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3 min read

How FIs can get the upper hand in core contract negotiations

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It’s rarely convenient for a busy bank or credit union executive to review a fintech core contract. If a contract reflected market rates when it was signed, how much easier to just file it in a drawer and let it auto-renew! What financial institutions may not know is that taking advantage of industry “sales” events could mean savings at renewal time.

Although a very strategic process, contract negotiation is typically not the favorite activity of most banking professionals. Ironically, the business events that can cause CFOs and COOs the most stress are the same events that make it the best time to negotiate with vendors for a better deal.

In all our years in the fintech marketplace, we have come to recognize one certainty: Sales makes the world go around. Fintech sales teams are paid on commission. Their bosses are paid on commission, and all the way up to the top of the organization (often even in their earnings calls) the vendors speak to sales objectives. Losing a sale or missing a sales target is such a large mis-step that the opportunity for a new sale can drive illogical behaviors when it comes to re-pricing current business. This can be great news for financial institutions.

Let’s look at some opportunistic situations that can build and support an FI’s ability to effectively negotiate. Note that each of these unique events coincides with a “sale” from the vendor’s perspective:

  1. Merger/Acquisition – We have seen banks and credit unions negotiate some of the best deals during a merger/acquisition. Why? Because if one FI is using Vendor A and another is using Vendor B, it can create a good healthy price war. Neither vendor wants to lose the business, and absorbing the account and transaction volume that formerly belonged to a rival often feels like victory to vendors.

Add in all of the activities that go into a merger or acquisition – conversion labor, de-conversion labor, and other migration-related expenses – and it’s clear that in-depth negotiations are needed right when executives feel rushed to make decisions and operationalize the merger.

  1. In-House to ASP Migration – Market momentum is afoot for FIs to run their core and ancillary platforms in the outsourced model. Evaluating moving from in-house to outsourced is a common event in the industry, but evaluating moving from outsourced to in-house is a rare exercise these days. FIs that have yet to make the move from in-house to outsourced processing have a valuable negotiating chip at their disposal. A vendor will typically charge an FI more when it converts an institution to an ASP environment; fairly so, as the services being provided represent a much deeper value to an FI. They also can come with a five- or seven-year contract where many older in-house contracts run year-to-year.

Banks and credit unions must ensure that providing this vendor with more valuable “software as a service” annuity revenue is met with a better deal on things like conversion fees, migration fees and services the vendor has been supplying for years, and is inclusive of all of the additional services the vendor will provide under the new relationship.

  1. Asset or Branch Acquisition, or the Addition of a Major Product – The acquisition of assets, accounts, branches, mortgage loans for servicing, or any other non-organic growth event that unexpectedly increases an institution’s expenses (and increases revenue for the vendor) is an opportunity to look at current contracts to determine if the time is right for a re-negotiation.

Oftentimes, acquisition events require an FI to seek additional services from its vendors, and that is a time to be careful and negotiate the right deal in the heat of integrating new scale. Even a major product acquisition, such as advancing the institution’s digital or payments platforms, provides a sweetener to vendors that a bank will not have during its average contract renewal. Translation: Do the homework and be proactive to drive the best overall value for a bigger package of services.

Many of these events coincide with the worst possible time for a CFO or COO to want to open up full contract negotiations. Most of these events are already causing abnormal workloads for the operational staff because they may require training, personnel decisions and/or organizational changes, and they likely require significant financial or strategic modeling and discussions. Yet these are exactly the times when a bank or credit union is in a position to negotiate the best deal.

The commission check is one of the most powerful forces in the fintech organization. Cornerstone has seen organizations create material value through an informed and assertive negotiation process, and others leave money on the table by failing to recognize the emergence of a true opportunity. In the heat of some of the biggest deals and organizational change inside your FI, remember: This is the time to bring your A-Game and level the playing field in vendor negotiations.

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