The Bottom Line

Buckle up: we’re in for a ride. Regardless of your political persuasion, all signs point to an extended stretch of market volatility as we head into the 2020 election cycle, which by many measures is already hitting its stride. The 2020 budget season is playing out against this backdrop, with budget-setters up against even greater uncertainty than usual. The question looms, as the political barrage reaches new heights in 2020, how can banks and credit unions remain flexible to the economic variables? 

As more financial institutions get serious about modernizing their core systems and revisiting opportunities surrounding contactless cards, our firm has noticed an uptick in the volume of requests for proposals (RFPs) issued as part of the vendor management process. SRM sees this as a positive development. In fact, we generally recommend that financial institutions regularly subject all their supplier relationships to an RFP process. 

Every institution wants its various processes and practices to be best of breed. Most, at minimum, want to know how they stack up against the best in their business. Typically, peer groups are established for this purpose, usually based on a bank or credit union’s asset base.

However, there are countless reasons why the performance of two financial institutions of identical size may not warrant side-by-side comparison. For example, one institution using a service bureau for core processing will have a lower efficiency ratio than one of its peers that does not use one. The retail/corporate mix within loan portfolios will also give rise to operational differences.

Ever had the experience of money coming into your life that you had not counted on from a source you did not anticipate? Some call it “found money” and others might describe it as a windfall. Whatever word is used to describe it, there is one question that always arises after such good fortune happens to someone: What should be done with the money? A shopping spree? Deposit it to savings? Maybe give it to a less fortunate person or a charity that is active in the community?

Vendor contract management is something that every financial institution (FI) undertakes as part of the cost of doing business. The average number of contracts a bank or credit union may have varies, but it is not unusual to see the number fall in a range of between 100 to 500 contracts on average. 

While every FI is looking for ways to trim costs, many treat vendor contract management as a responsibility that can be simply added to the list of duties held by an employee that probably already has a full plate. The ever-increasing complexity of contracts and the growing number of vendors can make this approach very expensive for an institution. 

While the vendor contract negotiation exercise does not need to be an adversarial one, the chances for a happy outcome are increased when both parties feel they are being treated fairly. In fact, that is the goal of most vendors and financial institutions (FIs) we have worked with. After all, vendors have no future without FIs and FIs have not future without vendors. It is in everyone’s best interest to work toward a deal that meets the needs of all the parties around the table.

The spiraling cost of complying with an ever increasing regulatory burden is possibly the greatest challenge facing US banks and credit unions – it’s not an exaggeration to label it an existential threat for some institutions. However, this threat can be mitigated by utilizing expertise available from compliance and strategic sourcing firms as well as via software automation. It won’t make the regulations go away, but it makes the process more efficient and helps make it less likely that something is overlooked.

Vendor contract amendments can seem pretty straight forward – a few paragraphs over a couple of pages that offers some modifications to the master contract that probably represent some improvement to current terms and conditions. The amendment may be perfectly innocuous or it may suggest some material changes. Either way, it is important not to treat this as a "no brainer."

Engaging with a sourcing partner can be an effective means to improve your institution’s bottom line and protect your operations from the distractions that can be created when management must handle such duties themselves. However, it is important to note that not all sourcing management firms are created equal. As with all partners you select, some of these firms will be a better fit with your culture and objectives than others. We suggest asking the following questions before selecting a strategic sourcing partner.

All banks and credit unions rely on third party vendors for products and services to support the backbone of their operations. These relationships are typically governed by long-term agreements and when those vendor contracts are up for renewal, the common reaction is to sign an extension with the incumbent. Assuming service levels have been acceptable, switching costs – especially for anything connecting with a financial institution’s core system – tend to be so onerous that there’s rarely any appetite for the hassle and resource diversion that accompanies a de-conversion.