Paladin Blog

Bankers News published an article featuring Paladin President, Aaron Silva, discussing frustrations by banks with their core providers.

"Gather a group of community bankers and you'll quickly find their common ground: A bad experience with a core processor. Their complaints might focus on lack of responsiveness, steep conversion or deconversion fees, or brutal terms to terminate a contract early; whatever the problem, the result is frustration."

Our President, Aaron Silva, weighed in on the topic.

Expert Insights from Aaron Silva, President & CEO of Paladin fs

Moderated by Timothy Chiodo, Payments, Processors, & FinTech Analyst at Credit Suisse

The following is a republication of a report by Credit Suisse.

Insights & Discussion with Core Banking Expert

We [Credit Suisse] hosted an expert call with the President & CEO of Paladin fs, a national research & consultancy firm that specializes in bank & credit union contracting for core banking & ancillary technology services via the likes of FIS, Fiserv, Jack Henry, etc. (with this expense often the second largest cost for many banks behind payroll). Our expert started the firm in 2007, and began negotiating fees on behalf of banking customers in 2009, with an emphasis on financial institutions under $25b in assets. Paladin fs is approaching ~200 transactions and has assessed hundreds of additional US financial institutions. Our expert also founded the Golden Contract Coalition with an aim toward organizing hundreds of institutions & ~$1b in core IT contract revenue.

Buried deep in the fine print of your Core IT agreement is something called an “Exclusivity Clause”.  Most bankers don’t know it exists.  Most again don’t know what it means until they bring a competitive solution from a newer fintech to the relationship.  Bankers are surprised to find out that a vendor armed with the Exclusivity Clause (EC) has near total control over your destiny – at least for the next 5, 7 or 10 years.  Unless, of course. you are prepared to cough up 50%, 80% or even 100% of the remaining contract value to exit the service for greener pastures. This is completely unreasonable but it’s important to understand how we got here before we chart a course of freedom.

After 12 years of running a company that is 100% focused on negotiating on behalf of community banks against the Big Three Core IT oligopoly of Fiserv, FIS and Jack Henry, it’s not getting easier. In fact, it’s getting more difficult and more complex each year as these very intelligent suppliers maneuver, juke and jive to maintain market dominance over community banks whom, when doing it alone in a contract renewal negotiation, have little chance of getting a fair deal. The deck remains stacked against the industry even as many organizations finally begin to cry foul. Following the launch of the Golden Contract Coalition in 2016, ABA launched the “Core Platform Committee” in late 2018 turning up the heat publicly against core suppliers and calling out their unfair trade practices.

It continues to escape any common or practical business sense as to why a community bank would agree to voluntarily be locked into a 10-year technology contract.  More so, the fact that a 10-year contract even exists (is offered at all) questions the ethical standards of technology suppliers and their commitment to selling services that fairly meet the needs of community banks in exchange for a reasonable profit.  10-year technology contracts are neither reasonable nor assist Banks in meeting any of their business needs. In fact, these contracts are predatory, outrageous and exorbitantly profitable to vendors and not their client “partners”. While all legacy Core IT suppliers would love to handcuff their clients to 10, 15 and 25-year contracts (yes, we’ve seen 25-year deals) one supplier - CSI of Paducah, Kentucky (www.csiweb.com) - appears to lead the charge on lacing their customer base within these contract shackles.

If you want a more innovative bank, it starts, and largely stops, with what your approval process looks like for new technology. Take a human and force them to grow up in New York City. Around age 20, you force them to go to conferences on living in the outdoors, hunting, fishing, and survival. You also hire consultants to come in and teach outdoor skills. Take your well-outdoor trained city dweller and then put them into the middle of the Colorado Rockies, chances are they become bear-food in a week. That is basically how banks are handling innovation.

Back in the 1980s, there were more banks, smaller banks, and little technology. We were still driving checks around, there was no online banking, and networked ATMs was the latest in bank technology. At the time, the rule of thumb for bankers was that each bank employee produced about $20,000 of operating profit per year. Since each bank had about 100 employees, operating profit was about $2mm per community bank. In this article, we look at how this equation has changed and what it means for the future.

Paladin's CEO, Aaron Silva, recently had the pleasure of appearing on the This Month In Banking podcast by The Kafafian Group. Aaron and the hosts - Sharon J. Lorman, Jeffrey P. Marsico, and Gregg J. Wagner - discussed what the future of banking looks like, industry issues with the Big Three core providers, and the relationship between the two.

In late June, Forbes published an article on FIS’ recent attempt to unilaterally implement a new security surcharge on a “select few” of their clients without their permission (FIS has not stated publicly how many were targeted but GCC estimates there were 250-300 guinea pigs). These fees, costing several tens of thousands of dollars per client, were imposed because FIS stated it had recently improved its security infrastructure to address new threats and that they wanted to “partner” with their clients in sharing this expense. No explanation was provided as to exactly what these threats were or why they decided to deploy this tariff [now] and without the consent of their clients, even though each FIS client had already agreed to a security SLA guarantee in their existing agreements.

According to FIS, this security surcharge was justified, and in exchange they would extend indemnification to include the Banks’ client behavior subject to exclusions and Limits of Liability (LOL) already stated within their agreement.  LOL is traditionally woefully inadequate in most standard FIS agreements as it is and so this "benefit" really has no tangible value to a banking franchise. FIS stated that these kinds of security measures are becoming increasingly necessary, as cyber-attacks are growing in popularity and evolving in complexity.

The largest problem with bank innovation is that we see or hear about a sexy piece of technology at a conference or at another bank and then acquire it. The new piece of technology ends up solving a known problem but in the process actually creates more problems, and risk, than it solves. It’s called the “Shiny Object Syndrome” (SOS), and it could be sowing the seeds of destruction for many banks. In this article, we look at the seven strategic questions you need to answer before acquiring any piece of technology.