Toxic assets

What was once a forgiving, relaxed and sometimes even generous affair has now turned into a cold, mistrusting and fraught one – that is how many now think of the relationship with their bank (or banks).

Some lament the end of the cosy fireside chat approach over asking for money, but the fact remains that it is gone: replaced with a more hard-headed approach focused on undertaking a thorough business review, putting your company’s performance and that of its market under the microscope.

In recent years, the relationship between company and bank – comparable to that of a master and servant – has performed a virtual 180-degree turn. Gone are the good old days when a finance director could phone the bank for a bit of leeway on the overdraft: now you are more likely to be told that the level of headroom you have is already much too generous and will soon be reduced to ensure maximum use of the bank’s now-rationed capital.

The post-crisis process of change and realignment in our commercial banking system took the blinkers right off. Banks finally showed their true colours and much unacceptable behaviour ensued – from written and dated offers withdrawn without any notice and personal undertakings not met, to long-term relationships being swiftly devalued for the short-term gain of a few spot points. It was a hard-earned lesson, but at least we know where we stand now.

Asked about banking relationships in a past article in this magazine, I said that relationship banking was essentially a strategy used by banks to enhance their profitability, by cross-selling financial products and services to strengthen their relationships with customers and thus increase customer loyalty. It used to be an ideal; it is now a warning. We must all take care to ensure that loyalty is truly earned through the delivery of value by a bank, rather than by us being so inherently tied to a supplier that it seems more trouble than it is worth to attempt to disentangle yourself. I could even compare our commercial banks with children: demanding attention, getting irate if they are not fed (fed with information, in the bank’s case), becoming jealous at the mere suggestion of you seeking a relationship with another bank, and causing general mess and confusion if they do not feel properly looked after by the client. Maddening.

So what to do? In my mind, you need to do four things: use buying commodities as a way to transact and manage your cash; always have viable alternatives to bank sourcing, so you’re not in an emergency situation if it should dry up; remember, quite simply, that banks are in it to make money from you; and, finally, understand and adhere to the rules of engagement, whether they are related to the provision of timely information, being open and honest, or acting in a professional manner. Simple, but very often forgotten.

Undoubtedly, banking relationships will continue to help open doors but most banks have now implemented such exacting levels of internal governance – from Chinese walls between those negotiating business and those writing it, to credit committees positioned high in the ivory banking towers – that we are all going to have to put in a lot more to get out, at best, the same product.

And smaller businesses will be facing an even greater challenge as they struggle to develop even a basic understanding of the relationship among the merry-go-round of account managers tasked with handling an ever-growing portfolio of clients.

I remain strong in my belief that real value can still be gained through good relationships with the banks. However, I will always remember the dark days of 2008 and 2009 when we witnessed the beast unmasked. And long live my elephantine memory.