I recently read an article sent to me by my Finance Mentor titled “Toontown Bank Ignores Policies and Procedures – And Pays for It” fictitiously written by Paul Phillips in the February, 2013 edition of The RMA Journal. The piece reflects key principles that guide the financial services industry – specifically the following of credit policies and procedures to mitigate risk, the reconciliation of inconsistencies in financial information and the need for an independent third-party for oversight. The aforementioned points are just table stakes of any relationship between borrower and lender – the fundamentals that must be satisfied before a relationship can progress. While satisfaction of these and other lending principles may get a client through the door, sole reliance on them should never guarantee a seat at the table. The key takeaway from this article is the need to validate the character of anyone you do business with and move beyond the ‘face-value’ of information. This extends beyond the financial services sector and is applicable to any industry that values integrity, character and moral objectivity. As was the case in the ‘Toontown’ article, the lender was blinded by the prospects of a lucrative new client and bypassed critical credit procedures to expedite the lending process. The disregard of established credit policies coupled with a lack of due diligence in regards to background research and verification of the customer led to significant financial losses for the institution. The ambitious lender chose to conduct business with the client on terms that deviated from the institution’s normal practices in an effort to be accommodating and develop the relationship further.
The need to ‘know your customers’ is critical to relationship-management in financial services and other sectors, however I will add a caveat to this statement – do not let the ‘good’ aspects over-shadow the ‘bad’ or concerning characteristics. This is applicable across a wide spectrum of industries and extends to other areas of society – one need only open the newspaper for examples of how proper oversight and due diligence on one’s character and background could have prevented an issue or grievance from occurring. Pundits would argue that ‘hindsight is 20/20’ in nearly every instance, however I would counter this cliche with another and stress that ‘history repeats itself.’ Risk management often focuses solely on financial indicators and past performance and less on intuition and common sense – again a dependence on the evaluation of a customer solely on face-value is a very slippery slope. Red flags must always be approached with caution and given the same respect as the positive characteristics of potential customers or business partners.
The rush to ‘get a deal done’ should never compromise the process – policies are in place for a reason, however even these do not provide the blueprint to evaluating one’s character – this comes from experience, intuition and consensus amongst respected peers. While the ‘Toontown’ piece is a fictitious account, it provides a sound example of how financial institutions can get ‘burned’ by sloppy practices as real-life instances occur on a daily basis. In closing, when finalizing a deal, new hire, partnership or other significant event, I encourage all decision-makers to take a step back, get a second opinion, go for a beer (or coffee), make a phone call, or do whatever is deemed neccessary to gain greater insight into the character of a prospective partner. Doing so will inevitably save considerable resources (and headaches) in future should the relationship go astray.