In the spirit of Halloween, here’s a hypothetical question: You have a 5-year CD at a bank with two years left on its term. Your rate is below current rates. The bank offers you the option to renew for five years today at a rate higher than what you’re earning now but lower than the bank’s current new money rate. Should you do it?
Well, that depends on a few unknowns. The biggest one is this: What would the rate be when the current renewal date hits? If that were known, the answer would be easy. But without that piece of information, the answer is that maybe it would be a good idea and maybe it wouldn’t.
What is certain, however, is that the bank put a lot of data analysis, maybe AI, and thought into the offer, and it priced the offer at a rate that it is sure will work for the bank (i.e., not you).
Now, let’s apply the same logic to vendor contracts. Consider:
Is it a good idea? Like our hypothetical CD, it might be, or it might not be. An early contract renewal is fairly simple – in theory. It’s a matter of trading term for lower current costs. The vendor is trading current revenue for a longer, future revenue stream. Done well, it can be a win-win for both sides.
Now for the small print. If the institution is considering this strategy and starts a conversation with the vendor, it can be sure the vendor will use data, business intelligence and experience to make sure the deal is good for the vendor.
How do bank leaders do the same, and what should they consider or know to make sure the deal is as good as it can be on their side? Here are some thoughts and strategies we’d suggest:
Next to people, technology is likely the biggest expense at a financial institution. Whether there are opportunities to reduce that expense through early renewals is a very fair 2024 planning question. Banks that pursue an early renewal strategy need to make sure they get their share of the win.