Global independent investment banking advisory firm Evercore ISI interviews fintech expert Aaron Silva on all things banking. Listen now to Aaron's predictions for the banking industry: bit.ly/SilvaOnEvercore
As we enter 2018, it's more crucial than ever for local banks to focus on their bottom lines, and for credit unions to improve member value. The number of banks with less than $100 million in assets has declined by more than two-thirds since 1995 — due in large part to big banks usurping market share.
It's the beginning of a new year, and that equates to an opportunity for a fresh start. For community banks and credit unions, this means the chance to review what obstacles have held them back from competing with the big banks on a level playing field — and to develop strategies to overcome those hurdles in 2018.
Since 1994, the loan market share held by big banks (financial institutions with assets greater than $10B) has relentlessly increased from 50 percent to approximately 80 percent. This has left community banks and credit unions with less than a quarter of the overall market — an already meager slice of the pie that is steadily shrinking.
So what happened?
Cost Inefficiency – An Industry Plague
By Aaron M. Silva, President Paladin fs, LLC
A 2nd annual report from the Business Performance and Innovation Network (BPI Network, www.bpinetwork.org) focuses again on the impact that core and IT services contracts have on community financial institutions nationwide. The 2013 report titled “Less Burn, More Return” was well received by the market and generally panned by major core service providers. The newly released 2014 report, titled “The Core Way Forward,” will have a positive reception by bankers as it is a tome of informational data and analysis, never before assembled in one resource. The report includes:
- The results of a comprehensive ‘state of the industry’ survey sent to 15,000 bank leaders.
- A line-by-line analysis of 54 actual contract negotiations between bankers and vendors ranging between $150 Million to $5 Billion in assets.
- Specific M&A section that details real-life examples of contracts’ impact on mergers.
- Insights and advice from industry experts including legal, compliance and investment bankers.
- Peer reviews and commentary on their experience negotiating contracts with core services vendors.
- An assessment of the impact of vendor consolidation on a bank leaders ability to negotiate a fair market value contract.
CLICK IMAGE TO READ THE NEWLY RELEASED CORE WAY FORWARD REPORT:
Key Takeaways from the Core Way Forward Report.
Impact on Mergers is Real. The number of mergers has grown since the Less Burn, More Return report was issued in 2013 and of those that have taken place, an ample number were tracked in BPI’s, 2014 The Core Way Forward report, which allowed for actual and quantified measurements of impact. I believe, as the valuation of an institution moves away from tangible book value to profitability, we will see the entry and exit clauses of these agreements reaping havoc on M&A deals going forward unless bankers are willing to attack these agreements in advance, rather than waiting until they already have an LOI or purchase agreement working with another bank. The Core Way Forward report points out that leverage with vendors is wasted if you ask for help after word on the merger is out.
Vendor Consolidation: Vendor consolidation has turned the tables of negotiation even further against the industry. With so few vendors (the report details a total of 5, 3 of which control 85% of the market) there is little competition. Demand for core and IT services [according to BPI’s survey] will increase for the foreseeable future. An oligopoly has formed and there is real concern that banks will have a difficult time getting a fair shake.
Hard Market Data Trumps: No longer can institutions go into a renewal situation with professional negotiators unless they are armed with information that can be backed up and substantiated. Very little efficiency in pricing exists, according to BPI Network, and this may be a result of vendors delivering a “get what you can” approach to pricing. Companies like Paladin, which is equipped with the Paladin Blue Book™ database, are keeping vendors fair and allowing for an introduction of favorable terms and conditions into contracts. Accomplishing these conditions is not without great amount of time, effort, finesse and experience.
Over the coming months Paladin will break apart BPI’s The Core Way Forward report into small, manageable and easy-to-understand chapters. These sectionals provide education and analysis of the material, as well as additional information and insights not found in the report.
You may also find this article in the not yet published quarterly magazine from Community Banker's of Washington's. Click here to view Summer 2014s publication.
I think it may be true. Clint Eastwood has been secretly behind the physical design and layout of most banking and credit union events for years. This theory dawned on me this spring as I attended and spoke at many national and regional events all over the country. Until starting Paladin fs in 2008, I spent most of my career as your typical vendor selling IT services to bankers. Today, I spend all of my time representing bankers in difficult Core IT negotiations with their vendors (Fiserv, FIS, JHA, S1, Q2, etc). Back in the day, attending and exhibiting at events became almost obligatory if you wanted to "get noticed" or hoped for someone to buy your wares. Being stuck behind a booth in the exhibit hall next to three of your competitors with flashier pens, higher-priced golf putters is a difficult and thankless pursuit. The days are long laced with many hours of boredom while your targets attend breakout sessions or play golf. Then, two to three times a day, a stampede of bankers rushes past you to acquire coffee, food or alcohol strategically located at the other end of the hall - that reminded me of the famous 1977 Clint Eastwood movie, The Gauntlet.
As a middle-aged man I ask this same question of myself all the time. Luckily, my wife is nice enough to not bring it up so often as she might otherwise like to - which is good since this is what makes her a great wife...she lies to me (about me). And of course I know what to say when she asks that question about how she looks in those new pants she just bought too.
I was maybe only 5 or 6 years old when my father took me to the Cow Palace in San Mateo, California to watch Ali and George Foreman fight in what is known as The Rumble in The Jungle on closed circuit television broadcast on giant movie screens. I don't remember much of the fight except that I recall how surly the crowd was and all the smoking. My Dad was always, and still is, a big boxing fan and it was a favorite pastime listening to Howard Cosell describe Ali fights. I watched that fight many times in years since and grew ever more appreciative of just how masterful Ali really was in using the "Rope-a-Dope" to fool his opponents and snatch victory. In my book he is the greatest fighter of all time and like so many sports - there are lessons which can be carried into life and certainly into business.
A recent poll of 10,000+ CEOs and CFOs uncovered a very interesting result: The majority agreed they would participate in M&A in some way however, very few sheepishly admitted (3%) to wanting to sell. But I think the die has been cast.
For an institution implementing a future merger strategy, what would another $250,000+ per year in additional profit mean (without having to make a single loan)?