It’s important for bank executives to review all core contracts in order to gain a clearer picture of overall financials. In the long term, reviewing these contracts can save time, money and aggravation. In the banking industry, contracts include core processing, debit cards, digital channels, item processing and imaging.
Contract review is not just important for product and service additions, it’s also valuable in the long-term strategic planning process as well as preparing for any M&A activity. It can be very illuminating, whether you’re considering switching vendors, negotiating better terms or in the valuation process.
Some of the trends banking has been experiencing include a focus on PPP, staff, customers and banking communities. Banks are also seeing less churn, less switching from one core to another and less buying and selling of banks. Vendors are approaching bank clients who have signed contracts in the past few years to ask them to sign renewal extensions. These trends indicate it’s an ideal time to review contract terms for planning for the coming years and to make any modifications.
If you’d like to hear the latest thoughts about how your core and IT vendor contracts affect M&A considerations and what might be best for your bank, listen to hour 2 of our recent presentation.
Be sure to watch session recordings of Eide Bailly’s 40th Annual Bank Seminar. Hot topics covered in 2020 included banks approaching the $500 million threshold and $1 billion threshold, core contracts, CECL and M&A as well as updates on tax, political, economic and regional issues.
Start the review process early, optimally at least 24 months out, by locating all core contracts. Be sure to make a note of original contract dates, attached addendums, autorenewal dates and nonrenewal terms as well as any other small print. Pay attention to contract provisions and commitments, early termination language, liquidated damages, deconversion caps, incentive credits and contract expiration terms. It can be very beneficial for banks to enlist the help of consultants to analyze contracts and protect their clients.
To prepare for a bank sale, optimal savings will be achieved when the seller plans ahead and hires consultants for the contract review process, as well as to help negotiate all terms and conditions. All products and services contracts ideally should be coterminous.
In the valuation process, be sure all contracts are reviewed, and look for any red flags. Some red flags to watch out for include contracts that don’t match up with their major products and any early termination clause that doesn’t credit time with the vendor. Keep in mind that nothing is guaranteed unless it’s in writing in the contracts.
Areas to analyze in core contracts when selling include:
It can be alarming how quickly vendor fees can add up when contracts aren’t matched up and when calculating how much is owed to the vendors. Total fees owed to vendors may be much higher than expected. Consultants may be able to help you work with the vendors to reduce the fees or negotiate new terms.
Buyers need to know what they’re buying when acquiring a bank. As part of the due diligence process in preparation for the addition of new assets, accounts and products, buyers will also need to anticipate fees for conversion and training. It may be possible to negotiate with the seller or the vendor in the process. It’s important to understand all the contracts to see the actual financial ramifications.
Core processing analysis services are a way to help alleviate the burden of researching, selecting and negotiating your core banking solutions. With the assistance of experienced professionals, you can be confident you are maximizing the value of vendor contracts and choosing solutions that meet the needs and goals of your bank or credit union.
The phases of core processing evaluation, core processing selection and technology contract negotiation are as follows.
There should also be an evaluation of your vendors. This could include:
When it comes to core contracts, the review process can be complex. It’s not necessarily recommended to move away from a “best of breed” model to a single source provider model to achieve maximum results. A bank may have one service provider providing every service, with all the contracts having differing expirations, renewal terms and cancellation notification terms.
Vendors are trained to create contractual chaos to minimize margin compression. Experienced advisors help protect their clients and provide as many options to consider as possible. What’s ultimately important is that clients and staff are happy with the products and services in the core contracts.
Get started today with Eide Bailly