The Power of Core Processors and What You Can Do About It

core-processor-9-5-16.pngDuring what I would argue was a defining moment of his presidency, Bill Clinton under oath was asked about why he had previously denied that he was in a relationship with Monica Lewinsky. He said his answer depended on the definition of the word “is,” basically that he hadn’t lied because the question had been posed in the present tense and there was no such present relationship. Such dissembling may be maddening when it comes from a president, and it’s equally upsetting when it comes from your business partners.

Few chief information officers have the time necessary to spend pouring through the thousands of pages of the core and IT contracts they sign from each and every vendor. What ends up happening more often than not is that time passes, management changes, renewals occur, technology fades or is upgraded and products are added without scrutiny—all in the name of efficiently running institutions and ensuring a competitive edge.

Any reasonable bank leader could make the assumption that the most current deal takes precedent over the past. Ambiguity is trumped by good faith born from long-term loyalty. After all, why would old agreements govern new technology? Well, it depends on what your definition of is, is.

My company, Paladin fs, was recently retained by a banking client in Massachusetts with $400 million in assets and charged with the task of restructuring each of its core and IT vendor agreements. In our initial research, we saw that for nearly a decade, this bank went to a core processor for account processing, as well as ATM and electronic funds transfer needs, but—curiously—maintained a 13-year relationship with a competing core processor for item processing. It made good business sense to move the bank’s item processing and negotiate a better deal for improved pricing.

With 12 months remaining on the bank’s existing item processing agreement, we calculated the termination expense to be somewhere in the neighborhood of $130,000, based on the “estimated remaining value” for the previous three months multiplied by 60 percent—a standard termination computation. But to our surprise, the core processor had a very different number in mind: $252,000.

When challenged, the core processor happily provided us text and verse from their 2003 agreement with our client. The note was handwritten on paper, but clearly stated that based on its definition of “estimated remaining value,” the company had the right to go back through the entire 13-year relationship with the bank, find the three highest-charged months including taxes, and multiply that total by 60 percent to calculate the accurate “termination for convenience” penalty.

Though we tried, rationalizing with the core processor went nowhere, as it had nothing to gain by being either reasonable or fair—it was losing the business anyway. This illustrates how vendors continually prey on unsuspecting, out-gunned and ill-equipped banks and credit unions. Skilled at garnering trust from bankers, rather than verifications, core and IT vendors know that they will always have the upper hand in professional technology negotiations. They leverage the power of the oligopoly to bilk billions from the community banking industry on a daily basis, while delivering sub-standard products and services that leave institutions wanting. And they do it by choosing their own definitions.

The only way we can combat their cunning nature is with numbers of our own—both by collecting market data, and by coming together as allies. After almost a decade of filling our database with thousands of vendor contract terms and pricing details to help us fight the good fight on behalf of banks, I’ve realized that the oligopoly is just too powerful to take down with a one-bank-at-a-time approach. I’ve now teamed up with Pillsbury Winthrop Shaw Pitman, LLP, and together we’ve built the Golden Contract Coalition (GCC) to tackle vendors’ uncontrollable terms and bad contract deals that our community banks and credit unions fall victim to, time and time again.

An alliance of large groups of community banks, credit unions and key players from within the banking community, the GCC gives us the capacity to leverage our collective influence and untold millions in combined contract value to negotiate fair deals with the unscrupulous core and IT vendors. For the first time in history, the power will be in the hands of institutions, giving us the protection we need to challenge the core and IT vendor oligopoly and end the era of underperforming IT functionality, unfavorable contract terms and one-sided deals.

From here on out, the definitions in our core and IT contracts, will be dictated by those affected most.

Joining Together to Fight the Core

it-contracts-7-27-16.pngEvery banker has to make decisions about technology purchases. But a core vendor and information technology (IT) oligopoly has emerged, leaving very few vendors to choose from, and the costs of new services and fees for early termination are increasing exponentially.

Struggling under the oppressive weight of the core vendor goliaths—with FIS, Fiserv and Jack Henry & Associates now controlling upwards of 85 percent of the market—and shackled by contracts that last five, seven and 10 years or longer, community banks and credit unions have been unable to develop and deploy the same cutting-edge, customer-facing services as those produced by larger national banks, and have been forced to pay more and more, while receiving less and less competitive functionality.

But after decades of injustice, community banks and credit unions are now rallying together as part of the Golden Contract Coalition (GCC), to bring an offensive response to the current era of underperforming IT functionality, unenforceable service-level agreements, unfavorable contract terms and overpriced, one-sided deals.

Today’s savvy consumer has high expectations regarding the products and services they receive from their bank. The structure of core providers slows the adoption of new products for community banks, which ultimately impacts consumer choice and may force consumers into a banking relationship where they will pay higher fees,” said Carl A. Kessler III, chief information officer of First Federal Lakewood, a mutual based in Lakewood, Ohio. “The Golden Contract Coalition has the real opportunity to be a disruptor—helping to empower community banks to meet consumer demands, and allowing consumers to maintain the local banking relationship they value most.”

An alliance of community banks, credit unions and key players from within the banking community, the GCC is charged with addressing core vendor contract disparities from one institution to another, and aims to level the negotiation playing field by creating a fair, standard, right-sized agreement between community financial institutions and their core and IT vendors—exclusively available to its members.

Backed by Pillsbury Winthrop Shaw Pittman LLP, the leading IT contract negotiation law firm in the world, the GCC aggregates expert negotiators, champions of competitive banking and the institutions themselves to implement higher standards of service and more equitable terms.

The vendors and the banks need each other, but there has to be a fair balance established. We are trying to achieve this through the creation of the Golden Contract,” said Pillsbury Senior Partner Robert Zahler.

By stripping the excessive legalese and self-serving conditions from core and IT agreements and pricing, and dictating the master commercial terms and legal conditions by which all core and IT providers must abide, the Golden Contract is able to manufacture unprecedented levels of leverage by pooling the combined contract value found in large groups of community banks and credit unions. With more than 40 members already on board, these collective bargaining methods equip smaller institutions with the same negotiating power as the large, national and multi-national banks, allowing them to pass on cost-saving benefits to their shareholders and to consumers.

The fact is, we are fighting for fairness and equity. Whether the oligopoly knows it or not, the industry is unhappy with the quality of the products, services and value they are currently buying, and there is an alarming suspicion that bankers are being taken advantage of economically. It’s time to change the game, once and for all.