Paladin Blog

 

Your bank is constantly looking for ways to improve its fintech as competition from the big banks steadily increases. Routinely you turn to your current core and IT suppliers for ancillary add-ons like mobile deposit, fraud detection, a CRM or a new EFT card services feature. There are a million options your supplier can up-sell that will improve the current core solution. There probably isn’t an institution in the United States that doesn’t have a quote on someone’s desk waiting for approval.

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. 

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.

 

At Paladin, we are to committed to charitable giving and investing in people and organizations who work hard for those who have greater needs. And because everyone can use a helping hand, support or guidance at one point or another, we launched our Paladin Gives Back: Power of One Reference program, and we’re proud to announce we’re seeing compelling results.

One of the charities we’ve worked closely with for years, and have remained loyal to in this endeavor is Opportunity Junction, an organization that fights poverty by helping low-income Americans garner the skills and confidence necessary to both attain and sustain jobs that will help support themselves and their families. We would like to share with you the below letter our team recently received from Alissa Friedman, Opportunity Junction’s Executive Director, as a clear example demonstrating the payoff our charitable dollars have generated within the community.

For community financial institutions, it’s customary that every 5-7 years the decision must be made to either stay and renegotiate with their Core and IT provider or embark on a new contract with a competing vendor. When this time comes, it’s important that all decision makers have the right information, which can create more work for the banking staff with minimal incentive.

After many years of fighting on behalf of community FIs and countless conversations with senior bank executives, the truth is that senior management and their staff are not always receiving objective and unbiased information when it comes to identifying the best options for their franchise because there is so much extra work involved (with a future core conversion) —which in turn creates an incentive to stay put with their original vendor.  

In a recent conversation with the COO of a past client, an $800 million asset bank in New England, I learned that he believes his staff, and just about the staff of any community bank, has a natural incentive to want to do nothing when it comes to the question of staying or going. 

 

Chapter 1 - The M&A Analysis (Special Edition)

Two annual studies by the BPI Network (June 2013 and July 2014) include specific details from several recent merger deals and proves that Core IT contracts are increasingly, and now more than ever, ambushing unwitting bank leaders and negatively impacting mergers. In some instances Core IT contracts are outright killing deals before they can even start.  Bank leaders are usually the cause due to a lackadaisical approach toward these business concerns - mainly because few of them understand this area of Non-Interest Expense nor have they previously received training on how to negotiate these areas of an agreement. 

Vendor oligopoly threatening industry recovery and M&A transactions nationwide. 

 

After two years of continual research the BPI Network has confirmed our worst fears about the impact on community banks and credit unions resulting from the oligopoly now enjoyed by just 5 major Core IT providers nationally.  Bank and Credit Union leaders must now deal with this clear and present danger to their long-term strategic planning and cost management goals.  BPI’s survey and report confirms that while economic optimism is rising, unfavorable legal terms and price gouging hidden in vendor-crafted master agreements and cost structures are raising major headaches during mergers and contract renewal negotiations. 

The reports confirm:

• Price inefficiency is rampant. Similar sized institutions pay wildly different amounts for the same exact services. Institutions in the South and West pay more than any other region.
• Bankers have no way of understanding if they are paying FMV or not and vendors have taken advantage of this for many years.
• The odds of achieving Fair Market Value for any service can only improve if intelligently restructuring contracts that with the help of hard market data and outside professional negotiators.  On average BPI says institutions they tracked are reducing 5 year run rates on average by $1.2 Million if done intelligently.
• Hidden terms lay waiting in contracts ready to ambush mergers and weaken shareholder value just when you need it the most.
• In the absence of competition - and an effective oligopoly - vendors hold all the cards and are making negotiations very time consuming and expensive for small institutions.

By Aaron Silva

Contrary to popular belief, you cannot just pick up your Core and IT service contracts a few months before expiration and hope to get it restructured in a way that isfavorable to the franchise. Frankly, this may be the worst timing with respect to trying to get your contract restructured. The act of negotiating a renewal agreement can begin the minute after you sign the original agreement and then continue for years.  It takes a team that is in control, well managed, detailed and articulate.  And it takes strong management to make sure it gets done and at the right time.

 

Be honest.  Are you one of those banks that manages your contracts with an Excel spreadsheet? If you said yes then congratulations, you are in the majority.  While Excel is a great database for this type of "stuff", it doesn’t work unless you actually open that particular worksheet or workbook in time to review your renewal dates.  This means you have to set a reminder in your Outlook calendar or other system.  Sometimes you might delegate this internally. Either way, it’s inefficient and relies on a human and is now subject to human error.  Outsourced Core and IT services contracts with the likes of Fiserv, Fidelity, Jack Henry, CSI, D+H, etc. are usually the second largest expense in your institution, behind payroll.  Weigh down this reality with the fact that they are one of your most critical vendors and this is no small matter or fleeting concern.  Make a mistake and it will be another 5 to 7 years before you get another shot at your core vendor contracts.  An Excel spreadsheet is just not enough and wisely restructuring is key.

Contract Management Systems