Sell your bank and face the wrath of the Core IT oligarch’s power when they unfairly levy termination fees that typically range from 50% to 100% of remaining contract value.
If you’re fortunate enough to be the acquiring institution in the same M&A deal, don’t get too comfortable watching their shareholders take the low blow as you handicap the purchase price to adjust for their misfortune. The Core IT supplier “partner” will inflict that wire-hanger whipping as soon as the definitive deal is inked.
Question: If your best commercial customer came into the bank one day and announced he had convinced all of their employees to change banks to your institution – how would you thank that customer? Probably with more than a handshake. You’d find ways to politely compensate your client, perhaps with a better interest rate on a loan, or introduce a new product for nada. But that’s not what your Core IT suppliers do when your bank acquires another institution processed by their competitor. No, no. Shower your IT partner with millions in new monthly revenue, tens of thousands of new accounts, incremental EFT revenue, and online banking users, and you can expect them to punish you for doing your best to be Mommy’s Dearest.
Here’s a practical example: Assume your Fiserv-processed bank with three years remaining buys a bank processed by competitor Jack Henry with three years remaining on their deal as well (I’m not picking on Fiserv or Jack Henry for any reason, but fact is, they nearly all transact the same way). The acquired bank will pay Jack Henry 100% of the remaining contract value – that’s three years of revenue awarded to Jack for doing jack. Your bank will then pick up the tab for all of the de-conversion fees necessary to get the Jack Henry data ready to be transferred to your Fiserv systems.
Then, your business partner Fiserv steps in and charges you conversion fees to accept the de-converted Jack data into your system. On top of conversion charges, they’ll hit you for professional services “at the prevailing rate” necessary for custom programming, and integration, and finally, they’ll ding you for the incremental transaction volume at your pre-merger asset and volume rates, pretending not to notice the fact that you should be paying less for giving them more (it’s called a volume discount, folks).
Why would your partner penalize your franchise for leveraging millions in shareholder equity and cash to kill their Jack Henry competitor in buying the other bank while simultaneously granting them additional market share? Why would Fiserv not recognize the fact they didn’t spend a single penny or years performing sales-guy judo to acquire that other bank on their own – you did it for them – and they didn’t need to so much as buy that bank’s management team a steak dinner for the trophy? The answer is simple…because they can. The vendors tacitly collude to get you coming and going no matter if they survive the merger or not. What a scam.
When observed from this position, it is patently unfair and in many respects, unethical. This isn’t the way community banks do business with their customers. But for our industry, this is the method of how many IT vendors “help” banks through a merger. This arcane thinking is institutionalized in hardened agreements going back more than 30 years. Thousands upon thousands of banks have signed and re-signed these deals so many times with these embedded defective business terms it’s now nearly impossible to get them rejected or modified to be more balanced. Core IT suppliers have built entire business units around the massive profits reaped in the form of termination, de-conversion and conversion fees associated with major corporate events (mergers).
It’s Time to Turn the Tables
Just for fun, ask your Core IT supplier representative or management why they treat their clients this way when they are the surviving vendor in a merger? They’ll probably respond with a rote corporate tow-the-line programming to the effect of there are “…real hard costs associated with converting one system to the other and they have to recover these costs yada, yada, yada.” Then hit them with the punchline. Why, then, are you willing to pay hundreds of thousands and in some instances millions to “take away” a bank from one of your competitors in an open market competitive bid? How can you say you must pass these costs on to my institution in a merger when we’re using our capital to buy a bank, but if you were to steal the same bank away before our merger, you would have absorbed every dollar in conversion costs and offset two to three years of their termination expense as incentive for them to leave their contract early?
Hopefully you’re asking these questions in person and over a very expensive lunch so you can see the expression on their faces. Pay attention closely to which party pays for the bill at the end of this meeting and please let me know.