April is National Community Banking Month, and, in my opinion, an issue that has long been brewing is now causing serious economic harm to community banks.
The issue pertains to the terrible treatment of these banks by certain technology vendors when the bank decides to leave that vendor. This situation is not new. I have written in an oblique way about it in my blog here, but seriously more needs to be done.
It is time we drive the issue out into the open!
The problems are becoming more common because in the past very few community banks would leave their primary tech vendor—2 or 3 banks a year—and they wouldn’t talk about it. Today, many more banks are leaving and bankers are beginning to share with other bankers their experiences in peer groups and even at conferences.
I want to note also that what is written here is not a generalization, but based on the work of The Copper River Group with community bank clients. We continue to encounter bad vendor behavior in the treatment of community banks when the bank’s management team decides to leave their current core vendor and move to a competitor. It is, after all, management’s responsibility to make decisions that are in the best interests of the bank.
Banks now digging deep on tech deals
Technology decisions in the past have not been a high priority for most community banks, but that has all changed. Today, a core technology contract can be one of the most important decisions a community bank can make. Contract terms can reach ten years and processing fees can eclipse (all in) $50,000 a month.
That is “ginormous!”
Community banks have begun taking these decisions very seriously, not only because of the terms and cost, but also to remain competitive. They are digging deep to understand the trends, the cost, the processes, and the competition.
When undergoing a detailed core processor review, for example, banks that have relied on one main vendor for an extended period of time quickly realize that they are not only being overcharged, but are way behind the curve in terms of capabilities. Understanding that they now have choices, they often conclude that it is easier to leave than try convince the incumbent vendor that what they have just discovered is real and must change.
That’s when things start to get really interesting!
If you haven’t realized by now, vendor contracts—like casinos—favor the house. In the majority of cases we have observed, where banks have contracts that have been in existence for many years, there often are unpublished de-conversion fees. What do I mean “unpublished”?
There will be language in the contract saying things such as, “We will charge you standard de-conversion fees in the event you change vendors, or if the bank is sold, etc.” But the actual fees are never published.
Ridiculous and unbelievable
When a community bank decides to switch vendors, it soon learns that their “unpublished fee” for de-conversion can be in excess of two-years’ contract revenue.
Furthermore, the vendor negotiating tactics we have observed have been nothing short of intimidation.
That is correct: six figure de-conversion fees combined with a vendor attitude that if you don’t execute the contract amendment, you will miss your conversion date and you will have to pay more fees.
We have also observed a tactic of limited, vague de-conversion product listings with incredibly high fees for things not included in the standard package that the community bank just paid a six-figure fee for and absolutely need to de-convert. It is borderline ridiculous, and unbelievable.
We have even witnessed vendors impute an exit cost on a departing community bank that extracts an additional year or two of revenue from the bank, even though the contract is over. That’s right, an undisclosed tactic that takes a five-year contract and makes it a seven-year contract.
The exiting bank is hit with six-figure fees or more. Somebody has to pay these fees, and if the new vendor doesn’t cover them, the bank pays for it and that is a hit against capital! Ultimately the consumer will pay the increase, and that is just wrong.
If a community bank knew in advance that when it decided to leave a vendor, it would be forced to undergo this treatment, the bank would absolutely not execute the contract and choose another vendor.
What can be done
Part of the cause for this misbehavior on the part of some vendors is that banking in general, and the bank technology business in particular, has become much more competitive. But these contract abuses are absolutely the wrong response to a changing situation.
The greatest weapon in this fight is awareness and transparency. I and others are now speaking up more forcefully about the issue. By having more banks push back against bad practices, all community banks gain leverage. But they still need all the help they can get because the bank technology business in recent years has become dominated by a few big firms. If a bank can get through this “exit trauma,” there are many more technology options available now, including core processing.
I also believe the banking trade groups should take a much more active role in this issue. An association has a responsibility to advocate for its members, and this shouldn’t be limited to legislative and regulatory issues.
Let’s face it, some vendors are clearly taking advantage of association members by gouging them for fees and services as they exit as a means of striking back at the winning vendor. The bottom line is these dubious tactics increase costs to community banks while at the same time saddling the bank with less-than-competitive services.
In the past year, some associations have included sessions on the subject at community banking conventions, but more needs to be done. [One recent session is covered in “Core system contract tips.”]
My suggestion to the banking trade groups is that they design an in-depth survey assessing vendor relationships and their de-conversion experience (where applicable) and send it to all of their community banking members.
Why? Because when you do the math, if every five-year processing contract increased a community bank's cost by the equivalent of two more years of net contract cost, it will not take long for technology cost to catch up with the cost of regulations!
No matter how you look at it, the cost of vendor contract abuse is a big number and it is causing a lot of stress with community bankers. I know, because I work with them on this issue every day.