Think fast: When is the last time you paid more for a piece of technology than you would have five, even 10, years ago? Maybe a laptop? A camera? An MP3 player?
“You can’t think of one because there isn’t one,” says Aaron Silva. “Unless you’re a banker.”
Silva, president and CEO of Paladin FS, says that community banks and credit unions are often overpaying for IT and core processing services. That’s also the conclusion of “Less Burn, More Return,” a report recently produced by BPI Network, with input from Paladin, a small consulting company that’s found its niche in negotiating these contracts for banks and credit unions.
According to the report, community banks and credit unions pay as much as 24 percent over fair market value for core processing and IT services, which are often a financial institution’s second-highest non-interest expense, after personnel costs. In an environment of increasing regulatory burden and compressed margins, the report’s authors argue, banks and credit unions would do well to look at renegotiating those contracts, perhaps with a third-party negotiating team.
But what constitutes fair market value anyway?
“As we look at this issue, it appears that there’s very little consistency in pricing for core services and IT services for community banks,” says Dave Murray, the director of thought leadership for BPI Network.
The data contained in “Less Burn” was collected from Paladin’s Blue Book. Much of the methodology is proprietary, but Silva says it’s gathered from survey data and information collected from more than 1,100 financial institutions nationwide.
Murray said one contributing factor is consolidation within the vendor community.
“There’s just a handful of major vendors today that offer these core services to community banks, so the competition that could drive a good RFP process has really dwindled,” he said.
Size Matters
Additionally, the report’s authors found that mid-sized banks and credit unions may have the most to gain from renegotiating for these services. According to the report, community banks and credit unions with assets between $500 million and $1 billion achieved an average savings of 29 percent, or about $1 million over the life of a five-year contract, when they renegotiated for core processing services. Smaller institutions saved 22 percent and larger institutions saved a little less than 25 percent.
That’s likely because an institution of that size is likely to be a bit older, it’s probably been through multiple contract extensions, and it hasn’t yet reached the size where it’s likely to have professional contract negotiators on staff, Silva said.
Timing Is Everything
Another takeaway from the report is timing. According to Silva, the ideal time to begin negotiating a new contract is about 18 to 30 months away from the current agreement’s expiration date.
“When a vendor is approached by a bank to renegotiate the contract early, the goal is to drag your feet as long as you can. The longer you drag your feet, the less leverage the bank has,” Silva, a former vendor himself, said.
Of course, “Less Burn” is not without its skeptics, most of whom counter that the core-processing and IT business has become increasingly complex over the past decade.
“Technology has adapted to many, many changes in banking over the past 10 years. Increased regulation, channel proliferation and security threats have dramatically increased the complexity of our business. Regulatory demands such as GLBA, introductions of mobile banking, PFM, remote capture, and other multi-faceted products, and the continuing onslaught of cybercrime have changed our business profoundly,” Joe Trafton, chief strategy officer at the Avon, Conn.-based core processing firm COCC, told Banker & Tradesman via email.
He added, “Simply focusing on the rise in technology expense ignores the efficiencies gained through those expenditures. Banks need to assess their entire business before making technology decisions based on price alone.”
Dave Sidon, a principal at the Gloucester-based consulting firm the Navis Group, agreed on the complexity point.
“Let’s use, as an example, a bank that’s renewing a contract after eight years. Eight years ago, the bank may have only been supporting checks and ATM cash. But today, their ATM is now taking check deposits, they’re supporting remote deposit capture, mobile banking,” he said. “Yes, it is more expensive because you’re offering four times the number of channels.”
According to Sidon, who has helped to negotiate many of these contracts himself, banks usually do wind up saving money when they renegotiate a contract – and the longer the contract, the deeper the savings. Having a number of long-term clients in their stable does, after all, add value to the vendor’s company, he points out.
Of course, he’s not suggesting that banks accept a contract renewal at face value.
“I always counsel my clients to go through a couple of demos with other companies and let the vendor know you’re sniffing around,” he said. “Your leverage is enhanced if they’re not quite so sure they’re going to land you for seven years.”
Email: lalix@thewarrengroup.com
