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Paladin Blog

Finally an Industry Study Actually Worth Reading

Posted by Aaron Silva on May 22, 2013 1:43:00 PM

The Business Performance & Innovation (BPI) Network created quite a brouhaha releasing a new and unique study in May called the Less Burn, More Return (LBMR) that looks at the issues and priorities facing today’s community banks during a period of prolonged low interest margins, increased regulatory pressure and sluggish economic growth.  While the study touches many different aspects of current industry business problems, it looks closely at one key area of non-interest expense (NIE) – spending on core bank processing and related IT outsourcing services.  The study uncovers a major opportunity for improved efficiency ratios, profitability and franchise value.  One California CEO quoted in the study completed a merger just a few months after restructuring a new 7 years deal with their core vendor that in turn added more than 7% to the merger deal for his shareholders.  The data used to validate the BPI Network study was collected from surveys conducted with over 10,000 senior executives from banks and credit unions with less than $5 Billion in assets.  Interviews and testimony from CEOs, CFOs, investors, and advisors are peppered throughout the 24-page report further standing up BPI’s claims and data sources.  The report can be downloaded for free at bpinetwork.org – just look for the Less Burn, More Return program link.

In my recollection LBMR is the only in-depth, independent study of these issues facing CEOs and CFOs of banks in recent memory.  In fact, it may be the only one of its kind to dare to dive into an area of the P&L that most bank leaders have very little insight or expertise dealing with effectively even though it may be the 2nd or 3rd largest line item after payroll.  While these multi-million dollar contracts affect almost every single institution in the U.S., there is almost no way for bankers to truly understand what they should be paying.  The market has lacked any measurable pricing efficiency in this area as vendors have grown unchecked dominating the landscape for nearly 20 years.  With little resistance Fiserv, Fidelity, Jack Henry and others have force-fed product choices while dictating the market pricing discussion; hobbling free-market forces and competition through non-stop mergers and reselling services to bankers that have little bandwidth to really study the cost reduction opportunity or contract complexity in a meaningful way.  Let’s face the facts, these service providers make community banking possible (and they know it) as their products and services are critical to permitting industry survival against larger institutions with massive IT budgets.  I’m the last guy to begrudge free market capitalism and I applaud their success over many years as these companies and their employees’ work very hard to provide an important host of services.   But it is time for a market reckoning.

The BPI Network report is interesting in that it presents a lot of very important data in the way we have always wanted to see and understand it.  They answer questions such as: Why institutions overpay?  Which category of services presents the biggest savings?  Why vendors don’t want you to know you can (and should) restructure these agreements early?  They blow away common entrenched myths and explain why restructuring core & IT agreements before any M&A activity (buy or sell) may actually be a great idea!  

In future blog posts about the Less Burn, More Return report we will discuss the break down of the numbers, information about timing of contract negotiations and a deep dive into how these contracts can greatly impact Mergers & Acquisition strategies (positively and negatively).  Subscribe to this page to participate in the ongoing conversation and click here to download the full report.

Less Burn More Return.  Download Report.

Finally, someone dares to write a report and study that is actually worth reading.  In this instance the value of downloading the report, studying it and reaching out for help may be worth millions.


Topics: Contract Negotiations, Paladin Research, community banks, Credit Unions, Editorial