Core processing & IT vendors outmaneuver community financial institutions in negotiating contract pricing and terms, new report finds
Business Performance Innovation Network Says Latest Data Shows Banks and Credit Unions Overpaying Average of $1.2 Million Over Fair Market During Life of a Contract
SAN JOSE, CA (07/21/14) — Continued consolidation within the core processing and IT services industry has made it increasingly difficult for community banks and credit unions to get a fair shake from vendors, according to a new report issued today by the Business Performance Innovation Network. However, community financial institutions that renegotiate contracts based on national fair market pricing stand to save an average of $1.2 million over a five-year contract. To download the report, please visit: http://www.bpinetwork.org/the-core-way-forward-report
The new report, entitled “The Core Way Forward,” also finds that poorly negotiated contracts for outsourced core processing and IT services significantly reduce shareholder value in mergers and acquisitions and, in some cases, sabotage deals altogether. The impact on mergers and acquisitions is becoming increasingly notable, as M&A valuations remain tight and consolidation pressures intensify.
The study findings are based, in part, on national data on contract pricing, terms and conditions supplied by Paladin fs. Paladin is the only research and consulting firm tracking pricing data for core and IT services for community financial institutions. In addition, the study incorporates a national survey of community financial executives conducted in the first half of 2014, as well as interviews with leading executives and advisors.
The study finds that on average, community banks and credit unions between $100 Million and $5 Billion in asset size are paying between 10.2 and 41.4 percent above fair market for these services, or $1.2 million over a five-year contract. The amount is equivalent to the interest income generated by making $6.4 million in new loans based on the average net interest margin of 3.7 percent earned by community banks the end of 2013.
“Community bank and credit union executives continue to grapple with the rising cost of compliance and technology services in a period of low interest margins and a less-than-stellar economic growth,” said Dave Murray, Director of Thought Leadership for the BPI Network. “As a result, expense control is a critical lever for building shareholder value and sustainable performance. For most institutions, restructuring vendor contracts is a missed opportunity for positive action.”
The analysis demonstrates that institutions in every part of the country can significantly reduce the cost of vendor services by negotiating based on fair market pricing. On average, however, banks and credit unions tend to overpay most in western and southern states.
A survey of community institution executives shows they are more positive about the business environment, but only modestly so. Just 8 percent of respondents said business conditions have “significantly improved”. Another 52 percent say conditions have “improved somewhat,” while 40 percent say they have either stayed the same or deteriorated further.
Respondents identified their top four priorities for the coming 12 months as: growing loan portfolios, improving operating efficiency, managing new regulatory requirements, and adding new technologies and banking processes.
Some 69 percent of executives expect a significant increase in mergers and acquisitions over the next two years. Some 36 percent say they expect to participate in industry consolidation as a buyer. Another 21 percent say they will participate as either a buyer or seller, depending on the opportunity, while only 4 percent identify themselves as probable sellers.
The survey also finds significant concern with the vendor contracts. Only 30 percent of respondents say they believe they are paying fair market for their core processing and IT services, while 37 percent believe they are overpaying, and another 33 percent feel they lack sufficient information to know whether or not they pay too much.
Nevertheless, executives say they will continue to add new services. Some 77 percent expect to do so in the next three years. The top four areas for added spending are Internet banking, mobile banking, compliance and fraud detection.
Getting a Better Deal
With 85 percent of the core services market now controlled by three companies (FIS, Fiserv and Jack Henry & Associates), negotiating a favorable contract can be challenging. Most institutions fail to realize they can renegotiate with existing vendors well over a year before their current contracts expire. In fact, study analysis showed that the “sweet spot” for renegotiating is between 24 and 18 months before expiration.
Aaron Silva, president of Paladin fs, believes banks and credit unions are challenged in negotiating fairer pricing for two key reasons: 1) They have too little experience negotiating core processing and IT vendor contracts, and 2) They lack sufficient data on pricing and contract terms nationwide.
“A community bank executive might negotiate a vendor contract only a few times in his or her career, while the negotiator on the other side of table does it for a living. That’s an unfair advantage,” Silva says. “In addition, most institutions are flying blind. They have no idea what other institutions of similar size and transactional volume pay for the same services. That information is critical, especially when only a few vendors now control the entire market and competitive bidding processes have become ineffective.”
The report also finds that institutions need to understand and negotiate terms and conditions that will impact service costs and obligations as business operations change — particularly in a merger or acquisition. The reports sites numerous examples of mergers and acquisitions that were negatively impacted by hidden and poorly understood stipulations within the contracts of acquiring and selling institutions. It also outlines contract key areas that impact M&A value, including cost of services, cost of change, integration fees, tiered pricing for growth and survival incentives.
About the BPI Network
The Business Performance Innovation (BPI) Network is a peer-driven thought leadership and professional networking organization dedicated to advancing the emerging role of innovation within today’s enterprise. The BPI Network brings together global executives who are champions of change within their organizations through ongoing research, authoritative content and peer-to-peer conversations. The group advocates for Innovation as a fundamental discipline and function within 21st Century organizations and seek to demonstrate where and how new inventive solutions and approaches can advance business value, gratify customers, ensure sustainability and create competitive advantage for companies worldwide. More information is available at: www.BPINetwork.org.
About Paladin fs
Founded in 2007, Paladin fs is the leader in bringing greater cost efficiency to the core services and IT investments of community financial institutions. The company improves the profitability and shareholder value of community banks and credit unions by restructuring outsourced core services and IT contracts. Paladin takes a unique data-driven approach to contract negotiations. It’s the only firm with a continually evolving database, or Blue Book, on the outsourcing costs for all national and regional vendors, including service agreements with institutions ranging from de novo banks to those with assets of up to $5 billion. Paladin provides free assessments of the potential savings that can be achieved by these institutions through contract restructuring. For more information, visit www.Paladin-fs.com or call 877-746-4859.