GonzoBankers, let’s say you’re a CIO or CFO at a $400 million community bank or credit union on the verge of (re)negotiating a core contract with one of the Big 3 vendors. You’re about to do battle with a table full of cufflink-wearing sales managers and attorneys. To bankers with a sense of scale and perspective, bellying up to the table with these reps from companies with $10B in sales can be a little daunting if not outright terrifying. It’s easy to think you have no leverage with the deck stacked as it is.
But fear not! The negotiation table is the time you have more leverage than you will ever have with the vendor. Yes, your fees can get lost in the rounding at the Big 3, but understand that they really, really fear losing your business. Vendors would much rather reduce the margins they earn on your bank than have to replace the revenue entirely along with spending the extra marketing dollars to replace you. Plus, think of the people at the vendor who will straight up look bad if your negotiations don’t lead to a signed contract: the account rep, service reps, sales managers, attorneys – it’s personal to them if for no other reason than tough questions start to get asked when they lose a client/prospect.
You need to puff up your chest and leverage the vendor’s fear of losing at the negotiating table. Here are four ways to do that:
1. Leverage your choices. The core vendor landscape for financial institutions with $500 million in assets and below is significant. When we look at the entire core market, not just the Big 3, there are more than 10 core providers offering over 25 core solutions. While a core conversion is not something found on most financial institutions’ “things we look forward to” list, understanding that you have choices and, however subtly, conveying this message to your incumbent can increase your leverage. Additionally, nearly all core vendors provide a full suite of ancillary services in addition to core processing.
2. Leverage all your services. Financial institutions within this asset range typically receive most of their ancillary services from their core providers. These ancillary services such as item processing, debit/ATM processing, credit processing, loan origination systems, Internet/mobile banking and bill pay can be leveraged as part of the total package in your negotiation strategy.
This is not to suggest when negotiating, you renegotiate every line item of every service. The first step is to identify the potential points for negotiations to be included. Focus on the 80/20 rule: 20% of your line items typically account for 80% of your spend. Once you have established where the bulk of your spending is, look for the line items that will have the most impact in light of your future growth and what spending items are volume driven.
3. Start early—but not too early. Time is on your side, until it isn’t. The typical core and ancillaries renewal can take, on average, four to six months to complete. The average core conversion can take nine to 12 months—maybe longer. Vendors consider timing during the renegotiation process, and you should too. Timing in your decision process directly impacts your leverage.
The sweet spot to begin negotiations is 18-24 months from the end of the existing term. Negotiations can begin outside of this window, but the closer to renewal, the less the leverage. Of course, if your auto-renewal term is shorter, i.e. 12 months, then the “closer to renewal to begin negotiations” is not as critical. Alternatively, starting negotiations too early can decrease the vendor’s incentive to come to the table—the vendor has a signed agreement that outlines the receivables they will collect from you over the next several years.
4. Don’t forget the Ts and Cs. Dodd-Frank and the regulatory burden it has brought to the community FI space has begun to have the opposite effect on what was originally intended. “Too big to fail” is becoming “too small to succeed.” As a result, there has been a renewed focus in our industry on consolidation. As part of your review of the terms and conditions, put additional scrutiny into the clauses related to a merger, both as an acquirer and an acquiree. A few other key areas to focus on, especially if your FI is thinking M&A, are liquidated damage clauses, agreements are coterminous, and caps and/or discounts on de-conversion and conversion services.
While negotiating with your core vendor can seem like an intimidating task, especially if it is a Big 3 vendor, remember that you have leverage. Keeping these four best practices in mind will set you off in the right direction.
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