The Bottom Line

Proceed with Caution on Vendor Contract Changes – A Real World Example

Posted by Ben Mrva on Jul 17, 2017 9:00:00 AM

VISA-116014-edited.jpg

In recent posts, we have offered words of caution concerning the perils of free money when considering a proposal, contract or addendum from a vendor. As part of our work, we are continuously monitoring the market to remain current on the trends that impact our clients. Lately, we have seen a real-time case study playing out in the market that reinforces why every proposed vendor contract amendment should be reviewed carefully.

Register For CBA Webinar

Traditionally, smaller banks and credit unions have had limited options when it comes to various types of vendor products and services. Today, more vendors are creating packages that can be attractive to institutions of this size. On the one hand, this is good news as it allows these financial institutions (FIs) to have more control over their own destiny. On the other hand, often these packages contain trade-offs that may not fit with the strategy these banks and credit unions want to pursue in a particular product or service area. Typically, to determine whether the offer is a home run or a foul ball, it helps to have the perspective that comes with evaluating these types of deals day in and day out.

Recently, we have learned of vendors approaching smaller banks and credit unions with unsolicited offers designed to establish a direct relationship between the two parties. On the surface, these offers are quite appealing, verging on “no-brainers.” The FI receives an unexpected windfall in the form of an upfront signing bonus and often a nominal reduction in ongoing fees as well. In most cases, the change can be achieved without altering established FI/processor workflows.

What’s Not to Love?

To be fair, these offers are indeed an improvement over the status quo. However, the question is how much money is being left on the table and how much future flexibility is being sacrificed. The most important point to be realized by an FI receiving such a proposal is that the vendor sees sufficient value in the FI’s business to have made the offer. This fact raises another question: how much would that business be worth on the open market?

This is where the value of a skilled strategic sourcing partner enters the equation. Such firms understand the value of these portfolios in a truly competitive setting. Without such input, a FI might negotiate the initial proposal and feel good about extracting a few more upfront dollars, yet still have money left on the table. 

Know the Rules of the Game and the Value of Your Hand

In any situation of this type, it is important to consider what the vendor’s motivations might be. As we have noted before in The Bottom Line, we do not believe the vendors are doing anything unprofessional. Vendor’s have an obligation to their stakeholders to run their businesses profitably.  Clearly, for vendors there is a value in establishing a long-term relationship with a bank or credit union that provides a predictable revenue stream.  On the FI side, it may be perfectly logical to trade a few years of flexibility on the back end for expense reductions and cost certainty. However, such commitments should not be made without thoughtful analysis.

Given the pressures many FIs face, short term upside is attractive. However, no proposal should be seen as a “slam dunk” because as the saying goes, “If it is too good to be true, it probably is.” The main takeaway is that any unsolicited proposal, whether in the form of an amendment or a new agreement, should trigger an analysis of the attributes in play on the bank and credit union side of the table. Be sure that analysis is done against current data and benchmarks.

Register For CBA Webinar

Topics: Strategic Sourcing, Vendors & Contracts