Here’s a New Year’s resolution. Promise yourself to get a better deal when you renegotiate a new contract with your core processor this year, or negotiate a new one with a competitor.
Even if you’re not facing that now, you will in a few years, so it’s a good time to start thinking about it. According to a couple consultancies up on such matters, the opportunity to do better is there, despite the shrinking number of platforms available to credit unions.
They are Paladin fs and Cornerstone Advisors. Of course, these firms have serious skin in the game, but they also offer some insight worth sharing.
Here’s one: “Community banks and credit unions between $100 million and $5 billion are overpaying between 10.2 and 41.4% for core services based on a line-by-line, fair-market contract review of community banks and credit unions.”
That’s from a report titled “The Core Way Forward: How Core Services Contracts Can Reshape the Future of Community Financial Institutions.” The BPI Network produced the report using data and analysis from Aaron Silva, Paladin fs founder.
Silva says he draws on invoices from more than 1,300 community banks and credit unions across the United States for his conclusions, as well as “forensic-level assessments” of more than 200 institutions and more than 70 engagements completed since 2009.
The report says that data show that “the average savings opportunity per institution was more than $1.2 million over five years. To generate the equivalent amount of interest income, a bank would need to make more than $6.4 million in new loans on day one (based on the average net interest margin for community banks).”
Meanwhile, Scott Hodgins and Sam Kilmer, industry veterans with Cornerstone, note that Paladin fs is a competitor so it wouldn’t be appropriate for them to critique that report, but they say they also see overpricing in the core market.
Silva includes account processing, item processing, Internet, ATM and EFT services in his assessments. Hodgins agrees. “Overspending on the core is just the tip of the iceberg.” He says Cornerstone consultants are seeing some of the biggest opportunities for savings in the emerging payments and mobile remote delivery arena.
And both agree that there is ability strike a better deal. Silva recommends starting early and doing an in-depth, fair-market-pricing analysis of every service area, including terms and conditions.
He also says not to threaten or try to bluff vendors when you’re sitting at the table. “Vendors are very smart,” the Paladin fs founder says. “They can see how entrenched their technology is and can estimate how hard it would be for you to switch. If they don’t think you have the financial strength and other wherewithal to do it, they’ll stare right back.”
Of course, there’s still the issue of competition. In the credit union world, a small group of vendors control the vast majority of the business. But they still compete, the consultants say, and so do the smaller players who have their own loyal following.
“Not a lot of good has come out of the consolidation in the industry, but I haven’t seen that really change the way negotiate,” Hodgins says. And while it’s not everyone’s idea of a good time, negotiating is a necessity even if you’re simply staying with the same processor.
“You really shouldn’t be on autopilot,” says Kilmer, Hodgins’ colleague at Cornerstone. “Just because you got a good deal seven years ago doesn’t mean it is now. If you let it auto-renew, you’re probably paying too much.”
Silva at Paladin fs says the best time to start talking is about 18 to 24 months before contract expiration. He also says credit unions that have previously renewed contracts with their vendor two or more times realize, on average, the greatest cost reductions when intelligently restructuring.
“It’s better do a deal with the devil you know than the one you don’t,” Silva says. “A friendly negotiation is a win-win. Vendors get longer contracts. You’re happy. They’re happy.”
That doesn’t mean settling for a raw deal, of course. Friend or foe, the talks must take place. And when they do, Silva says, quoting his dad when he advises: “If you’re feeling froggy, you better be able to jump. The vendor will call your bluff.”
Finally, if you’ll indulge us a bit of self-promotion, Callahan’s 2015 Market Share Guide to Credit Union Core Processors has been published. There are more tables, more graphs, and more insight. It’s available here.