Legal Tips for Dealing With Your Core Processing Vendor

Core processing contracts are typically close to 100 pages of dense legal content with exhibits, schedules and addenda that allocate risks in favor of the processor and against the bank. The vendor wants your board to believe the terms are standard, and there is no opportunity to negotiate. Notwithstanding the complexity of the contract and the vendor’s strong reluctance to make modifications, the following tips can help you to regain an element of control in managing this third-party relationship.

Know the Regulatory Expectations
As with any third-party engagement, review and consider the Interagency Guidance on Third-Party Relationships. Since your core processing agreement is likely one of your most critical contracts, consider documenting the steps you took in accordance with this guidance during your core processor relationship, including proposed redlines to the contract to incorporate contractual provisions recommended by the guidance. Your regulator will likely appreciate this documentation even if the core processor rejects many of your proposed revisions. In particular, pay close attention to audit rights, compliance responsibilities, data security and confidentiality, indemnification, business continuity and termination rights. 

Review the Service Level Agreements and Remedies
If you are not happy with your core processor’s performance, the service level agreements (SLAs) will likely provide your primary, and often only, remedy. Further, SLAs and associated remedies may be one area that the core processor is willing to negotiate more freely. Once you establish the SLAs and remedies, consider having a one-page summary of these items handy for future reference so you do not need to review the entire contract in the event of a potential SLA breach. The best remedy may be a right to terminate the contract, but that is often the most difficult remedy to obtain, and, while that remedy sounds appropriate in a vacuum, negotiating a contract with a new vendor and putting staff and customers through a core processor conversion is a challenging endeavor.

Consider the Pros and Cons of Long-Term Engagements
Core processors typically offer engagements with up to a seven-year term, with preferred pricing for longer engagements. Are you sure you know what strategic position your bank will be in after three to five years? If an audible is required, early termination and deconversion fees can add up quickly, so be sure to consider an intermediate to short-term contract consistent with your strategic outlook. Even if your board has determined not to pursue a sale or merger, the tools and services you need in three years may be different from what your provider offers today, and there may be new technologies and vendors arriving on the scene. 

Know Key Dates and Penalties
Do you know the actual termination date, early termination penalty and deconversion fees associated with your core processing contract? Many board and C-suite members do not because the core processing contract typically lists a term rather than an exact termination date. It is wise to convert the term to the exact termination date. The contract also typically provides formulas rather than exact numbers for calculating early termination and deconversion fees (such as the average of the prior 12 months’ volume multiplied by the number of months remaining). Consider discussing the exact numbers for early termination and deconversion fees with your representative, even if you use estimated volumes. Review this information annually as volumes and calculations may change.  

Be Aware of Potential Conversion Delays
Core processors generally require a relatively long notice period in advance of a system conversion, and the timing is completely within their discretion. It is common for the clock to begin only after the definitive merger or purchase agreement is signed and provided. In order to avoid last minute M&A related surprises, discuss typical conversion scheduling time frames with your representative, as the exact timing is not typically memorialized in the contract. Also consider planning for a material delay before conversion as the timing can change even if the representative anticipates that it will be shorter.

Discuss Your Core Contract and Relationship Annually
It is not uncommon for the core processing contract to be negotiated and for there to be no further board discussions about it until the contract nears its end. Boards should ask management teams to report on the core processing services regularly and should receive reports about whether the SLAs are being met, annual confirmation of the term, termination and deconversion fees, confirmation of ongoing vendor due diligence and updates on new technologies being offered. 

Although the core processor relationship is one of the more complex arrangements for your bank to manage, the steps above will place you in a better position than most and help to put you back in the driver’s seat.