outperform treasury bills?. Journal of financial economics, 129(3), pp. 440-457, DOI: 10.1016/j.jfineco.2018.06.004.
  • Blankespoor, E., Linsmeier, T., Petroni, K. & Shakespeare, C., 2013. Fair value accounting for financial instruments: Does it improve the association between bank leverage and credit risk?. The Accounting Review, 88(4), pp. 1143-1177, DOI: 10.2308/accr-50419. 2013.
  • Cici, G. & Palacios, L., 2015. On the use of options by mutual funds: Do they know what they are doing?. Journal of Banking & Finance, 50(1), pp. 157-168, DOI: 10.2139/ssrn.1571132.
  • Denisova, P., Rukina, N., Samoylova, N. & Takmazyan, S., 2017. Financial Instruments of the Socially Responsible Economy. European Research Studies Journal, 20(1), pp. 284-293.
  • Forbes, 2011. How the Internet Powered the Financial Crisis. [Online] Available at:https://www.forbes.com/sites/billdavidow/2011/03/23/how-the-internet-powered-the-financial-crisis/#785b4f0276ab [Accessed 31 May 2019].
  • Gârleanu, N. & Pedersen, L., 2013. Dynamic trading with predictable returns and transaction costs. The Journal of Finance, 68(6), pp. 2309-2340, doi: 10.3386/w15205.

Jaideep Bhattacharjee

Research consultant at Project Guru
Jaideep is an engineer in marine engineering and was a part of the Mediterranean Shipping Company for a year.With expertise in the technical field, he is good with numbers and statistics and mostly uses SPSS.His expertise are in the field of marketing, human resources management, change management, strategic management and Finance. His strengths also lie in framing strong literature review and interpretation. Being an avid follower of Manchester United, he also takes interest in sports especially football, cricket and chess.

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