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Much has been written about the “stickiness” of consumer payment apps and their value in cementing bank and credit union relationships with customers and members, but behind the scenes at most financial institutions (FIs) there is a far stickier relationship.  In this relationship, the bank or credit union is the customer and the cement composed of those mission critical services provided by their core processing vendor.

Most bankers would agree that, all other things being equal, minimizing the cost of complexity is a key operational goal, which normally means consolidating around a limited number of financial services vendors. The big “gotcha” in the above statement, however, is that all other things are rarely equal, and recent industry trends reveal that other factors are at work.

In a perfect world, core banking service providers would serve as one-stop shops for ancillary products like mobile banking and remote deposit capture as well. In fact, an acquisition spree by the cores over recent years was aimed to round out their portfolios and solidify that single-source status. Recently, however, newer startups have delivered compelling enough innovations to prompt financial institutions (FIs) to expand their horizons. 

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."

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.

In less than a decade, the smartphone has become essential to our daily lives. Perhaps ironically, its primary function of allowing us to make a call at almost any time and anywhere has been superseded by a dizzying array of other activities it facilitates, including banking. The convenience and accessibility with the smartphone and subsequent digital devices, e.g., tablet, wearables, etc., has changed things radically for financial institutions (FIs). Today, consumers determine how, when and where they will access financial services. To say this change has complicated things for banks and credit unions is an understatement.

A study conducted by the International Association of Contract and Commercial Management (IACCM) found that poor vendor contract processes cost companies as much as nine percent of their total revenues. Although this was a cross-industry study, there is little reason to believe the financial services sector fares any better or that the picture has improved since 2015. With so much money being left on the table and the drumbeat for cost efficiencies sounding as loudly as ever, financial institutions are seeking new ways to make this area easier to manage more effectively.

Acquisition continues to be a preferred strategy for financial institutions (FIs) seeking to gain economies of scale while also expanding service offerings and reach. Choosing the correct merger candidate usually centers on factors like strategic fit, market footprint and business integration. There is another less exciting but important factor to consider during these talks: vendor contracts which can cause costly, tactical headaches if not identified early in the process.  However, if the contracts are assessed early enough in the acquisition process, an institution can reap benefits greater than expected through due diligence process.

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.

For years, the trend in the financial services sector has been toward consolidation as the total number of US financial institutions (FIs) has been on a steady and steep decline with the roster of supporting vendors following a similar (if less dramatic) trajectory. Most recently, however, we are starting to see the supplier pendulum swing in the opposite direction, providing more choice to FIs in their vendor selection process.