When contracts put vendors in control...

I have been examining banks’ technology relationships, with two recent blogs on electronic transaction processing. In my next blog, I will be talking about the trend of more banks leaving their current core application vendor. But before that I am going to focus on one specific vendor tactic.

Contracts, like Network Operating Rules, must be read before executing them, before you agree to abide by the rules.

This is a caveat emptor kind of thing right?

Yes, it is, but these processor contracts are becoming more and more complicated. And they are rife with what can be characterized as “gotcha clauses," clauses that are meant to restrict action by the bank or hold the institution to an action that is not in its best interests.

I am not an attorney, but it doesn’t take a lawyer to figure some of these out … and the outcome if they happen.

The sad thing is that once a bank has been victimized by one of these clauses, the relationship is burned. There will be nothing an incumbent vendor will be able to do to change what will happen next.

So let me share a few with you …

The auto-renewal (“Whaaat!?!?”)

We have reviewed contracts that contained an eight-year term with an auto-renewal term of eight years. This arrangement included a non-renewal notification period of 180 days in writing.

Problem: The bank missed the notification period by one day— and the processor held the bank to the renewal.

The annual price increase and the product price increase (“Say it’s not so!”)

We have reviewed contracts that contain an annual price increase based on the Consumer Price Index or 5%, whichever is greater.

Not bad, you say?

Consider this more carefully. Think of a five-year contract with the first price increase in Year 2.

That would translate, with annual compounding, to a 21.55% price increase over the term of the contract.

Oh, the contract also included the authority to impose price increases at the product level with as little as 30 days written notice to the bank. And the bank had no recourse.

Problem: Price increases are not limited to once per year. Consequently, if your organization negotiated directly with the vendor a 8% price savings at contract renewal, the vendor got it back—and more—at the start of year three.

[We have a calculator that will help you figure this out the next time before you sign. Download our app.]

Exhibits that extend the contract’s term

Every contract has attachments, exhibits, schedules, and amendments.

What you may not realize is that some of these have tremendous power. For example, if one of these add-ons contains a term, it may extend the overall contract beyond the original term.

Problem: If you think your contract has a five-year term and you send the vendor a non-renewal letter, you may receive a reply that your contract does not end for two more years. But should you want to leave early, it will cost you $200,000.

Burned by the relationship

Often when my firm is engaged to conduct a core review for a bank, the bank has already made the decision to leave its current vendor.

The items I have outlined are just three examples of many that we have found that have burned a long-term vendor relationship because the bank feels that they have been taken.

Why? With as much as banks pay in monthly fees, one-time installation fees, and annual maintenance fees, they have become intolerant of vendors that call themselves “partners” and yet place clauses like these and others in the contract.

Such behavior violates a trust. Once trust is gone, so is the relationship.

What can you do?

Before you execute a contract, always engage a resource that understands and will have your best interests out in front at all times.

Let’s get something straight here. You, the bank, own the relationship—not the vendor.

It is important that you use every available resource to insure that your bank's interests are always looked out for.

The vendor will be your vendor, and in a majority of cases a good vendor, but never your advocate.

Avoid clauses like these and others that will burn the relationship on the front end, during negotiations.

If the vendor says “no,” then you go!

Once you get hit with a “gotcha clause,” you’ll never forget. It will be a story you will repeat to your colleagues many times.

—The Wombat!