How to Save Millions in Vendor Costs Without Changing a Thing

vendor-6-21-19.pngA mutual bank with $1.72 billion in assets managed to save more than $4.4 million in expenses—without changing a single IT supplier or disrupting online customers. Other banks can do it too.

In 2014, BayCoast Bank, in Swansea, Massachusetts, found itself with three suppliers that had three different termination dates. Its core account processing supplier was in the early days of an eight-year agreement but its online retail banking and commercial online services agreements both had about 24 months remaining. The bank, led by President and CEO Nicholas Christ and aided by Chief Information Officer Daniel DeCosta, decided to negotiate against their core IT suppliers and technology vendors in order to save costs. Ultimately, they found a way to save the bank millions and continue servicing customers by leveraging market intelligence and pricing data, with the help of outside expertise.

BayCoast made the same mistake many banks do: signing agreements that are too long and not coterminous with each other. Bank should never lock themselves into contracts that are longer than 60 to 84 months.

To prepare, BayCoast leveraged a business analysis to come up with a new approach to managing these relationships. BayCoast needed to renew its retail and commercial online banking agreements, but market analysis indicated these agreements were over-priced by at least $1.2 million over five years. The contracts had deficiencies, and lacked balancing commercial terms and meaningful service level agreements.

The bank took advantage of a recent acquisition by its core supplier to create a competitive bidding process for these two contracts. The core supplier offered nearly $1 million more in incentives to take over the retail and commercial banking agreements, but the incumbent beat that by offering $2 million to keep the relationship.

The reduction of $2 million from the bank’s cost structure improved BayCoast’s efficiency rate and allowed it to redirect the funds toward other fintech projects and initiatives.

After several years had passed, Baycoast gave itself a 24-month margin before its vendor agreements expired to renegotiate those contracts. This margin allowed executives enough time to get a deal they wanted, or find another supplier.

This time, BayCoast wanted a total change for its commercial online vendor. Their incumbent core and retail online banking suppliers both had competitive offerings, but were under performance probation periods. DeCosta used a third party to interface and negotiate with the suppliers for the core and retail online banking renewals.

The result? Savings of at least another $2.4 million in cost reduction. The bank is putting the finishing touches on its commercial online contract, which could add another $500,000 and push straight-line savings to more than $5 million. This is the equivalent of $151 million in new loans, assuming a net interest margin of 3.3 percent.

By adopting a new approach to negotiating critical vendor relationships and using an outside expert, BayCoast freed up funds that are better deployed. The vendors now have a happy client who is confident they have a market-conforming deal. It’s a win-win for both parties.

Get Smart About Core Contracts

Bank leaders focus on a number of issues when M&A is on their radar—but they shouldn’t overlook the bank’s core contract. Proactively negotiating with the core provider to account for a potential sale or acquisition can make or break a future deal. In this video, Aaron Silva of Paladin fs shares his advice for negotiating these vital contracts so they align with the bank’s strategy.

  • How Core Contracts Derail Deals
  • How to Mitigate Their Impact
  • Why and How to Conduct a Merger Readiness Assessment

One Risk in M&A You Maybe Have Not Considered

core-provider-9-25-18.pngThe vast majority of middle-market community banks and credit unions will at some point explore acquiring or being acquired because M&As are one of the quickest and most effective ways a bank can scale up, expand reach, and grow. Unfortunately, many of these banks have no choice but to watch lucrative opportunities pass them by because they unwittingly agreed to grossly unfair and inequitable terms in their core and IT contracts.

Financial institutions constantly assess risk from nearly every conceivable perspective to protect shareholder value, but far too many realize too late that hidden astronomical M&A termination fees and other hidden contractual penalties render a deal totally unfeasible. Over and over again, blindsided banks are hobbled by stifled growth.

Simply stated, core and IT suppliers punish banks with excessive termination, de-conversion and conversion fees because they can get away with it. Suppliers also sneak in large clawbacks for discounts awarded in the past as an added pain for measure. Banks fall for it because they don’t know better.

Bank deals are complex procedures with the possibility of extraordinary payoff or extraordinary peril. Terms regarding potential M&As are buried deep within the pages of lengthy and convoluted core and IT supplier contracts. Suppliers are betting that arduous language within these five- to seven-year agreements deter bankers from looking too closely or fully comprehending terms and conditions they contain. Many banks are not thinking about a merger or acquisition when they originally signed those contracts. The suppliers’ bets pay off, and banks either lose the deal or are forced to pay in spades.

Termination fees core and IT suppliers secure for themselves in most contracts with community banks and credit unions border on unconscionable. Banks find themselves saddled with the prospect of paying 50, 80, or even 100 percent of the amount due to the core provider based on what would have been paid if the institution remained with that supplier for the life of the contract.

And these fees apply even if the financial institution they’re merging with or acquiring has the same core IT supplier. Even in cases where the core has virtually nothing to lose in the deal, they still demand a fat check for their “pains.” These fees are so high they can easily kill a potential deal before it even reaches the negotiating table — and they often do.

Banks Have Defendable Rights
A contract isn’t a contract unless there’s some cost for exiting it early. But there’s fair and then there’s fleecing — and let’s just say core and IT suppliers wield a pretty big pair of shears.

The reality is that more than half of all states will not tolerate these termination fees in court, provided they’re challenged by institutions. The maximum amount of liquidated damages a supplier is entitled to legally — provided they can rationalize how they were harmed — is the discounted value of remaining net profit. This might not be more than 18 to 22 percent of remaining contract value, or about one year on a five-year deal. That’s nowhere close to what is often claimed by core suppliers.

But you have to know your rights before you can demand they be respected, and a wealth of knowledge regarding the most favorable core and IT contract terms available can’t be acquired overnight. It’s taken many years for Paladin to amass proprietary core and IT supplier contract data.

Secure Fair Terms Now to Protect Deals Later
By updating your contracts before a transaction, you can speed the M&A process, protect your institution and shareholders, and prevent unforeseen deal risks. But you’ll need to come armed and ready for battle. Core and IT suppliers have enjoyed decades of manipulating the system to their advantage. Going it alone in your next contract negotiation will likely result in ending up with more of the same hidden and unfair terms. That’s how good these guys are at getting what they want from the community banks they call their “partners.”

There are experts with a proven track record of going toe-to-toe with core and IT suppliers and coming out ahead for community financial institutions. Time and again, we’ve approached the table with our clients, advocated for a fair deal, and walked away with terms that make sense for both parties — not just the suppliers.