The pent up demand for an alternative, modern, competitive core to the out-dated legacy stack saddling the community financial industry today led by Fiserv, FIS, Jack Henry and their cousins at Finastra and CSI is incredible. Bankers are not only thirsty for a platform that is easy to use and easy to train their staff, they need platforms that are flexible and can be integrated easily with any number of other systems. This isn't much to ask for in the 21st century, but unfortunately the options are slim pickings and will remain that way for some time. I predict that it will be another 3-5 years (circa 2024 - 2025) before any of the new fintech cores are mature enough and exhibit the appropriate risk profile palatable for bankers to jump in. What I mean is that a rank-and-file banker is going to need to see and understand many reference-able accounts that have operated for many years successfully before they will risk their franchise. Community bank CEOs (many older and nearing retirement) are going to be risk averse even though they know a technology transformation is the key to long-term success. Regardless of their tenure, very few bankers are interested in being the 5th, 15th or 25th bank on a new, unproven core platform.
Three sales reps from Fiserv, FIS and Jack Henry walk into a bar one night and belly up to the counter. The bartender says, "What would you three gentlemen like?" In unison they all answered, "A banker with less than 12 months on his contract willing to negotiate alone!"
Earlier this year FIS announced the groundbreaking innovation of a "Simple Contract" (now renamed FIS ClearEdge) that delivers a, "...simplified pricing and contracting model for qualifying U.S. community banks and credit unions that [enables them] to bring innovative new products and services to market more quickly, control expenses, and maximize the efficiency and resiliency of their operations – better positioning them for success as the economy recovers from the current health crisis."
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.
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.
In October we highlighted a clear and present danger resulting from the further consolidation of the Core IT vendors. Fewer vendors exist than ever before and the impact to your service level, legal rights and business options are even slimmer if the institution does not make restructuring your relationship and contract a strategic board-level matter. We teamed up with attorney Gary Findley to put on a national web seminar on this very topic that was widely attended by CEOs and CFOs of all sized institutions. With tremendous feedback we have scheduled an encore presentation on December 10th and 11th if you are interested in joining and hearing some proprietary legal and business strategies on how to manage and mitigate this major risks area please attend.
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.